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Midterm Review October 2015, answers

Mathematics for Economics (Singapore Management University)

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ECON 205 -- Intermediate Mathematics for Economics

SMU, SCHOOL OF ECONOMICS
Term I, 2015-2016

Midterm Review Test (100 points) (answer key)

Name______________________________SID______________________Section___

Instruction:

You have 90 minutes. Write down your Name, SID, and Section # on both the exam
and the booklet! Write down your answers on the booklet only. Please follow the
instruction strictly. Closed book, no food, no drink! Absolutely no cell phone or
other wireless devices!

Use time wisely! Don’t spend too much time on any one question. Skip difficult
questions and return to them later. You should attempt all questions with the
allocated time so therefore the order doesn’t matter.

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1. (10 points)
 x 1 
1

(a) Find the domain of f ( x)  e x  2 x 1

2
ln  2 .
 x  x6
x 1 x 1
We must have x2  2 x  1  0 , 2   0 and ( x  2)( x  3)  0 . Using the sign
x  x  6 ( x  2)( x  3)
diagram, we have 2  x  1 or x  3 , i.e. (2, 1)  (3, ) .

(b) For what value of A is the following function continuous for all x?
 A2 x  2 A if x  1
f ( x)  
 2 if x  1
At x=1, lim f ( x)  A2 1  2 A  A2  2 A and lim f ( x)  2 . But A2  2 A  A2  2 A  1  1  ( A  1)2  1,
x1 x 1
which is strictly greater than 2 . That is, lim f ( x)  lim f ( x) for any A. Limit does not exist at x=1 for
x1 x1
any A, which implies the function is NOT continuous at x=1 for any A. Even though at all other points the
function is either a polynomial or a constant and continuous, the function is NOT continuous (everywhere
in its domain).

2. (25 points)

(a) Use the formal definition (i.e., limit of the Newton Quotient) of the derivative to find out the
derivative of the following function f ( x)  1/ x  3 .
1 1

f ( x  h)  f ( x ) ( x  h)  3 x  3 1  x  3  ( x  h)  3  1  x  3  ( x  h)  3 x  3  ( x  h)  3 
     
h h h  ( x  h)  3 x  3  h  ( x  h)  3 x  3 x  3  ( x  h)  3 
1 ( x  3)  ( x  h  3) 1
 

h ( x  h)  3 x  3 x  3  ( x  h)  3  ( x  h)  3 x  3  x  3  ( x  h)  3 
f ( x  h)  f ( x ) 1 1
f ( x)  lim  lim 
h 0 h h 0 ( x  h )  3 x  3 x  3  ( x  h)  3 x3 x3 x3 x3   
1

2( x  3) x  3

(b)
d ln x
dx
x  
Using the logarithmic differentiation, let f ( x)  xln x . Then, ln f ( x)  ln xln x  ln x ln x
d ln f ( x) d  ln x ln x  1 1 2
  ln x  ln x  ln x
dx dx x x x
Thus, we have

dx
x
d ln x
 
df ( x) d ln f ( x)
dx

dx
2 
f ( x)   ln x  xln x
 x 

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2 x 2  3x
(c) Find the intervals over which the function f ( x)  is increasing / decreasing.
x2
2 x 2  3x
The domain of the function f ( x)  is (,2)  (2, ) .
x2
(4 x  3)( x  2)  (2 x 2  3x) (4 x 2  11x  6)  (2 x 2  3 x) 2 x 2  8 x  6 x( x  1)( x  3)
f '( x)     , which
( x  2)2 ( x  2)2 ( x  2)2 ( x  2) 2
is non-negative if x  (,1]  [3, ) and non-positive if x [1, 2)  (2,3] . Thus, the function is
increasing over the interval (,1] and [3, ) ; decreasing over the interval [1, 2) and (2,3] .

1
(d) Suppose the demand function is Q  . Find out the price elasticity of demand  .
PP
1
Using the logarithmic differentiation, ln Q  ln   P ln P .
PP
d ln Q d   P ln P  1
   ln P  P  (ln P  1)
dP dP P
Thus, we have
dQ P d ln Q
  P  (ln P  1) P
dP Q dP

