QUIZ 5

TIME: 45 +10= 55 MIN

MARKS: 30

1. (6 marks) A utility function of a typical consumer is given by the following function:

𝑈 𝑥, 𝑦 = (𝑥 − 𝑎)2 + (𝑦 − 2)2 𝑤ℎ𝑒𝑟𝑒 𝑥 ≥ 0 𝑎𝑛𝑑 𝑦 ≥ 0

Where x and y are the units of two goods consumed.

a) Find and sketch the level curves at U=1, U=2 and U=4. Explain the shape of indifference
curve.
b) What is indifferent curve? How it related to answer you calculated in part a).

2. (6 marks) Which of the following sets are convex sets? Explain by interpreting each set
geometrically.
a) {(𝑥, 𝑦)|𝑥 2 + 𝑦 2 = 𝑎}
b) {(𝑥, 𝑦)|𝑥 2 + 𝑦 2 < 𝑎}
c) {(𝑥, 𝑦)|𝑥 2 + 𝑦 2 > 𝑎}

3. (6 marks) Let the function be 𝑓 𝑥, 𝑦 = 𝑎𝑥𝑦. Is the function concave, convex or neither?

4. (12 marks) Consider a competitive firm with the following profit function:

𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑅 − 𝐶 = 𝑃𝑄 − 𝑤𝐿 − 𝑟𝐾

Where P is the price, Q is the quantity, L is unit of labour used, K is units of capital consumed, w
and r are input prices of labour and capital respectively.

Since it is a competitive market, P, r and w are constant and equal to 50, 2 and 3 respectively. K,
L and Q are endogenous. Q is a function of K and L and can be written as:
𝑎 𝑎
𝑄 𝐾, 𝐿 = 𝐿20 𝐾 30

a) Find the profit maximizing unit of labour and capital and find the respective maximum profit.
b) Prove that the profit found in part a) is indeed profit maximizing.