ECON 104 G4 Assignment 5 (Deadline 8:00 am November 9)

1.The profit function of a firm is π(x, y) = px + qy − αx2 − βy 2 , where p and q are the
prices per unit and αx2 + βy 2 are the costs of producing and selling x units of the first
good and y units of the other. The constants are all positive.
a. Find the values of x and y that maximize profits. Denote them by x∗ and y ∗ . Verify
that the second-order conditions are satisfied.
b. Define π ∗ (p, q) = π (x∗ , y ∗ ) . Verify that ∂π ∗ (p, q)/∂p = x∗ and ∂π ∗ (p, q)/∂q = y ∗ .
Give these results economic interpretations.

2. Let A, a, and b be positive constants, and p, q, and r be arbitrary constants. Show

that the function f (x, y) = Axa y b − px − qy − r is concave for x > 0, y > 0 provided
that a + b ≤ 1

3. A firm produces and sells a product in two separate markets. When the price in
market A is p per ton, and the price in market B is q per ton, the demand in tons per
week in the two markets are, respectively,

QA = a − bp, QB = c − dq

The cost function is C (QA , QB ) = α + β (QA + QB ) , and all constants are positive.
a. Find the firm’s profit π as a function of the prices p and q, and then find the pair
(p∗ , q ∗ ) that maximizes profit.
b. Suppose it becomes unlawful to discriminate by price, so that the firm must charge
the same price in the two markets. What price p̂ will now maximize profit?
c. In the case β = 0, find the firm’s loss of profit if it has to charge the same price in
both markets. Comment.

4. A profit-maximizing monopolist produces two commodities whose quantities are

denoted by x1 and x2 . Good 1 is subsidized at the rate of σ per unit and good 2 is
taxed at τ per unit. The monopolist’s profit function is therefore given by

π (x1 , x2 ) = R (x1 , x2 ) − C (x1 , x2 ) + σx1 − τ x2

where R and C are the firm’s revenue and cost functions, respectively. Assume that
the partial derivatives of these functions have the following signs

R10 > 0, R20 > 0, 00

R11 < 0, 00
R12 00
= R21 < 0, 00
R22 <0
C10 > 0, C20 > 0, 00
C11 > 0, 00
C12 00
= C21 > 0, 00
C22 >0

1
everywhere in their domains.
a. Find the first-order conditions for maximum profits.
b. Write down the local second-order conditions for maximum profits.
c. Suppose that x∗1 = x∗1 (σ, τ ), x∗2 = x∗2 (σ, τ ) solve the problem. Find the signs of
∂x∗1 /∂σ, ∂x∗1 /∂τ, ∂x∗2 /∂σ, and ∂x∗2 /∂τ, assuming that the local second-order conditions
are satisfied.
d. Show that ∂x∗1 /∂τ = −∂x∗2 /∂σ

5. Consider a function f (x, y) = 8x3 − 12xy + y 3

a. Find all the stationary point(s).
b. Classify whether each point is a (local) maximum or minimum point.

6. Consider the following profit maximization problem:

max pf (L, K) − wL − rK
(L,K)

We have a stationary point (L∗ , K ∗ ) that satisfies the first-order conditions:

pf10 (L∗ , K ∗ ) = w and pf20 (L∗ , K ∗ ) = r

Assume that p, w and r are output and input prices and are fixed. Show that if f is
twice-differentiable and concave, then (L∗ , K ∗ ) is the global max point.

7. Consider a function: f (x, y) = x2 + xy + 2y 2 + 3, where x and y are defined on

(−∞, ∞)
a. Find stationary point(s).
b. Show that the stationary point(s) is a global max or min.

8. Consider a function: f (x, y) = 4x3 + 3y 2 , where x and y are defined on (−∞, ∞).
Are we able to know whether this function have a global maximum or minimum point?
1 1
9. Suppose that a firm has the production function f (L, K) = 4L 4 K 4 and that w and
r are input prices and p is output price. The firm does not change those prices.
a. Show that the firm’s profit π is a concave function of (L, K).
b. Find (L∗ , K ∗ ) that maximizes the profit, as a function of (p, w, r).

