Calculus II 2nd Semester, 2019-20

Extra exercises, Chapter 4

1. A friend of yours tells you that he has just been informed that both his Physics and Literature
finals will take place exactly two days from today. After taking into account his sleeping,
eating and resting hours, he estimates that the maximum number of study hours during
these two days will be 25. He comes to you for advice on how many hours of these 25
hours he should devote to studying Physics (x1 ) and Literature (x2 ). Your friend’s grades
in Physics and Literature, y1 and y2 , respectively, are:
√
y 1 = 2 x1
x2
y2 = 3 +
4
Your friend’s utility equals his average grade in the two courses minus his disutility of effort,
+x2 )2
which is given by (x1500 (he dislikes spending time studying, and even more so the longer
he has been studying).

(a) Write down your friend’s utility maximization problem.

Solution: The utility maximization problem reads
1h √ x2 i (x1 + x2 )2
max 2 x1 + 3 + −
x1 ,x2 2 4 500
s.t. x1 + x2 ≤ 25
x1 ≥ 0
x2 ≥ 0

(b) Write down the Lagrangian and the Kühn-Tucker conditions.

Solution: The Lagrangian function, explicitly considering the non-negativity con-
straints, is:
1h √ x2 i (x1 + x2 )2
L(x, y, λ, µ1 , µ2 ) = 2 x1 + 3 + − −λ(x1 +x2 −25)−µ1 (−x1 )−µ2 (−x2 )
2 4 500
The Kühn-Tucker conditions are:
1 x1 + x2
√ − − λ ≤ 0, = 0 if x∗1 > 0
2 x1 250
1 x1 + x2
− − λ ≤ 0, = 0 if x∗2 > 0
8 250
λ ≥ 0, λ(x1 + x2 − 25) = 0.

A first inspection of the Kühn-Tucker conditions allows us to see that the solution will
never be such that x∗1 = 0. Notice that if that was the case, then the term 2√1 2 → ∞,
and therefore the top condition could never be less than or equal to zero. Therefore,
in all cases, the solution will be such that your friend allocates some time to studying
Physics. Whether your friends allocates some time to studying Literature or whether
he uses up all his available time remains is unclear and depends on the functional form
of the cost of effort function, as seen below.

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(c) Will you advise your friend to study for the full 25 hours? How many hours should
your friend optimally spend studying Physics (x∗1 ) and Literature (x∗2 )?
Solution: Given that the solution involves some time to studying Physics, the top
condition holds with equality. Assume that the solution is such that the total number
of hours studied is less than 25. Then, λ = 0 and the Kühn-Tucker conditions become:

1 x1 + x2
√ − =0
2 x1 250
1 x1 + x2
− ≤ 0, = 0 if x∗2 > 0
8 250
λ = 0, (x1 + x2 − 25) < 0.

Here we have two possibilities, namely x∗2 = 0 and x∗2 > 0. First, if x∗2 = 0, then
solving the top equality, x∗1 = 25, but then the second condition would not hold, since
1
8
25
− 250 > 0. Therefore, we rule out this case. Now, if x∗2 > 0, then it must be the case
that x∗1 = 16, but then x∗2 = 15.25, and the total number of hours would exceed 25.
Therefore, the solution must involve x∗1 + x∗2 = 25, with λ∗ ≥ 0. The conditions are now

1 x1 + x2
√ − −λ=0
2 x1 250
1 x1 + x2
− − λ ≤ 0, = 0 if x∗2 > 0
8 250
λ ≥ 0, λ(x1 + x2 − 25) = 0.