(e) Suppose x3 g ( xy)  e xy  x implicitly defines y as a function of x, where g(•) is some differentiable
function. Find an expression for y ' .
x3 g ( xy)  e xy  x  3x2 g ( xy)  x3 g '( xy)( y  xy ')  e xy ( y  xy ')  1

 y[ x4 g '( xy)  xe xy ]  1  3x 2 g ( xy)  x3 yg '( xy )  ye xy

1  3x 2 g ( xy)  x3 yg '( xy)  ye xy
 y 
x 4 g '( xy )  xe xy

3. (15 points)
(a) A firm is a price taker, who pays w=1 for each unit of labor input. It obtains the revenue p for
each unit of output that it sells. Its output from l units of the input is l1/3 . In addition, the upper
bound of labor input usage is 1000, that is l  1000 . For what value of l is its profit maximized?
Then find out the maximum amount of profit at the optimal choice.

max  (l )  pl1/3  l
l

s.t. l [0,1000]
3/2
1  p
FOC  (l )  p  l 2/3  1  0  l1   
3 3
3/2
 p
If p<300, we have an interior stationary point l1     (0,1000) . Otherwise, if p≥300, we don’t have.
3
1  2
SOC:  (q)  p      l 5/3  0 . The profit function is concave and the interior stationary point is a
3  3
global maximizer, if there is any.

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3/2
 p
If p<300, the interior stationary point l  l1   
*
is the optimal solution and the amount of profit is
3
1/3
  p 3/2   p
3/2
 p
3/2

 (l )  pl  l  p         2   .
* *1/3 *
 3   3 3
 
If p≥300, we do not have an interior stationary point. The object function is continuous and the constraint
set is compact. By the Extreme Value Theorem, the optimal solution exists. The value of the profit
function at the boundary points are
 (0)  0
 (1000)  p 10001/3  1000  10 p  1000  0
Thus, l *  1000 is the optimal solution and the amount of profit is  (1000)  10 p  1000 .

(b) Continuing with part (a), if the parameter p changes, how does the maximum amount of profit
change accordingly (in the marginal sense)?
d 1/3
By the envelope theorem,  l l l  l *1/3  0 , which implies there exists a positive relationship
dp
between p and the maximum amount of profit.

Depending on the value of the parameter p, we have two cases.

3/2 3/2 1/2
 p  p  p
If p<300, l *    and  (l )  pl  l  2   . d (l ) / dp     l *1/3 .
* *1/3 * *

3 3 3

If p≥300, l  1000 and  (l )  10 p  1000 . d (l ) / dp  10  l .
* * * *1/3

Here, envelope theorem holds for both these two cases.

5 4 40 3
(c) Find all stationary points for f ( x)   x5  x  x  5 and characterize the stationary points
2 3
as local max or local min.
FOC f '( x)  5x4  10 x3  40 x2  5x2 ( x  2)( x  4)  0  x1  0, x2  2, x3  4
SOC f ''( x)  20 x3  30 x 2  80 x
At the stationary points,
f ''( x1 )  0  inconclusive
f ''( x2 )  20(2)3  30(2)2  80(2)  120  0  x2  2 is a local min
f ''( x3 )  20(4)3  30(4)2  80(4)  480  0  x3  4 is a local max

4. (20 points)
Suppose a monopolist sets its price p. The (inverse) market demand is p = 1200 −2q, where p is
market price and q is market quantity demanded. Its cost function is C(q) = 400+q2, where q is the
output of the monopolist. In addition, the capacity of the firm is 200, which means q≤200.
(a) Find out the optimal output level, the market price, and the profit of the monopolist.
(b) Then find out the price markup for the monopolist at the optimal output level.

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(c) Suppose the entry barrier for the industry is removed. There are more firms entering this
market such that the industry becomes a perfect competitive one. Assume all firms (including the
previous monopolist) have the same cost structure: C (qi )  400  qi 2 with capacity 200 (i.e.
qi  200 ). Find out the number of firms in this perfect competitive industry and the market price.
(Hint: In perfect competitive industry, all firms are price taker and get zero profit in the long-run.)

(a) As a monopolist, the firm’s output is equal to the amount available on the market. The monopolist’s
optimization problem is
Max  (q)  R(q)  C (q)  p(q)q  C (q)  (1200  2q)q  (400  q 2 )
q

s.t. q [0, 200]

FOC: 1200  4q  2q  0 , which gives q*  200  (0,200) . Thus, interior stationary point does not exist.
The object function is continuous and the constraint set is compact. By the Extreme Value Theorem, the
optimal solution exists.
At the boundary point,  (0)   400 and  (200)  (1200  2  200)200  (400  2002 )  119600 .
Thus, we have the corner solution, q*  200 . At the optimal solution, p*  800 and the amount of profit is
 *   (q* )  119600 .

