Unconstrained optimisation

∂𝑧 ∂𝑧
1. (a) Find the first-order partial derivatives, , , of the function
∂𝑥 ∂𝑦

𝑧 = 2𝑥 2 + 𝑦 2 − 12𝑥 − 8𝑦 + 50

and hence find the stationary point.

∂ 2 𝑧 ∂2 𝑧 ∂2 𝑧
(b) Find the second-order partial derivatives, 2
, 2
and , and hence show that
∂𝑥 ∂𝑦 ∂𝑥 ∂𝑦
the stationary point is a minimum.
2. Find and classify the stationary points of the following functions:
(a) 𝑓(𝑥, 𝑦) = 𝑥 3 + 𝑦 3 − 3𝑥 − 3𝑦
(b) 𝑓(𝑥, 𝑦) = 𝑥 3 + 3𝑥𝑦 2 − 3𝑥 2 − 3𝑦 2 + 10
3. A firm's profit function for the production of two goods is given by

𝜋 = 24𝑄1 − 𝑄12 − 𝑄1 𝑄2 − 2𝑄22 + 33𝑄2 − 43

Find the output levels needed to maximise profit. Use second-order derivatives to
confirm that the stationary point is a maximum.
4. A perfectly competitive producer sells two goods, G1 and G2, at $70 and $50,
respectively. The total cost of producing these goods is given by

TC = 𝑄12 + 𝑄1 𝑄2 + 𝑄22

where 𝑄1 and 𝑄2 denote the output levels of 𝐺1 and 𝐺 2. Find the maximum profit
and the values of 𝑄1 and 𝑄2 at which this is achieved.
5. An individual's utility function is given by

𝑈 = 260𝑥1 + 310𝑥2 + 5𝑥1 𝑥2 − 10𝑥12 − 𝑥22

where 𝑥1 is the amount of leisure measured in hours per week and 𝑥2 is earned income
measured in dollars per week. Find the values of 𝑥1 and 𝑥2 which maximise 𝑈. What
is the corresponding hourly rate of pay?
6. A monopolist produces the same product at two factories. The cost functions for
each factory are as follows: TC1 = 8𝑄1 and TC2 = 𝑄22

The demand function for the good is 𝑃 = 100 − 2𝑄

where 𝑄 = 𝑄1 + 𝑄2 . Find the values of 𝑄1 and 𝑄2 which maximise profit.

7. A monopolist sells its product in two isolated markets with demand functions
𝑃1 = 32 − 𝑄1 and 𝑃2 = 40 − 2𝑄2

The total cost function is TC = 4(𝑄1 + 𝑄2 ).

(a) Show that the profit function is given by 𝜋 = 28𝑄1 + 36𝑄2 − 𝑄12 − 2𝑄22

(b) Find the values of 𝑄1 and 𝑄2 which maximise profit and calculate the value of the
maximum profit. Verify that the second-order conditions for a maximum are satisfied.
8. (a) If the monopolist in Question 7 is no longer allowed to discriminate between the
two markets and must charge the same price, 𝑃, show that the total demand, 𝑄 = 𝑄1 +
3
𝑄2 , is given by 𝑄 = 52 − 𝑃
2
 1
and deduce that the profit function is 𝜋 = (92𝑄 − 2𝑄2 ).
3
(b) Find the maximum profit in part (a) and hence work out how much profit is lost by
the firm when it can no longer discriminate between the two markets.

Constrained optimisation
1. (a) Make 𝑦 the subject of the formula 9𝑥 + 3𝑦 = 2.
(b) The function, 𝑧 = 3𝑥𝑦
is subject to the constraint 9𝑥 + 3𝑦 = 2

Use your answer to part (a) to show that 𝑧 = 2𝑥 − 9𝑥 2

Hence find the maximum value of 𝑧 and the corresponding values of 𝑥 and 𝑦.
2. Find the maximum value of 𝑧 = 6𝑥 − 3𝑥 2 + 2𝑦

subject to the constraint 𝑦 − 𝑥 2 = 2

3. Find the maximum value of 𝑧 = 80𝑥 − 0.1𝑥 2 + 100𝑦 − 0.2𝑦 2

subject to the constraint 𝑥 + 𝑦 = 500

4. A firm's production function is given by 𝑄 = 50𝐾𝐿

Unit capital and labour costs are $2 and $3, respectively. Find the values of 𝐾 and 𝐿
which minimise total input costs if the production quota is 1200.
5. The total cost of producing 𝑥 items of product A and 𝑦 items of product B is

TC = 22𝑥 2 + 8𝑦 2 − 5𝑥𝑦

If the firm is committed to producing 20 items in total, write down the constraint
connecting 𝑥 and 𝑦. Hence find the number of each type that should be produced to
minimise costs.
6. Find the maximum value of the utility function, 𝑈 = 𝑥1 𝑥2 , subject to the budgetary
constraint, 𝑥1 + 4𝑥2 = 360.
7. A firm produces two goods A and B. The weekly cost of producing 𝑥 items of 𝐴
and 𝑦 items of 𝐵 is TC = 0.2𝑥 2 + 0.05𝑦 2 + 0.1𝑥𝑦 + 2𝑥 + 5𝑦 + 1000

(a) State the minimum value of TC in the case when there are no constraints.
(b) Find the minimum value of TC when the firm is committed to producing 500
goods of either type in total.

8. A firm's production function is given by 𝑄 = 𝐴𝐾𝐿 where 𝐴 is a positive constant.

Unit costs of capital and labour are $2 and $1, respectively. The firm spends a total of
$1000 on these inputs.
(a) Write down the cost constraint.
(b) Write down expressions for the marginal products of capital and labour.
(c) Use the fact that at the maximum output, the ratio of the input prices is equal to the
ratio of their marginal products to show that 𝐿 = 2𝐾.
(d) Use your answers to parts (a) and (c) to find the values of 𝐾 and 𝐿 which maximise
output.