Again, we need to consider the cases x∗2 = 0 and x∗2 > 0. In the former case, the
optimal value of x1 must be 25. However, the second condition would not hold, and
this case is ruled out. Therefore, x∗2 > 0. In this case, the top two conditions hold with
equality, and the solution is x∗1 = 16, x∗2 = 9, λ∗ = 40
1
.
(d) What is the interpretation of the multiplier associated with the time constraint?
Solution: It is the change in your friend’s average grade, and therefore in its utility,
were your friend allowed to study for an extra hour.
(e) Would you advise your friend to study for the full 25 hours if his disutility from effort
+x2 )2
was (x1300 ? Justify your answer.
Solution: Notice that the only change is in the denominator of the cost of effort
function. Now the Kühn-Tucker conditions are:

1 x1 + x2
√ − − λ ≤ 0, = 0 if x∗1 > 0
2 x1 150
1 x1 + x2
− − λ ≤ 0, = 0 if x∗2 > 0
8 150
λ ≥ 0, λ(x1 + x2 − 25) = 0.

Again, the solution will always involve x∗1 > 0. In this case, you can verify that
the solution will not be such that x∗1 + x∗2 = 25. Instead, the solution is such that
x∗1 + x∗2 < 25, with λ∗ = 0. Then the Kühn-Tucker conditions are:

2
 1 x1 + x2
√ − =0
2 x1 150
1 x1 + x2
− ≤ 0, = 0 if x∗2 > 0
8 150
λ = 0, (x1 + x2 − 25) < 0.

Given that x1 + x2 < 25, you may easily verify that the solution can not be such that
x∗2 = 0. Then, focusing on the case x∗1 > 0, x∗2 > 0, we have that the top two conditions
hold with equality leading to x∗1 = 16, x∗1 = 150
8
− 16 = 11
4
.
2
(f) Assume that the disutility of effort is (x1500
+x2 )
. How many hours would you advise
your friend to study for each of the two subjects if your friend’s grades in Physics and
√
Literature were y1 = 2 x1 and y2 = 4 + x62 ?
Solution: Now the Kühn-Tucker conditions are:
1 x1 + x2
√ − − λ ≤ 0, = 0 if x∗1 > 0
2 x1 250
1 x1 + x2
− − λ ≤ 0, = 0 if x∗2 > 0
12 250
λ ≥ 0, λ(x1 + x2 − 25) = 0.

Again, the solution will be such that x∗1 > 0. You may also easily dismiss the cases
where the time constraint is non-binding (please do it). The solution is such that
x∗1 + x∗2 = 25, with a non-negative value of the multiplier. We need to verify whether
x∗2 > 0 or x∗2 = 0. Assume that x∗2 > 0, then the Kühn-Tucker conditions are
1 x1 + x2
√ − −λ=0
2 x1 250
1 x1 + x2
− −λ=0
12 250
λ ≥ 0, λ(x1 + x2 − 25) = 0.

but then the solution is such that x∗1 = 36, clearly violating the time constraint.
Therefore, x2 must be zero at the solution. Then, x∗1 = 25, with the top two Kühn-
Tucker conditions becoming
1 25
√ − −λ=0
2 25 250
1 25
− −λ≤0
12 250

therefore, λ∗ = 0, and the bottom condition holding, therefore, the solution is x∗1 = 25,
x∗2 = 0, λ∗ = 0. In this case, the fact that λ∗ = 0 means that if your friend were given
an extra hour, he would choose not to study more. This is because when he studies
for 25 hours, he has reached a point in which the extra average grade that he gets,
√1 , exactly equals the disutility of effort, 25 . Therefore, your friend quits studying
2 25 250
right after the 25th hour. Meanwhile, he does not study Literature at all because the

3
 marginal effect on the average grade of one hour of study of Physics, given by 2√1x1
1
always exceed the marginal effect of one hour of study of Literature, 12 , for any value
of x1 ∈ [0, 25].

2. Consider a situation in which there is a monopolist in a market with inverse demand function
p(q) = 10 − q. The monopolist makes two choices: How much money to invest in cost
reduction, and how much to sell, q. Assume that the monopolist makes these two choices
simultaneously. The monopolist’s total cost of production is C(q, α) = c · (1 − α) · q. If no
investment in cost reduction is made, then α = 0, and increasing the value of α costs the
monopolist bα + α2 . The monopolist’s costs can not be negative, therefore, α ≤ 1.

