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Exercise 6: Leontief 15 points

An economy is based on three industries: food, Clothing, and shelter.
To make 1 unit of food, it requires 0.1 units of food, 0.3 units of clothing and 0.2 units of shelter.
To make 1 unit of clothing, it requires 0.3 units of food, 0.1 units of clothing and 0.1 units of shelter.
To make 1 unit of shelter, it requires 0.4 units of food, 0.2 units of clothing and 0.3 units of shelter.

The goal is to find the output for each sector that is needed to satisfy a final demand of $4 millions for Food, $12
millions for Clothes, and $16 million for Shelter.

The Leontief model is given by X = MX + D with: X the output matrix, M the technology matrix and D the final
demand matrix. Our goal is therefore to determine X.

1.Find the technology matrix M and the final demand D.

2. Compute 𝐼3 − 𝑀 and show the computation for one element.

4. Find 𝑋 = (𝐼3 − 𝑀)−1 𝐷 using augmented matrices. Round to 4 digits after the decimal.

Matrix Operations performed

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SKEMA Business School - Campus de Sophia Antipolis

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06902 Sophia Antipolis cedex - France www.skema-bs.fr | www.skema.edu

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5. Interpret your findings.

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Exercise 7: Price demand, marginals and price elasticity 20 points
In marketing a certain item, a business has found that the demand for the item is represented by the function:
55
𝑝=
√𝑥
The cost for producing x items, is given by the function:
𝐶 = 0.4𝑥 + 700

1. Find the feasible domain.

2. Find the revenue function R(x).

3. Find the Profit function P(x)

4. Find the price per unit that gives the maximum profit.

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5. How many items does the company have to produce and at what price would they have to sell those items to
have a unit elastic demand?

1. Here is a sketch of the Revenue function in blue and of the Cost function in red. Place the break-even points
and explain their meaning.

2. Based on the sketch from part 6. Answer the following questions

On what interval is the demand elastic?

On what interval is the company making money?

On what interval is the marginal Revenue Negative?

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7. Exercise 8: Markov Chains 10 points
2 sushi shops, Kyo-to-go (K) and Narita-express (N), share the Sophia Antipolis market. A market survey over 1
month shows that 80% of customers who bought sushi from Kyo-to-go order from Narita-express the next time,
while 60% of customers of Narita-express order again from Narita-express the next time they want sushi.
1. Draw the associated Markov transition diagram.

State State
K N

2. Give the associated transition matrix.

𝐾 𝑁
𝐾
[ ]
𝑁

3. If each shop has 50% of the market at t=0 (S0), what share of the market does each have after 2 periods (S2)?