Final Exam 2016

WSU Economics PhD Mathematics Bootcamp

August 17, 2016

Problem 1.
Consider the market for commodity x. The quantity demanded in this market depends
on the market price for x, p, and the value of an external unpriced factor, r, such as the
status symbol value of owning commodity x which increases quantity demanded
at any price. Given a known constant bD we have the demand function:
q = bD 2p + r
The supply of x to the market increases with market price and we assume for some
reason that higher values of r, the status symbol value, decrease the willingness to
supply at any given price. Important cost factors faced by suppliers result in a known
constant bS and we have the supply function:
q = bS + 2p r
Finally, the status symbol value r increases the more expensive the commodity is and
it decreases as more of the commodity is supplied because it becomes more common.
Given some known constant value br , the status symbol value is determined by the
function:
r = 2br + 4p 2q
(a) Using the functions provided, construct a proper system of linear equations to
represent the market for commodity x.
(b) Derive a matrix expression for the system in part (a) that takes the form Ax = b.
(c) The system of equations describing the market for commodity x has three equations in three unknowns. The system either has no solution, infinitely many
solutions or a unique solution. Perform a test on the matrix A (show your process
and results) from part(b) that can tell you whether there is a unique solution and
interpret the result.
(d) Find the inverse matrix of A (show it) and use it to solve the system for the
equilibrium values of q, p, r when we have the constants

bD 10

bS = 8

br
2
Solution:
1

(a) The system of linear equations is

q + 2p r = bD
q 2p + r = bS
1
q 2p + r = br
2
(b)

1 2 1 q bD

1 2 1 p = bS

br
1 2 12 r
Ax = b
(c) det A = 2 , 0 so A is invertible and there exists a unique solution to the system.
(d)
A1

1 1
2 2 0

= 14 43 1

0 2 2

and the solution is found as x = (p, q, r) = A1 b where b = (10, 8, 2). The solution
is (p, q, r) = (9, 13
2 , 12).
Problem 2.
Consider the market for another commodity, y, with the following demand and
supply functions where bD and bS are constants.
Supply qS = bS ep
Demand qD = bD ep
2 R
(a) Find the equilibrium price function p : R++
++ such that for some values

(bD , bS ) the equilibrium price for y will be p (bD , bS ).

(b) Derive the gradient function p .

(c) We are interested in the behavior of the equilibrium price in the market for commodity y as structural aspects, bD and bS change. Suppose through econometric
analysis it is determined that the current values are (bD , bS ) = (5, 1). Calculate the
total differential of equilibrium price p as the values of bD and bS change slightly
(dbD , dbS ) = (1/9, 1/7).
(d) Using the values from part (c), calculate a linear approximation of the equilibrium
market price as the structural parameters change as in part (c).
Solution:
(a) p (bD , bS ) = (1/2) ln(bD ) (1/2) ln(bS ).
(b) p = (1/(2bD ), 1/(2bS )).
(c) dp =

26
315

(d) p (5, 1) + dp = (1/2) ln(5) (1/2) ln(1) +

26
315

26
315

+ 12 ln(5).

