QUIZ 5

TIME: 45 +10= 55 MIN

MARKS: 30

1. (6 marks) A utility function of a typical consumer is given by the following function:

2 2
U ( x , y )=( x−a) +( y−2) w h ere x ≥ 0∧ y ≥ 0

Where x and y are the units of two goods consumed.

a) Find and sketch the level curves at U=1, U=2 and U=4. Explain the shape of indifference
curve.
b) What is indifferent curve? How it related to answer you calculated in part a).

2. (6 marks) Which of the following sets are convex sets? Explain by interpreting each set
geometrically.
a) {( x , y )∨x 2+ y 2=a }
b) {( x , y )∨x 2+ y 2< a }
c) {( x , y )∨x 2+ y 2> a }

3. (6 marks) Let the function be f ( x , y )=axy . Is the function concave, convex or neither?

4. (12 marks) Consider a competitive firm with the following profit function:

profit=R−C=PQ−wL−rK

Where P is the price, Q is the quantity, L is unit of labour used, K is units of capital consumed, w
and r are input prices of labour and capital respectively.

Since it is a competitive market, P, r and w are constant and equal to 50, 2 and 3 respectively. K,
L and Q are endogenous. Q is a function of K and L and can be written as:
a a
Q ( K , L )=L 20 K 30

a) Find the profit maximizing unit of labour and capital and find the respective maximum profit.
b) Prove that the profit found in part a) is indeed profit maximizing.