Problem 1: For a given good, we know the following:

Supply is given by q
s
(p) = p
2
.
Demand is a linear function of price.
When the good is free, the quantity demanded is 160.
The market equilibrium price for the good is 10.
What is the price elasticity of demand at the equilibrium price and quantity?
(A) There is not enough information to solve this problem.
(B) -0.6
(C) -6
(D) -1.6
(E) -60
Solution: (B). The price elasticity of demand is given by
D
=
dq
d
(p)
dp
p
q
d
(p)
. We must rst nd
q
d
(p). We are told that demand is a linear function of price. So, q
d
(p) = ap + b, where a and
b are constants. We are also told that when the good is free (i.e. p = 0), quantity demanded is
160. Therefore, q
d
(0) = b = 160. We are also told that supply is given by q
s
(p) = p
2
and that the
market equilibrium price for the good is 10. At market equilibrium, q
s
(10) = 10
2
= 100 = q
d
(10) =
10a + 160. This tells us that a = 6, and that q
d
(p) = 6p + 160.
Applying the function for the price elasticity of demand when p = 10 and q
d
= 100, we nd that

D
= 6 10/100 = 0.6.
Problem 2: Given that
U(x
1
, x
2
, x
3
) = x
1
x
2
x
3
,
which of the following is the dierential of U?
(A) dU =
1
U
3

i=1
x
i
dx
i
(B) dU = U
3

i=1
dx
i
x
i
1
(C) dU = U
3

i=1
dx
i
x
i
(D) dU =
1
U
3

i=1
x
i
dx
i
(E) dU = U
3

i=1
x
i
dx
i
Solution: (C). dU = U

1
dx
1
+ U

2
dx
2
+ U

3
dx
3
= x
2
x
3
dx
1
+ x
1
x
3
dx
2
+ x
2
x
3
dx
1
.
To write this in the form of the possible answers, we need to recover the original function U. To
do that, we multiply and divided each term in this sum by the variable that we dierentiated with
respect to:
dU = x
1
x
2
x
3
dx
1
x
1
+ x
1
x
2
x
3
dx
2
x
2
+ x
1
x
2
x
3
dx
3
x
3
= x
1
x
2
x
3
_
dx
1
x
1
+
dx
2
x
2
+
dx
3
x
3
_
= U
3

i=1
dx
i
x
i
For problems 3, 4, and 5, please use the following production function:
F(K, L) = (aK
r
+ (1 a)L
r
)
1/r
where K is capital, L is labor, and a and r are constants.
Problem 3: What is the value of the marginal rate of substitution of labor for capital, R
LK
=
F

K
F

L
,
divided by the slope of a level curve,
dL
dK
, of this production function?
(A)
1
1 r
(B) 0
(C) 1
(D)
1
r 1
(E) None of the above
Solution: (E). We learned that the slope of a level curve
dL
dK
=
F

K
F

L
. So, dividing the MRS by
the slope of a level curve will give a result of 1.
2
Problem 4: For this production function, what is the elasticity of substitution between labor and
capital?
(A)
1
1 r
(B) 0
(C) 1
(D)
1
r 1
(E) None of the above
Solution: (A). First, lets nd the MRS:
R
LK
=
F

K
F

L
=
1
r
(aK
r
+ (1 a)L
r
)
1/r1
arK
r1
1
r
(aK
r
+ (1 a)L
r
)
1/r1
(1 a)rL
r1
=
a
1 a
_
K
L
_
r1
=
a
1 a
_
L
K
_
1r
We write this last term in terms of
L
K
for the next step. The elasticity of substitution is written

LK
=
d
_
L
K
_
dR
LK
R
LK
L
K
L
K
can be solved as a function of R
LK
:
L
K
=
_
1 a
a
_
1/(1r)
R
1/(1r)
LK
Then:

LK
=
_
1 a
a
_
1/(1r)
1
1 r
R
1/(1r)1
LK
R
LK
L
K
=
1
1 r
Problem 5: Assume that r = 2, a = 0.25, and that you are required to use amounts of capital
and labor such that K + L = 100. What combination of K and L will maximize production?
(A) K = 100, L = 0
(B) K = 75, L = 25
(C) K = 0, L = 100
(D) K = 25, L = 75
3
(E) None of the above
Solution: (C). The production function becomes F(K, L) =
_
K
2
/4 + 3L
2
/4. We would like to
nd the values of K and L that maximize this function, but we are restricted to values of K and
L such that K + L = 100. With this restriction, we can make a replacement to convert this into a
single-variable maximization problem. If we solve for L = 100K, we get the following production
function:
F(K) =
_
K
2
/4 + 3(100 K)
2
/4 =
_
K
2
/4 + 7500 150K + 3K
2
/4 =
_
K
2
150K + 7500
Now, maximizing this function will give the same result as maximizing the part under the square
root (since the square root function is strictly increasing), so we can proceed to maximize K
2

150K + 7500.
If we take a rst derivative and set it equal to 0, we nd:
2K 150 = 0 K = 75.
However, taking a second derivative results in a positive value, indicating that this stationary point,
K = 75, is a local minimum. There are only one other type of points we need to check (there are no
points where the derivative of the function does not exist, and we cannot take K to innity since
it is bounded by our restriction that K + L = 100): the boundary points K = 0 and K = 100. At
K = 0, F(K) =

7500 86.6. At K = 100, F(K) =

2500 = 50. So, production is maximized

when K = 0 and L = 100.
Problem 6: Which of the following is the closest to e
100x
at x = 0.99?
(A) e
100
[1 + 100(x 1) + 5000(x 1)
2
]
(B) e
100
[1 + 100(x 1)]
(C) e
100
[1 + 100(x 1) + 10000(x 1)
2
]
(D) e
100
[1 + 100(x 1) + 10000(x 1)
2
+ 1000000(x 1)
3
]
(E) e
100
Solution: (A). It should be recognized that the possible answers are all polynomials with terms
(x 1)
k
. This indicates that they are polynomial (Taylor) approximations of the function e
100x
around the point x = 1. We know that Taylor approximations get better as we increase the number
of terms in the approximation (i.e. increase the order of the Taylor polynomial). If we want to
4
calculate the third-order Taylor polynomial of e
100x
around x = 1, we rst need the derivatives of
e
100x
:
f(x) = e
100x
f

(x) = 100e
100x
f

(x) = 10000e
100x
f

(x) = 1000000e
100x
Recall that the formula for a third-order Taylor polynomial around x = a is:
f(x) = f(a) + f

(a)(x a) +
f

(a)
2!
(x a)
2
+
f

(a)
3!
(x a)
3
Then the third-order Taylor polynomial of e
100x
around x = 1 is the following:
e
100x
e
100
+ 100e
100
(x 1) + 5000e
100
(x 1)
2
+
500000
3
(x 1)
3
While (E) is a third-order polynomial, it is not a Taylor polynomial as it does not match what we
have found here. (A) is a second-order polynomial that does match the rst 3 terms of what we
have found, so it is the second-order Taylor approximation of e
100x
around x = 1, and as such gives
us the correct answer.
Problem 7: The domain of f(x, y) =

xy are all points (x, y) such that x and y are:

(A) both positive.
(B) both not equal to 0.
(C) of the same sign.
(D) of dierent signs.
(E) None of the above
Solution: (C) or (E). The domain of f(x, y) is determined by the square root, as the argument of
a square root cannot be negative. xy is non-negative as long as x and y share a sign or x or y are
0. Because of this second case, where either x or y are 0, (C) is incorrect, leaving (E) to be the
correct answer. (C) was also accepted since there was ambiguity regarding the sign of 0.
Problem 8: Below is the graph of a function f(x). Which of the following is true?
5
y
x
a
y = f(x)
I. f

(x) has a local maximum point at x = a.

II. f(x) has an inection point at x = a.
III. f

(x) has a local minimum point at x = a.