10. A (price-discriminating) firm producing a good faces two types of customers, each
of whom has the demand curve:

2
 p1 = 50 − q1
p2 = 100 − 10q2
The cost of producing the good is 90 + 20q, where q = q1 + q2
a. Find q1∗ and q2∗ that satisfy the first-order conditions.
b. What are p∗1 and p∗2 , and the associated profit?
c. Show that the answer in (a) is a global maximum.

11. Use the Lagrange multiplier method to solve the problem

min −40Q1 + Q21 − 2Q1 Q2 − 20Q2 + Q22 s.t. Q1 + Q2 = 15

12. Solve the following problems:

a. min f (x, y) = x2 + y 2 s.t. g(x, y) = x + 2y = 4
b. min f (x, y) = x2 + 2y 2 s.t. g(x, y) = x + y = 12
c. max f (x, y) = x2 + 3xy + y 2 s.t. g(x, y) = x + y = 100

13. Consider the problem max U (x, y) = 100 − e−x − e−y s.t. px + qy = m.
a. Write down the first-order conditions for the problem and solve them for x, y, and λ
as functions of p, q, and m. What assumptions are needed for x and y to be nonnegative?
b. Verify that x and y are homogeneous of degree 0 as functions of p, q, and m.

14. Consider the problem min x2 + y 2 s.t. x + 2y = a, where a > 0 is a constant.

a. Solve the problem by transforming it into an unconstrained optimization problem
with one variable.
b. Show that the Lagrange method leads to the same solution.
c. Explain the solution by studying the level curves of f (x, y) = x2 + y 2 and the graph
of the straight line x + 2y = a. Can you give a geometric interpretation of the problem?
Does the corresponding maximization problem have a solution?
√
15. Consider the utility maximization problem max U (x, y) = x+y s.t. x+4y = 100.
a. Using the Lagrange method, find the quantities demanded of the two goods.
b. Suppose income increases from 100 to 101. What is the exact increase in the optimal
value of U (x, y)? Compare with the value found in (a) for the Lagrange multiplier.
c. Suppose we change the budget constraint to px + qy = m, but keep the same utility
function. Derive the quantities demanded of the two goods if m > q 2 /4p.

3
16. Consider the problem max(min)f (x, y) = x + y s.t. g(x, y) = x2 + y = 1.
a. Find the solutions to the necessary conditions for these problems.
b. Explain the solution geometrically by drawing appropriate level curves for f (x, y)
together with the graph of the parabola x2 + y = 1. Does the associated minimization
problem have a solution?
c. Replace the constraint by x2 + y = 1.1, and solve the problem in this case. Find the
corresponding change in the optimal value of f (x, y) = x + y, and check to see if this
change is approximately equal to λ · 0.1

17. Consider the two problems:

max x − 2x2 + y 2 s.t. (x + y)2 = 0

x,y

max x − 2x2 + y 2 s.t. x + y = 0

x,y

a. Using Lagrangian method, find the solution of the second problem.

b. Show why you cannot use Lagrangian method to solve the first problem, even if the
two problems are equivalent (any point that satisfies the constraint in the first problem
satisfies the constraint in the second problem, and vice versa).

18. Consider the following problem:

max xy s.t. x2 + y 2 = 2c2 where c > 0 is constant.

x,y

a. Show why it has a solution.

b. Show why this problem satisfies the constraint qualification.
c. Find all the solutions.

19. Demand for tickets for the Big Game is given by p2 = 20 − q2 /6000 for the general
public, and by p1 = 8 − q1 /2500 for SMU students. SMU checks student IDs. Assume
that there are no costs.
a. If the stadium has an unlimited number of seats, then what prices maximize total
revenue? How many seats are sold?
b. Suppose that there are only 53,000 seats available. Then, what are the revenuemax-
imizing prices and quantities?
c. If SMU has one extra seat, then what is the profit increase for one more seat?