(b) According to the definition of price markup, markup = [p – MC] / p. At the optimal solution, p*  800
p*  MC (q* ) 800  400 1
and marginal cost MC (q* )  2q*  400 . Therefore, markup    .
p* 800 2
(c) In perfect competitive industry, all firms are price taker. Suppose the market price is p. For individual
firm i, the problem is
Max  (qi )  R(qi )  C (qi )  pqi  C (qi )  pqi  (400  qi 2 )
qi

s.t. qi [0, 200]

FOC: p  2qi  0 , which gives qi*  p / 2 .

If p<400, we have an interior stationary point q*  p / 2 . Otherwise, if p≥400, we don’t have.
SOC:  (q)   2  0 . The profit function is concave and the interior stationary point is a global
maximizer, if there is any.

If p<400, the interior stationary point q*  p / 2 is the optimal solution and the amount of profit is
 (q* )  pq*  (400  q*2 )  p2 / 4  400 .

If p≥400, we do not have an interior stationary point. The object function is continuous and the constraint
set is compact. By the Extreme Value Theorem, the optimal solution exists. The value of the profit function
at the boundary points are
 (0)   400
 (200)  200 p  (400  2002 )  200 p  40400  0
Thus, q **  200 is the optimal solution and the amount of profit is  (200)  200 p  40400 .
We know that perfect competitive firms get zero profit in the long-run. Thus, p cannot be greater than
400; otherwise each individual firm will get positive profit as  (400)  200 p  40400  0 . That is to say,
we must have p<400.

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Further, zero profit in the long-run,  i*  p2 / 4  400  0  p**  40 , qi**  p** / 2  20 .

Back to the (inverse) market demand p = 1200 −2q, we have the market demand q**  580 . This implies
q** 580
the number of firms in the perfect competitive industry is n**    29 .
qi** 20

5. (20 points)
n 1 1
 
D  1 n 1
(a) Suppose we have an n×n matrix n   . Find its determinant Dn .
 
1 1 n
n 1 1
1 n 1
Dn 

1 1 n
Adding row 2, row 3, ..., and row n to row 1, by rule #6 (lecture note 4 page 22) we have
n 1 1 n  (n  1) n  (n  1) n  (n  1) 2n  1 2n  1 2n  1
1 n 1 1 n 1 1 n 1
Dn   

1 1 n 1 1 n 1 1 n
Then, by rule #5 we have
1 1 1
1 n 1
Dn  (2n  1)

1 1 n
Adding (–1) times row 1 to row 2, row 3, …, row n, by rule #6 we have,
1 1 1
0 n 1 0
Dn  (2n  1)  (2n  1)(n  1)n 1

0 0 n 1
The last step from rule #2, for a triangular matrix, its determinant is the product of its diagonal elements.

(b) Determine whether the following quadratic form is positive or negative definite or semi-definite,
or indefinite.

– x12 + 2x1x2 + ax22 – 2x32, where a is a constant.

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The associated matrix is

–1 1 0
1 a 0 .
0 0 –2

The leading principal minors are –1, – (a+1), and 2(a+1). Thus, if a > −1 the matrix is indefinite; if a <
−1 the matrix is negative definite; if a = −1, we need to examine all the principal minors to determine
whether the matrix is negative semi-definite.

If a = −1, the associated matrix becomes

–1 1 0
1 –1 0 .
0 0 –2

The first-order principal minors are −1, −1, and −2, the second-order principal minors are 0, 2, and 2, and
the third-order principal minor (determinant) is 0. Thus for a = −1 the matrix is negative semi-definite.

6. (10 points)

 
2
Suppose the inverse demand is Pbuyer  20  3Q D and inverse supply is Pseller  Q  2 . Compute
S

the consumer surplus and produce surplus at the market equilibrium.

Market equilibrium: QD = QS = Q* and Pbuyer*= Pseller*= P*

 Pbuyer  20  3Q D

P
 
2
 seller  Q S  2

 Q D  QS  Q *

 Pbuyer  Pseller  P *

Solving the system of equations, we have Q*=3 and P*=11.

     
2 3
CS  
Q*
 20  3Q D  P * dQ D  3  20  3Q D  11 dQ D   9Q D  3 Q D
0   0  
 2

 0

 3   3 
  9  3  (3) 2    9  0  (0) 2 
 2   2 
 13.5

     
Q*   S  3   3 3
 2   dQS   11   Q S  2   dQS   9QS  Q S
2 2 1
PS    P *   Q 
0   0    3  0

 1 3  1 3
  9  3   3    9  0   0  
 3   3 
 18

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