EC400 Micro: Solutions 2019 Francesco Nava

4. (25 marks) For (a; b) 2 R R+ , consider the following quadratic form

p
Q(x) = a(x21 + bx22 + x23 ) + 2 bx1 (x2 + x3 ).

(a) (4 marks) Identify the symmetric matrix of coe¢ cients A associated with this quadratic
form. That is
Q(x) = xT Ax
Find all the principal submatrices of A.
Solutions: (2 marks) The matrix of coe¢ cients is:
0 p p 1
a
p b b
A = @ pb ab 0 A
b 0 a

(2 marks) Its principal submatrices are:

0 p p 1
a
p b b
rd
3 Order: @ A
pb ab 0
b 0 a
p p
2nd Order: pa b
, pa b
and
ab 0
,
b ab b a 0 a
1st Order: (a) , (ab) and (a).

(b) (6 marks) De…ne what it means for the quadratic form Q(x) to be negative semide…-
nite. How would you be able to assess, in terms of the properties of A, whether Q(x)
is negative semide…nite?
Solutions: (3 marks) Q(x) is negative semide…nite if Q(x) 0 for any x 2 R3 .
(3 marks) To, check if Q(x) is negative we need to verify that all odd principal minors
are non-positive and that all even principal minors are non-negative.
(c) (15 marks) Find the values of the parameter values, a and b, such that the quadratic
form Q(x) is respectively inde…nite, positive semide…nite and negative semide…nite?
Then, plot these regions in R R+ .
Solutions: (5 Marks) Q(x) is positive semide…nite if all principal minors are positive
which requires:

a 0, ab 0, a2 b b 0, a2 b 0, a2 b 0, a3 b ab ab2 0.

For these to hold at once it must be that either a = b = 0 or

a 1, b 0, b a2 1.

(5 Marks) Q(x) is negative semide…nite is all principal minors suitably alternate in

sign which requires:

a 0, ab 0, a2 b b 0, a2 b 0, a2 b 0, a3 b ab ab2 0.

For these to hold at once it must be that either a = b = 0 or

a 1, b 0, b a2 1.
EC400 Micro Solution 2019

(2 Marks) Consequently, Q(x) is inde…nite whenever it is not semide…nite. Thus,

Q(x) is inde…nite whenever

b > a2 1 for (a; b) 2 R R+ n(0; 0).

(3 Marks) The plot below depicts the answer

5. (30 marks) Let f : U ! R be a function de…ned on a convex subset of U R.

(a) (10 marks) State a de…nition of concavity for an arbitrary function f . Then, state
a de…nition of concavity for a twice di¤erentiable function f , which is based on the
Hessian of f .
Solutions: (5 marks) The function f is concave if for any x; y 2 R

f (ty + (1 t)x) tf (y) + (1 t)f (x) for all t 2 [0; 1].

(5 marks) The twice di¤erentiable function f is convex if for any x 2 R

f 00 (x) 0.

(b) (20 marks) Prove that the two de…nitions you gave in part (b) are equivalent provided
that f is twice di¤erentiable.
Solutions: (5 marks) To show that the two de…nitions are equivalent …rst note that
as f is di¤erentiable, for any x; y 2 R and any t 2 [0; 1],

tf (y) + (1 t)f (x) f (ty + (1 t)x) , t(f (y) f (x)) + f (x) f (x + t(y x)) ,
f (x + t(y x)) f (x) f (x + h) f (x)
f (y) f (x) , f (y) f (x) (y x),
t h
where h = t(y x). Taking limits when h ! 0, the latter implies that

f (y) f (x) f 0 (x)(y x). (1)

(5 marks) To prove the converse, let for any x; y 2 R and any t 2 [0; 1], let z =
ty + (1 t)x. By applying equation (1), we have that

f (y) f (z) f 0 (z)(y z),

f (x) f (z) f 0 (z)(x z).

Summing the …rst inequality multiplied by t to the second multiplied by (1 t), we

…nd the result

[f (y) f (z)]t + [f (x) f (z)](1 t) 0 , tf (y) + (1 t)f (x) f (z).

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EC400 Micro Solution 2019

(5 marks) To prove that equation (1) implies f 00 (x) 0, take any x; y 2 R and note
that by (1)
f (y) f (x) f 0 (x)(y x) and f (x) f (y) f 0 (y)(x y):
Summing these and dividing by (y x)2 implies that
f 0 (y) f 0 (x)
0:
y x
The limit of the last expression when y ! x yields f 00 (x) 0.
(5 marks) To prove the converse, pick y x, and note that by Fundamental Theorem
of Calculus and f 00 0, we have that
Ry Ry 0
f (y) f (x) = x f 0 (t)dt x
f (x)dt = f 0 (x)(y x).