(a) Write down the monopolist’s profit maximization problem. Hint: the monopolist’s
choice variables are q and α, and you must include the investment in cost reduction in
the monopolist’s profit function.
Solution: Since the monopolist’s production costs are linear in output, the monopo-
list’s problem can be written as:

max (10 − q − c(1 − α)) q − (bα − α2 )

q,α

s.t. α ≤ 1
q≥0
α≥0

Notice that the profit function includes the term −(bα − α2 ), which represents the cost
of investing in reducing the marginal cost of production from c to (1 − α)c.
(b) Write down the Lagrangian and the Kühn-Tucker conditions.
Solution: The Lagrangian is:

L(q, α, λ, µ1 , µ2 ) = (10 − q − c(1 − α)) q − (bα − α2 ) − λ(α − 1) − µ1 (−q) − µ2 (−α)

and the Kühn-Tucker conditions are:

10 − c(1 − α) − 2q ≤ 0, = 0 if q ∗ > 0
cq − (b + 2α) − λ ≤ 0, = 0 if α∗ > 0
λ ≥ 0, λ(α − 1) = 0.

Looking at the top condition, provided that c(1 − α) < 10, q ∗ > 0. Then, a sufficient
condition for this to occur is c < 10. Whether 0 ≤ α∗ ≤ 1 will depend on the specific
values of c and b, as seen below.
(c) What are the optimal values of q and α if:
i. c = 2 and b = 1?
Solution: As argued above, q ∗ > 0. Assume that α∗ = 0 (therefore, λ∗ = 0).
Then, the top two Kühn-Tucker conditions would become

10 − 2 − 2q = 0
2q − 1 ≤ 0

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 but this means that q ∗ = 4, and the bottom condition would not hold. Therefore,
α must be positive. However, we need to verify whether α∗ < 1 or α∗ = 1.
Suppose that α∗ < 1 (therefore, λ∗ = 0), then you may see that this leads to
10 − 2(1 − α) = 1 + 2α, which is impossible. Therefore, the solution must be
q ∗ > 0, α∗ = 1. In this case, the top two Kühn-Tucker conditions become

10 − 2q = 0
2q − (1 + 2) − λ ≤ 0

therefore q ∗ = 5, α∗ = 1, and λ∗ = 7, verifying all conditions. In this case, the

firm invests all the way to make its cost of production zero.
ii. c = 2 and b = 9?
Solution: Given the new values of c and b, you may verify that all cases may be
ruled out except the case α∗ = 0 (with λ∗ = 0, of course). Then the conditions
become:

10 − 2 − 2q = 0
2q − 9 ≤ 0

and the solution is q ∗ = 4, α∗ = 0, λ∗ = 0. Notice that the second condition

holds with inequality, since 8 − 9 < 0. In this case, reducing the cost of production
has become too expensive (b has increased) and the firm optimally decides not to
reduce its cost of production (α∗ = 0).
iii. c = 8 and b = 9?
Solution: In this case, we have several candidates for solution. You may verify
(please do so) that these are, on the one hand, 0 < α∗ < 1, that is the firm invests
in cost reduction, but not all the way to make them zero, as it did in part (i). In
this case, the top two Kühn-Tucker conditions become (recall that λ = 0 since we
consider that α < 1):

10 − 8(1 − α) − 2q = 0
8q − (9 + 2α) = 0

then α∗ = 30 1
, q ∗ = 15
17
, λ∗ = 0. However, there are other two candidates for
solution, namely α∗ = 0 and q ∗ = 1, λ∗ = 0, and also q ∗ = 5, α∗ = 1 and λ∗ = 29.
In this case, the highest profit corresponds to q ∗ = 5, α∗ = 1, where the firm’s
profits are 15, greater than in the other two cases.