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ECON3202

S2/2016

Mathematical Economics

Assignment 8 - Solutions
Due Date: 17 October, 2016 - Beginning of Week 12 Lecture
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name. You can submit a scanned copy of your handwritten solutions.

Assignment Questions
1. Given
min C = F (x)
subject to Gi (x) ri
x 0
(i = 1, 2, ..., m)
(a) Convert it into a maximization problem
Answer:
max C 0 = F (x)
subject to Gi (x) ri
x 0
i = 1, 2, ..., m
(with Gi (x) g i (x))
(b) Given the Kuhn-Tucker sufficiency theorem, what concavity-convexity conditions
should be places on the F and Gi functions to make the sufficient conditions for a
maximum applicable here.
Answer:
i. We require f (x), i.e. F (x), to be concave. Equivalently, we require F (x) to
be convex.
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ii. We require g i (x), i.e. Gi (x), to be convex. Equivalently, we require Gi (x) to


be concave.
2. Explain whether the Kuhn-Tucker sufficiency Theorem is applicable to:
(a)
max = x1
subject to x21 + x22 1
x1 , x 2 0
Answer: The objective function is linear and therefore concave. The constraint
is convex because it is a sum of convex functions. Therefore, the Kuhn-Tucker
sufficiency Theorem is applicable
(b)
min C = (x1 3)2 + (x2 4)2
subject to x1 + x2 4
x1 , x 2 0
Answer: Convert it into a maximization problem first,
max C 0 = (x1 3)2 (x2 4)2

subject to x1 x2 4
x 1 , x2 0
The objective function is concave (is the sum of concave functions). The constraint is
a linear function and thus convex. Therefore, the Kuhn-Tucker sufficiency Theorem
is applicable.
3. Consider the following problem:
max = x1
subject to x21 + x22 1
x1 , x 2 0
Solve the problem graphically and check whether the optimal solution point satisfies the
Kuhn-Tucker conditions.
Answer: The constraint border is a circle with radius 1 and with centre at point (0, 0).
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Therefore, the optimal solution is at: (x1 , x2 ) = (1, 0).


The Lagrangian function is


L = x1 + 1 x21 x22
Kuhn-Tucker conditions:
Lx1 = 1 2x1 0, x1 0, x1 Lx1 = 0
Lx2 = 2x2 0, x2 0, x2 Lx2 = 0
L = 1 x21 x22 0, 0, L = 0
At the optimal solution point: (x1 , x2 ) = (1, 0), x1 > 0, therefore, Lx1 = 1 2x1 = 0
has to hold. From Lx1 = 0 we find: = 21 at x1 = 1. We find at the optimum that
Lx2 = 0. The constraint is binding, with = 21 > 0. Therefore, L = 0 has to hold. At
the optimum: L = 1 (1)2 + (0)2 = 0.
Therefore, we have found that the optimum solution: x1 = 1, x2 = 0 and = 12 satisfy
the Kuhn-Tucker conditions.
Note that as answered in 2.(a), the objective function is linear and therefore concave. The
constraint is convex because it is a sum of convex functions. Therefore, the Kuhn-Tucker
sufficiency Theorem is applicable.
4. A consumer lives on an island where she produces two goods, x and y according to the
production possibility frontier x2 + y 2 200 (capacity constraint), and she consumes all
the goods herself. Her utility function is:
U = xy 3
The consumer also faces an environmental constraint on her total output of both goods.
The environmental constraint is given by: x+y 20. The quantity of either goods cannot
be negative.
(a) Write out the KuhnTucker first order conditions using the method of Lagrange
Answer:


L = xy 3 + 1 200 x2 y 2 + 2 [20 x y]
Kuhn-Tucker conditions:
Lx = y 3 21 x 2 0, x 0, xLx = 0
Ly = 3xy 2 21 y 2 0, y 0, yLy = 0
L1 = 200 x2 y 2 0, 1 0, 1 L1 = 0
L2 = 20 x y 0, 2 0, 2 L2 = 0
(b) Find the consumers optimal x and y. Identify which constraints are binding.
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Answer: We solve the problem using trial and error:


We can assume that x > 0 and y > 0, otherwise U = 0. Since x > 0 and y > 0, then
their marginal conditions have to be equal to zero with:
Lx = y 3 21 x 2 = 0

(1)

Ly = 3xy 2 21 y 2 = 0

(2)

which yields (by removing 2 )


y 3 21 x = 3xy 2 21 y

(3)

Now checking which constraints are binding:


i. Lets assume that the environmental constraint is binding. Then
L2 = 20 x y = 0 = x = 20 y and 2 0

(4)

A. Assume the capacity constraint is binding. Then L1 = 200 x2 y 2 = 0


and 1 0. Together with (4) we have

x = 20 y
2

= 200 (20 y)2 y 2 = 0 = y = 5, x = 15

200 x y = 0
Substitute them into (3) we have 1 = 50, which violates 1 0.
So this case, where both the environmental constraint and the capacity
constraint bind, is not a solution.
B. Assume the capacity constraint is not binding. Then L1 = 200x2 y 2 > 0
and 1 = 0. From (3), we have y 3 = 3xy 2 = y = 3x. Substitute this into
(4) and we have x = 20 3x = x = 5, y = 3x = 15. But this violates the
capacity constraint, 200 x2 y 2 = 200 52 152 < 0.
So this case, where the environmental constraint binds but the capacity
constraint does not bind, is not a solution.
ii. Lets assume that the environmental constraint is not binding. Then
L2 = 20 x y > 0 and 2 = 0

(5)

From (1) and (2) we have

L = y 3 2 x = 0
x
1
L = 3xy 2 2 y = 0
y

y 3 = 2 x
1
=
3xy 2 = 2 y
1

21 x
y3
=
= y 2 = 3x2
2
3xy
21 y

(6)
Note here we have x > 0 and y > 0, and therefore 1 > 0, so we can apply the
division as above.
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Since we have 1 > 0, the capacity constraint has to be binding. That is,
L1 = 200 x2 y 2 = 0 and 1 > 0. From (6), we have 200 x2 3x2 =

0= x2 = 50= x = 50 and y = 150. Does this violate the environmental

constraint? 20 x y = 20 50 150 h 20 7.07 12.25 = 0.68 > 0. Not


it does not.

Therefore: the optimal values for x and y are: x = 50, y = 150. The
capacity constraint (production possibility frontier) is binding, whereas the environmental constraint is not binding.