(A) Only I is true.
(B) Only II is true.
(C) Only III is true.
(D) Only I and II are true.
(E) Only II and III are true.
Solution: (E). The concavity of the f(x) changes at x = a, indicating that f

(x) changes sign

there, specically from negative to positive. When this occurs, we know that f

(x) has a local

6
minimum (rst derivative test applied to f

(x) rather than f(x)), and that f(x) has an inection

point.
Problem 9: Which of the following is the Hessian of f(x
1
, x
2
) = x
2
ln x
1
?
(A)
_
x
2
/x
1
0
0 ln x
1
_
(B)
_
x
2
/x
2
1
1/x
1
1/x
1
0
_
(C)
_
1/x
1
0
x
2
/x
2
1
1/x
1
_
(D)
_
1 0
0 1
_
(E)
_
0 x
2
/x
1
ln x
1
0
_
Solution: (B). The rst-order partials of f(x
1
, x
2
) = x
2
ln x
1
are f

1
= x
2
/x
1
and f

2
= ln x
1
. The
second-order partials are then f

11
= x
2
/x
2
1
, f

12
= f

21
= 1/x
1
and f

22
= 0. Putting these into the
form of the Hessian matrix gives us (B).
Problem 10: The local minimum and maximum values attained by
f(x) = x
3
7x
2
+ 16x 12
are, respectively:
(A)
4
27
and 0
(B)
8
3
and 2
(C) 2 and
8
3
(D) 1 and 2
(E)
4
27
and 2
7
Solution: (A). To nd the local minimum and maximum points, we rst take a rst derivative
and set it equal to 0:
f

(x) = 3x
2
14x + 16 = (3x 8)(x 2) = 0
This yields x = 8/3 and x = 2. The second derivative of f is f

(x) = 6x 14. At x = 8/3, this

second derivative is positive, indicating that x = 8/3 is a local minimum point. At x = 2, this
second derivative is negative, indicating that x = 2 is a local maximum point. Now, the question
asks for the local minimum and maximum values that the function attains, so we must plug these
points into the function. f(8/3) = 4/27 and f(2) = 0.
Problem 11: What is the value of
d
dy
_
2

y
e
x
2
dx
when y = 1?
(A)
1
2e

1
e
4
(B)
1
e
4

1
e
(C)
1
e

1
e
4
(D)
1
e
4

1
2e
(E) None of the above
Solution: (D). We will apply the rule that allows us to take the derivative of an integral, where
the variable of dierentiation appears in the bounds of the integral:
d
dt
_
b(t)
a(t)
f(x) dx = f(b(t))b

(t) f(a(t))a

(t)
So,
d
dy
_
2

y
e
x
2
dx = e
4y
y
1/2
e
y
1/2 y
1/2
When y = 1, this is equal to
1
e
4

1
2e
.
Problem 12: Let f(x) be dened by the following:
f(x) =
_
5(x 3)
2
+ a if x < 2
bx + 10 if x 2
where a and b are constants. If f(x) is dierentiable at x = 2, then
8
(A) a = 35, b is unrestricted
(B) a = 35, b = 10
(C) b = 10, a is unrestricted
(D) a = 5, b is unrestricted
(E) a = 5, b = 10
Solution: (B). For f to be dierentiable at x = 2, it must rst be continuous there. We rst check
the conditions for continuity. First, f(2) must exist. Here, f(2) = 2b + 10, so it exists. Second,
lim
x2
f(x) must exist. For this to be true, lim
x2
+
f(x) = lim
x2

f(x). As we approach from the right,

the function is bx+10, and the limit as x 2 is 2b+10. As we approach from the left, the function
is 5(x 3)
2
+ a, and the limit as x 2 is a 5. So, the rst condition is that 2b + 10 = a 5,
or a = 2b + 15. Third, f(2) = lim
x2
f(x). This will be true given that a = 2b + 15.
We now check for dierentiability. f is dierentiable at x = 2 if lim
h0
f(2 + h) f(2)
h
. Again, for
this to be true, lim
h0
+
f(2 + h) f(2)
h
= lim
h0

