LONDON SCHOOL OF ECONOMICS Department of Economics

EC400 September 2008

Solutions of Part 2 Exam: Mathematics for Microeconomics

1. (50 marks) Consider the following function:

z = F (x, y) = xα y β

defined on R2+ , that is x ∈ [0, +∞), y ∈ [0, +∞).

Assume first that α = −1 and β = 0.

(a) Draw the function z = F (x, y) in the (x, z) space.

Solutions: For α = −1 and β = 0 the function is z = 1/x, the plot of
the function is then (the graph is actually y = 1/x just for convenience of
the plotting program):

1
 3.2

2.8

2.4

1.6

1.2

0.8

0.4

-0.4 0 0.4 0.8 1.2 1.6 2 2.4 2.8 3.2 3.6 4 4.4 4.8
(b) Is the function z = F (x, y) increasing in x, decreasing in x or neither
increasing nor decreasing?
dz
Solutions: The function is decreasing = −1/x2 < 0 for x > 0.
dx
(c) Is the function z = F (x, y) concave in x, convex in x or neither concave
nor convex ?
d2 z
Solutions: The function is convex 2
= 2/x3 > 0 for x > 0.
dx
(d) State the definition of a quasi-concave function. Is the function z = F (x, y)
quasi-concave in x?
Solutions: The function g(x) is quasi-concave if and only if the set
{x|g(x) ≥ k} is convex for every k. The function of one variable z = 1/x
is monotonic decreasing hence satisfies the definition above and it is quasi-
concave.
(e) State the definition of a quasi-convex function. Is the function z = F (x, y)
quasi-convex in x?
Solutions: The function h(x) is quasi-concave if and only if the set
{x|h(x) ≤ k} is convex for every k. The function of one variable z = 1/x
is monotonic decreasing hence satisfies the definition above and it is also
quasi-convex.

Assume now that α = −1 and β = −1.

(f) Draw the level curves F (x, y) = k with k = 1, k = 2 and k = 5 in the

(x, y) space.
Solutions: The function is now z = F (x, y) = 1/(xy). The plot of the
level curves is then:

2
 3.2

2.8

2.4

1.6

1.2

F(x,y) = 1
0.8

F(x,y) = 2

0.4
F(x,y) = 5

.4 0 0.4 0.8 1.2 1.6 2 2.4 2.8 3.2 3.6 4 4.4 4.

 (g) Is the function z = F (x, y) increasing, decreasing or neither increasing nor
decreasing in R2+ ?
Solutions: The function z = 1/(xy) is decreasing for x > 0 and y > 0:
the gradient of the function is:
 
1 1
∇F (x, y) = − 2 , − 2
x y xy

(h) Is the function z = F (x, y) concave, convex or neither concave nor convex
in R2+ ?
Solutions: The function z = 1/(xy) is convex: the Hessian of the func-
tion is: !
2 1
x3 y x2 y 2
H= 1 2
x2 y 2 xy 3

This Hessian is positive definite for x > 0 and y > 0: |H1 | = 2/(x3 y) > 0
and |H| = 3/(x4 y 4 ) > 0.
(i) Is the function z = F (x, y) quasi-concave in R2+ ?
Solutions: The function z = F (x, y) is not quasi-concave. Consider the
set {(x, y)|F (x, y) ≥ 1} this is the set of points to the south west of the
level curve F (x, y) = 1 in the plot above. This set is clearly not a convex
set.
(j) Is the function z = F (x, y) quasi-convex in R2+ ?
Solutions: The function z = F (x, y) is quasi-convex. In other words,
the set {(x, y)|F (x, y) ≤ k} is a convex set for every k. For example,
{(x, y)|F (x, y) ≤ 1} is the set of points to the north east of the level curve
F (x, y) = 1 in the plot above. This is clearly a convex set.

2. (25 marks) Consider the function:

2
y = g(x) = −e(x−2) + 5

3
 defined over the interval [0, 5].

(a) Find the critical points of y = g(x) if any exists.

Solutions: The function g(x) has one critical point in the interval [0, 5]
dy 2
this is defined by: = −e(x−2) 2(x − 2) = 0 and is x∗ = 2.
dx
(b) Are these critical points local maximizers, local minimizers or neither of
the above?
d2 y 
Solutions: The critical point x∗ = 2 is a local maximizer: =
dx2 x∗ =2

−2 < 0.
(c) Are these critical points global maximizers, global minimizers or neither of
the above?
d2 y
Solutions: The critical point x∗ = 2 is a global maximizer: =
2
dx2
−e(x−2) [4(x − 2)2 + 2] < 0 for every x ∈ [0, 5] moreover the function
has negative values at both corners x = 0 and x = 5 while it is equal to 4
at x∗ = 2.

3. (25 marks) Consider the problem:

min x + y
x,y

s.t. x1/3 y 1/3 ≥ 1

Caveat: this tuned out to be a more tricky question that I initially thought (in
particular given that in the last iteration I dropped the extra bonus point for part
(c). So my proposal is that you allocate full marks to everyone that explicitly (or
implicitly) assumed the non-negativity constraints x ≥ 0 y ≥ 0 for this question.
I would however recommend giving 5 extra bonus point to anyone that realized
that the problem looks very different (especially part (c)) if one considers values
of x < 0 and y < 0

4
(a) Draw the level curves of the objective function (x + y) and the boundary
of the constraint, x1/3 y 1/3 = 1, in the (x, y) space.
Solutions: The plot of the level curves and of the boundary of the con-
straint looks like:

5
 3.2

2.8

2.4

1.6

x+y = 3

1.2

0.8

x+y=2

0.4 x+y=1

-0.4 0 0.4 0.8 1.2 1.6 2 2.4 2.8 3.2 3.6 4 4.4 4.8
(b) Set up the constrained optimization problem using Lagrange. Can you use
Lagrange to solve this problem?
Solutions: The problem can be rewritten as:

max −x − y
x,y

s.t. −x1/3 y 1/3 ≤ −1

−x ≤ 0
−y ≤ 0

Notice first that if the first constraint is satisfied then the inequality con-
straints cannot be binding, therefore we can ignore them for the moment
and check that they are satisfied in the end.
The Lagrangian of the simplified problem is then L(x, y, λ) = −x − y +
λ(x1/3 y 1/3 − 1).
The problem can be solved using the Lagrangian above after noticing that
in the positive orthant the non-negativity constraints cannot be binding.
(c) Write down the necessary first order conditions for the solution of the
constrained optimization problem.
Solutions: These are:

1 x(1/3) y (1/3)
0 = −1 + λ
3 x
1 x(1/3) y (1/3)
0 = −1 + λ
3 y
(1/3) (1/3)
1 ≤ x y
0 = λ(1 − x(1/3) y (1/3) )

(d) Solve the constrained optimization problem.

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Solutions: The solution is x∗ = y ∗ = 1 it is the solution to the set of
necessary conditions above (together with λ∗ = 3) that are both necessary
and sufficient given that the sufficient second order conditions are satisfied
for every x and y satisfying the non-negativty constraints.