Mathematics for Economics

Homework 6

Textbook Questions:

Section 10.5 #2, #4, #6, #8

p
1. A consumer’s utility function is u(x, y) = x2 y + 3 and her budget constraint is px x +
py y = I. Assume that px , py and I are exogenously given (regardless of the consumer’s
choice).
a. Find the slope of the budget line, px x+py y = I. Draw the budget line with intercepts.
dy
p
b. Find the slope dx of a level curve u(x, y) = x2 y + 3 = c where c is constant.
c. Find the point (x∗ , y ∗ ) that satisfies the two conditions: (i) the two slopes in (a) and
(b) are the same and (ii) the budget constraint is satisfied: px x + py y = I.
d. Show that x∗ decreases when the price px increases, given I. Draw a curve that
describes the relationship between x∗ and px (Ignore the intercepts. This is called a
demand curve).
∗ ∗
e. Assume now that px = 2, py = 1 and I = 3. Find the µ ∂uoptimal
¶ choice
µ (x ¶ , y ). Show
px
that in the optimal choice, there is λ∗ that satisfies ∂x
∂u = λ∗ .
∂y py

2. Suppose that you invest in a project that earns a fixed amount $100 each year, forever.
a. Show that the total present discount value (P DV ) decreases with interest rate r.
b. Suppose that the cost of the project is $1000. Find the range of r in which the project
is profitable (P DV > Cost).
c. Now suppose that you invest in a project that earns a continuous fixed income $100
from the current period t = 0 to t = 10. If the cost of the project is $1000, is the
project profitable when interest rate 10% is compounded continuously?
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3. Consider a quadratic form: Q(x, y) = ax2 + 2xy + cy 2 (a 6= 0).
a. Show that if Q(x, y) is positive definite, then a > 0 and c > 0.
b. Suppose that a > 0 and ac = 12 . What is the definiteness?
c. Suppose that c = −1. Find the range of value a in which Q(x, y) is negative definite.

4. A quadratic form Q(x, y) is written by using a symmetric matrix A.

1
a. Show that if Q(x, y) is positive definite, then the diagonal elements of A are positive.
b. Show that if Q(x, y) is negative definite, then the diagonal elements of A are negative.