Homework 8

Mathematics for Economics

Textbook Questions:

Section 13.2 #6 (assume α ≥ 0 and β ≥ 0) and #8 in page 461

Section 13.4 #2 in page 472

Section 13.7 #6
#5 in page 486: This question is challenging but worth trying! Hint: (a) Find
FOC, not the solutions; (b) Use Hessian; (c) We assume that x∗1 (s, t) and x∗2 (s, t) are the
solutions of two FOC in (a). Take differentials of two FOC in (a) and write dx∗1 and dx∗2 in
terms of ds and dt as we did in the previous homework; (d) Obvious from (c).

1. Consider a function f(x, y) = 8x3 − 12xy + y 3 .

a. Find all the stationary point(s).
b. Classify whether each point is a (local) maximum or minimum point.

2. Consider the following profit maximization problem:

max pf (L, K) − wL − rK.

(L,K)

We have a stationary point (L∗ , K ∗ ) that satisfies the first-order conditions:

pf10 (L∗ , K ∗ ) = w and pf20 (L∗ , K ∗ ) = r.

Assume that p, w and r are output and input prices and are fixed. Show that if f is
twice-differentiable and concave, then (L∗ , K ∗ ) is the global max point.

3. Consider a function: f(x, y) = x2 + xy + 2y 2 + 3, where x and y are defined on (−∞, ∞).

a. Find stationary point(s).
b. Show that the stationary point(s) is a global max or min.

4. Consider a function: f(x, y) = 4x3 + 3y 2 , where x and y are defined on (−∞, ∞). Are
we able to know whether this function have a global maximum or minimum point?
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5. Suppose that a firm has the production function f (L, K) = 4L 4 K 4 and that w and r are
input prices and p is output price. The firm does not change those prices.

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 a. Show that the firm’s profit π is a concave function of (L, K).
b. Find (L∗ , K ∗ ) that maximizes the profit, as a function of (p, w, r).

6. A (price-discriminating) firm producing a good faces two types of customers, each of

whom has the demand curve:

p1 = 50 − q1
p2 = 100 − 10q2 .
The cost of producing the good is 90 + 20q, where q = q1 + q2 .
a. Find q1∗ and q2∗ that satisfy the first-order conditions.
b. What are p∗1 and p∗2 , and the associated profit?
c. Show that the answer in (a) is a global maximum.