6. (45 marks) For a > 0, consider the problem:

maxx;y y ex
s.t. ay a2 x + 1
y 0, x 0.

(a) (5 marks) Establish whether the objective function and the constraints are respec-
tively concave, convex, or neither. Can you solve this optimization problem using
the Kuhn-Tucker method? That is, for what values of a > 0 is the Slater condition
satis…ed?
Solutions: (1 marks) The constraints are obviously linear and thus both convex
and concave. (2 marks) The objective function is concave, as its Hessian is negative
semide…nite,
0 0
D2 f (x; y) = , D2 f (x; y) = 0 0, ex < 0 and 0 0.
0 ex

(2 marks) When the constraint set has a non-empty interior, we can adopt the Kuhn-
Tucker approach to solve the problem. This is the case for all a > 0, since the point
x = " and y = a" is always in the interior of the constraint set, as
ay = a2 " < a2 " + 1 = a2 x + 1, x > 0, y > 0.

(b) (10 marks) Suppose the Slater condition is satis…ed, write down the Kuhn-Tucker
necessary …rst order conditions that must be satis…ed by the solution of the con-
strained optimization problem. Are solutions to these conditions also maximizers of
the Lagrangian?
Solutions: (7 marks) The necessary …rst order conditions for the solution of the
constrained maximization problem are:
0 = 1 a 1 + 2,
0 = ex + a2 1 + 3 ,
0 = 1 (ay a2 x 1) = 2 y = 3 x,
0 ay a2 x 1, 0 y, 0 x,
0 1, 0 2, 0 3.

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EC400 Micro Solution 2019

(3 marks) Any solutions to these conditions is maximizer of the Lagrangian, because

the Lagrangian is a sum of concave functions by the arguments in (a) and because
Slater condition holds.
(c) (20 marks) Solve the constrained optimization problem in terms of a.
Solutions: Consider the various supports:
(3 marks) At a maximum it must be that 2 (a) = 0. If 2 > 0 and y = 0, the
objective could be improved while ful…lling the constraints for any x 0, since
f (x; 0) = ex < ax + 1=a ex = f (x; ax + 1=a).
(3 marks) At a maximum, it must be that 1 > 0, because 1 (a) = 1=a by the
…rst KKT condition coupled with 2 (a) = 0.
(7 marks) Next consider the case in which 1 ; 3 > 0, while 2 (a) = 0. If so, the
two binding constraints would imply that
y(a) = 1=a and x(a) = 0.
Solving the two …rst order conditions for goods x and y would imply that
1 (a) = 1=a 0, 3 (a) =1 a 0.
But then 3 (a) 0 would require a 1. Thus, there is a solution on this support
if and only if a 1.
(7 marks) Finally, consider the case in which 1 > 0 while 2 (a); 3 (a) = 0. If so,
solving the two …rst order conditions for goods x and y would imply that
1 (a) = 1=a 0, x(a) = log(a) 0,
which in turn requires a 1 for x(a) 0. But then, the binding constraint would
imply that
y(a) = a log(a) + 1=a 1=a > 0.
(d) (10 marks) State the Envelope Theorem and use it to …nd the slope of value function
with respect to the parameter a. Is the value function concave or convex? For what
value of a > 0 is the value function minimized?
Solutions: (3 marks) The Envelope Theorem states that if (x(a); y(a); (a)) are
di¤erentiable functions and the constraint quali…cation holds, then
dv(a) @L (x(a); y(a); (a))
= = 1 (a)(2ax(a) y(a))
da @a
(2 marks) If a < 1, x(a) = 0 while y(a) = 1 (a) = 1=a. Thus, the value decreases in
a
dv(a)
= 1 (a)(2ax(a) y(a)) = 1=a2 < 0.
da
(2 marks) If a > 1, x(a) = log(a), y(a) = a log(a) + 1=a while 1 (a) = 1=a. Thus, the
value …rst decreases and then increases in a
dv(a)
= 1 (a)(2ax(a) y(a))
da
= log(a) 1=a2 .
(3 marks). So the only critical point of the value function is the level a > 1 at which
a2 log(a ) = 1.
Moreover, this point is indeed a minimum as the value function is convex at a since
d2 v(a ) a2 + 2
= > 0.
da2 a3