Problem 3.
Let F : Rn R be a continuously differentiable function. Let V = {v Rn : kvk = 1}
be the set of all vectors in Rn of unit length. Also, let x0 Rn such that F(x0 ) , 0.
Prove that over the set V, the direction v in which F increases most rapidly at the
point x0 is the direction of F(x0 ).
Solution:
Let F : Rn R and let x0 Rn such that F(x0 ) , 0. Furthermore, let V be the set
of n-dimensional unit vectors. For unit vectors v V, the derivative of F at x0 in the
direction v is
Dv F(x0 ) = F(x0 ) v
The dot product can be expressed in terms of the norms of the vectors and the angle
between them.
F(x0 ) v = kF(x0 )kkvk cos
where is the angle between the vectors F(x0 ) and v. Since v is a unit vector kvk = 1
so we have
Dv F(x0 ) = kF(x0 )k cos
As we vary v over V, the value of cos changes. It takes its greatest value when
= 0 meaning that v and F will be coincident and point in the same direction. Thus,
Dv F(x0 ) is greatest when taken in the direction v = F(x0 ). 
Problem 4. Prove or disprove the following statement. There is no largest integer.
Solution:
Let N Z and assume to the contrary that N is the largest integer. Now let n = N + 1.
Since for any integer z Z we know that z + 1 Z, we know that n + 1 is an integer.
But n > N which contradicts our assumption that N is the largest integer. Therefore,
there is no largest integer. 
Problem 5.
Consider two firms engaging in Cournot competition in a market M. Both firms
face an inverse demand curve P(Q, ) where P is the market price when total market
quantity is Q and consumer taste intensity is > 0. Furthermore P(Q, ) follows the
law of demand so that PQ (Q, ) < 0 and more intense preferences increase demand
P (Q, ) > 0.
Firm 1 has total production costs C1 (q1 ) when it produces q1 units. Firm 2 has total
production costs C2 (q2 ) when it produces q2 units. For both firms costs increase in q,
so that C0i (qi ) > 0. Total market output Q = q1 + q2 . The firms profits are as follows
1 (q1 , q2 , ) = P(q1 + q2 ; )q1 C1 (q1 )
2 (q1 , q2 , ) = P(q1 + q2 ; )q2 C2 (q2 )
Each firm wants to choose its output quantity qi to maximize its profit i given the
output decision of the other firm. The solution to this maximization problem yields a
best response function Ri (qi , ) which has the interpretation that, for example, firm 1
will choose its output q1 = R1 (q2 , ). So R is a function that takes firm 2s output as an
argument and tells firm 1 what output, q1 will maximize its own profit. Firm 2 has a
similar function q2 = R2 (q1 , ).

Using q1 = R1 (q2 , ) and q2 = R2 (q1 , ) we can create a composite function

q0 = R1 (R2 (q1 , ), ) = F(q, )
An equilibrium will be a fixed point of this composite function, which means that if
you put a q in for some fixed and you get the same q back out, then that q is a Nash
Equilibrium. Let qe represent such values.
(a) Calculate the partial derivative q1 for firm 1s profit function.
(b) Calculate the partial derivative q1 q2 for firm 1s profit function.
dq

(c) For the identity qe = F(qe , ) = R1 (R2 (qe , ), ), calculate the derivative de , telling
us how the Nash equilibrium quantity changes as consumer taste intensity changes.
[Hint: Consider the use of total differentials and um...the chain rule.]
(d) (Bonus) Can you sign the derivative in part (a)? i.e., does the equilibrium output
increase or decrease as increases?
Solution:
(a)
1
= PQ (q1 + q2 ; )q1 + P(q1 + q2 ; ) C01 (q1 )
q1
2 1
= PQ (q1 + q2 ; )q1 + P (q1 + q2 ; )
q1
(b)
q1 ,q2 = PQQ (q1 + q2 ; )q1 + PQ (q1 + q2 ; )
(c) So because its an identity, the total change on one side has to equal the total change
on the other side.
R1 R2
R1 R2
R1
dqe =
dqe +
d +
d
R2 qe
R2

"
# "
#
R1 R2
R1 R2 R1
dqe 1
=
d
+
R2 qe
R2

Finally we have
h R R
i
R1
1
2
+
dqe
R2

i
= h
R1 R2
d
1 R2 qe
True, False or Uncertain For the following problems, determine whether the statement, as given, is true, false or if its uncertain. If you determine the statement is false
or uncertain, provide an explanation.
Problem 6.
True, False or Uncertain: Suppose f (x, y) is defined on a set D that contains a point
(a, b). If the partial derivative functions fxy and f yx are both continuous on D, then
fxy (a, b) = f yx (a, b).
4

Solution: True
Problem 7.
True, False or Uncertain: For a function f (x, y) if the partial derivatives fx and f y exist
near a point (a, b) then f is differentiable at (a, b).
Solution:
False: The implication isnt true because even though fx and f y exist near (a, b) if they
are not continuous then it is possible for discontinuities to prevent the existence of a
limiting value for the rate of change of the function. Also, note that differentiability is
sufficient for continuity. The implication is true if fx and f y exist and are continuous
near (a, b). This is an important result. For very general functions such as F : Rn Rm
we can know that this function is differentiable at some point x if all the partial
derivatives of F (the Jacobian Matrix) exist and are continuous around x.
Problem 8.
True, False or Uncertain: If f is a differentiable function of x and y, then f has a
directional derivative in the direction of any vector v and
Dv f (x, y) = f v
Solution:
False or Uncertain: Generally, this requires v to be a unit vector i.e., kvk = 1. Some
people dont require this, but we lose some of the meaning as when it is a unit vector
the expression represents a projection of f onto vectors in the same direction as v.