ECOS2903 Tutorial 6: Functions of Many Variables II

questions

29 March 2022

Please try your best to solve these questions before coming to the tutorial.
For the questions marked with ⇤, you will be invited to share your thoughts (even if you could
not solve them entirely), and we will discuss them in detail. For the other questions, we may invite
you to share your answers with your classmates and we may not go over them in detail in class if
we run out of time.

Q1 Each week a suburban railway company has a long-run cost C = aQ1 + bQ2 + cQ21 of provid-
ing Q1 passenger kilometres of service during rush hours and Q2 passenger kilometres dur-
ing off-peak hours. As functions of the regulated fares p1 and p2 per kilometre for the
rush hours and off-peak hours, respectively, the demands for the two kinds of service are
b b
Q1 = Ap1 a1 p2 1 and Q2 = Bpa1 2 p2 2 , where the constants A, B, a1 , a2 , b1 , b2 are all positive.
Assuming that the company runs enough trains to meet the demand, find expressions for the
partial derivatives of C w.r.t. p1 and p2 .

Q2* Q2 A firm produces Q = f (L) units of a commodity using L units of labour. We assume that
0 00
f (L) > 0 and f (L) < 0, so f is strictly increasing and strictly concave.
(a) If the sales price of the commodity produced is P per unit and the firm w for each unit of
labour, write down the profit function, and condition for profit maximisation at L⇤ > 0.
(b) By implicitly differentiate the condition you found in (a), examine how changes in P and
w influence the maximum point L⇤ by explicitly expressing ∂∂LP and ∂∂Lw .
⇤ ⇤

Quiz In Q2,
L⇤ sometimes/always/never (select one) increases with P.
L⇤ sometimes/always/never (select one) increases with w.

Q3* Prove the following theorem in guided steps. While the entire proof is very long, each step
is a good stand-alone exercise of mathematical proof.

Theorem 1. Let X be a subset of Rn+ (set of n-dimensional vectors with non-negative real-
valued coordinates).
Suppose that function f : X ! (0, •) is quasi-concave and homogeneous of degree r > 0.
Then f is concave if and only if r  1.

1
 (a) Prove that “if f : X ! (0, •) is a quasi-concave function and is homogeneous of degree
r = 1, then f is concave” in three steps.
⇣ ⌘
x
1. Show that for any vector x in the domain of f , f f (x) = 1.
2. Show that for any x1 , x2 in the domain of f and any a 2 (0, 1),
✓ ◆
x1 x2
f a + (1 a) 1.
f (x1 ) f (x2 )

3. Plug in a suitable value of a to show that f must be concave.

(b) Prove the following proposition (which is a very useful proposition in general):
Proposition 1. Suppose g(x) = H ( f (x)), where f is a concave function and H is an
increasing, concave function. Then the function g is also concave.
(c) Prove that “if f : X ! (0, •) is a quasi-concave function and is homogeneous of some
degree r 2 (0, 1) then f is concave” in two steps.
1. Let g (x) = [ f (x)]1/r . Use the result in (a) to show that g is concave.
2. Use the Proposition in (b) to show that f is concave.
(d) Prove that “if f : X ! (0, •) is a concave function and is homogeneous of degree r > 0,
then r  1” in two steps.
1. Fix a vector a from the domain of f . Let H(t) = f (ta) for all t > 0. Show that H
must be concave in t.
2. Let x > 0. Show that if c > 0 and r > 0 then cxr is concave in x if and only if r  1.
Use this to prove (d).

Q4 Suppose that you always consume tea and biscuits in fixed proportion: 1 cup of tea goes with
exactly 2 biscuits. Let pt denote the price for each cup of tea and pb denote the price for
each biscuit. Let M denote your total budget to spend on tea and biscuits. Write down the
expression for your demand function f (pt , pb , M) = (xt , xb ) and show that it is HOD 0.