f(2 + h) f(2)
h
. Now,
lim
h0
+
f(2 + h) f(2)
h
= lim
h0
+
b(2 + h) + 10 2b 10
h
= lim
h0
+
bh
h
= b
Also,
lim
h0

f(2 + h) f(2)
h
= lim
h0

5((2 + h) 3)
2
+ a a + 5
h
= lim
h0

5(h
2
2h + 1) + 5
h
= lim
h0

5h
2
+ 10h
h
= 10
Here, we were able to replace f(2) with a 5 because we established above that 2b + 10 = a 5.
This indicates that one restriction is that b = 10. From our continuity conditions, we nd that this
implies a = 35.
Problem 13: Let u = u(x) = (x 1)
2
+ 2. Also let g(x) be such that g

(2) = 5. What is
dy
dx
at
(x, y) = (1, 1) given that
g(uy) = x
2
y?
(A)
2
9
(B) -5
9
(C)
1
5
(D) 0
(E)
dy
dx
does not exist at (x, y) = (1, 1).
Solution: (A). This problem requires implicit dierentiation. First, we perform implicit dierenti-
ation with respect to x. We then plug in the value of the point where we are nding the derivative.
Finally, we solve for
dy
dx
. For clarity, I replace y with f(x):
g(u(x) f(x)) = x
2
f(x)
g

(u(x) f(x))[u(x)f

(x) + u

(x)f(x)] = x
2
f

(x) + 2xf(x)
g

(u(1))[u(1)f

(1) + u

(1)] = f

(1) + 2
g

(2)[2f

(1) + 0] = f

(1) + 2
10f

(1) = f

(1) + 2
f

(1) =
dy
dx

(x,y)=(1,1)
=
2
9
Problem 14: What is the area between the x-axis and function f(x) = ln(x) from x = 1 to x = e?
(A)
(B) 1
(C) 0
(D) 1
(E)
Solution: (D). This requires a denite integral:
A =
_
e
1
ln x dx
We can take this integral using integration by parts. We let f(x) = ln x and g

(x) = 1. This gives

f

(x) = 1/x and g(x) = x. Then

A = xln x

e
1

_
e
1
dx = e x

e
1
= e e + 1 = 1
10
Problem 15: When a rm produces at least 20 units of a good, it receives revenue and faces costs
equal to
R(Q) = 15Q
2
+ 5000
C(Q) = (Q20)
3
If the rm produces less than 20 units of the good, it receives no revenue and faces no costs. What
quantity should the rm produce in order to maximize its prots?
(A) 10
(B) As quantity produced increases, the rms prot increases without bound.
(C) 0
(D) 40
(E) None of the above
Solution: (D). The prot function is
(Q) = R(Q) C(Q) = 15Q
2
+ 5000 (Q20)
3
when Q 20. For now, we can ignore the part of the function when Q < 20. We will now take the
derivative of the prot function and set it equal to 0:

(Q) = 30Q3(Q20)
2
= 0 3Q
2
+150Q1200 = 0 Q
2
50Q+400 = 0 (Q10)(Q40) = 0.
This means that stationary points occur at Q = 10 and Q = 40. To check whether they are local
maxima or minima, we take a second derivative of the prot function:

(Q) = 30 6(Q20) = 6Q + 150

(10) = 90 > 0, so Q = 10 is a local minimum.

(40) = 90 < 0, so Q = 40 is a local maximum.

Because this occurs when Q > 20, we do not have to worry about when production is less than 20.
Next, we nd boundary points and compare the values of the function at those points to the values
at the stationary points. When Q = 40, (Q) = 21000. A boundary point occurs at Q = 0, with
(0) = 0 (according to the description). You could check Q = 20 since there is a discontinuity
there in pi(Q), but when we ignored the discontinuity, we found that (40) > (20), since Q = 40
was a local maximum point (indeed, pi(20) = 11000).
Finally, we notice that as Q , (Q) , since (Q) is a polynomial whose highest order
term, Q
3
, is negative. Therefore, the rm should produce at 40 units of the good to maximize
prots.
11