International Undergraduate Program (IUP)

Faculty of Economics and Business Universitas Indonesia

Mid Term Exam

Mathematics for Economics and Business 1
Friday, 1 April 2022; 08:00 – 11:30 WIB
Lecturer: Team
Open book

Instructions:

1. Answer all the questions.

2. Don’t forget to write your name and student number id on your answer sheet.
3. Please answers neatly, concisely and clearly in hand written on A4, HVS paper, or pad/tablet.
4. Please submit all of your answers in one (single) pdf file together with the Letter of Academic
Integrity to EMAS2, no later than 11:30 WIB Friday, 1 April, 2022.

Problem 1: Comparative Statics (25 points)

The economic model for Marc Jacobs Bag market is given as follows,

𝑄! = 𝑄"

𝑄! = 𝐷(𝑃, 𝐺)

𝑄" = 𝑆(𝑃, 𝑁)
where, 𝐺 is the price of substitute good and 𝑁 is the price of input. 𝐺 and 𝑁 are exogenous
variables. In order to ensure economic relevance, some restrictions on the signs of derivatives
related to demand and supply functions are imposed. They include:

𝜕𝐷 𝜕𝐷
< 0 , > 0
𝜕𝑃 𝜕𝐺
𝜕𝑆 𝜕𝑆
> 0 , < 0
𝜕𝑃 𝜕𝑁
By using implicit function rule, find the direction (sign) and economic intuition on the following
partial derivatives (positive or negative):

1
 a. The effect of an increase in the price of substitute good to the equilibrium price of Marc
!"∗
Jacob bag, or . (6 points)
!#
b. The effect of an increase in the price of substitute good to the equilibrium quantity of Marc
!$∗
Jacob bag, or . (6 points)
!#
c. The effect of an increase in the price of input to the equilibrium price of Marc Jacob bag,
!"∗
or . (6 points)
!%
d. The effect of an increase in the price of input to the equilibrium quantity of Marc Jacob
!$∗
bag, or . (7 points)
!%

Problem 2: Optimization with Equality Constraint (25 points)

The performance of a research and development institution depends on the number of researcher
with different education degree, i.e. graduate level (S2) and undergraduate level (S1). The
researcher’s contribution to the total revenue of is given by the following formula:

𝑇𝑅 = 𝑠! ".$ 𝑠% ".&

where, 𝑠$ and 𝑠% are numbers of researcher with graduate degree (S2) and undergraduate degree
(S1), respectively. On the other hand, the institute is facing a budget constraint of Rp. 120.000.000
per month. The monthly salary of a researcher with graduate degree (S2) is Rp. 12.000.000 per
month, while undergraduate degree (S1) is Rp. 8.000.000 per month.

a. Formulate the problem of maximization with equality constraint of the institute, by

defining what the objective function and the constraint are! (5 points)
b. Write down the Lagrangian function and solve for 𝑠% ∗ and 𝑠$ ∗ that maximize the total
revenue of the institute! (5 points)
c. Given your answer in part (b), what is the value of maximum revenue? (5 points)
d. Define the Bordered Hessian Matrix for this problem and check whether the second order
sufficient condition for maximization is satisfied or not! (5 points)
e. Is the TR function homogenous degree one? (5 points)

2
Problem 3: Optimization with Inequality Constraints (25 points)
An electric company is setting up a power plant in a certain region and it has to plan its capacity.
The peak period demand for power is given by P% = 200 − 0.1Q% ; where P% and Q% are price and
quantity of electricity in the peak period. While the off-peak period demand is given by P$ =
180 − 0.1Q$ ; where P$ and Q$ are price and quantity of electricity in the off peak period. The
variable cost is 20 per unit (paid in peak and off-peak periods/both periods). The capacity costs
10 per unit which is only paid once and is used in both periods. In this case, K may represent
capacity variable. Therefore, the objective of the company is to maximize its profit, i.e. the
difference between revenue from selling electricity in peak and off-peak periods with variable
and capacity costs, given that the quantity sold in each period should not exceed the capacity (K).

a. Formulate the problem of maximization with inequality constraints by defining what the
objective function and constraints are! (5 points)
b. Write out the Kuhn-Tucker conditions for this problem! (5 points)
c. Find the optimal outputs (Q% , Q$ ) and capacity (K) for this problem! (10 points)
d. Referring to your answer in part c, what are the values of 𝜆% and 𝜆$ and provide economic
interpretation! (5 points)

Problem 4: Integral Calculus (25 points)

Suppose demand and supply in a perfectly competitive market are as follows,

𝐷(𝑞) = 50 − 𝑞

𝑆(𝑞) = 20 + =𝑞

a. Find the equilibrium price and quantity (𝑝∗ , 𝑞∗ )! (3 points)

b. Calculate consumer surplus and producer surplus! (5 points)
c. If producers collude, they can determine the quantity of product supplied to the market.
Assume that producers collude and determine the quantity supplied to the market at 16
units (𝑞 = 16), then find the price faced by the consumers and recalculate consumer
surplus and producer surplus! (8 points)
d. If the producers now act as a monopolist, then there is only one producer in the market.
Find the quantity that maximize monipolist’s profit! Recalculate consumer surplus,
producer surplus, and total welfare! Compare your answer with the solution in part (b),
what is your conclusion? (9 points) [hint: the profit maximization rule for a monopolist is
𝑀𝑅(𝑞) = 𝑀𝐶(𝑞); while 𝑀𝐶(𝑞) = 𝑆(𝑞) in the short run and the demand for monopolist
equals to 𝐴𝑅(𝑞)]

***Good Luck****