NATIONAL UNIVERSITY OF SINGAPORE

EC2104 Quantitative Methods for Economic Analysis

Semester 2, AY2019-2020
Midterm Examination

March 6, 2020

Time Allowed: 70 minutes

Suggested Solutions
Problem 1: Utility refers to the amount of satisfaction derived from consuming goods and
services. Consider the utility function given by:

1 − x2
 
U (x) = ln
1 + x2

Find the marginal utility of consumption.

2x
(A) −
1 − x2
2x
(B)
1 − x2
4x
(C) −
1 − x4
4x
(D)
1 − x4
(E) None of the above

Solution: C

We can first rewrite the function to be as follows:

U (x) = ln (1 − x2 ) − ln (1 + x2 )

Hence, we have
−2x 2x
U 0 (x) = 2
−
1−x 1 + x2
1 1
 
= −2x +
1 − x2 1 + x2
2
 
= −2x
(1 − x2 )(1 + x2 )
4x
= −
1 − x4

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Problem 2: The Coefficient of Relative Risk Aversion is defined as follows:

V 00 (x)
γ=− x
V 0 (x)

Find the Coefficient of Relative Risk Aversion for a consumer with the following utility
function:

1
V (x) = x1−θ
1−θ

1
(A)
θ
(B) θ
(C) 1 − θ
(D) 1 + θ .
(E) None of the above.

Solution: B

V 0 (x) = x−θ
V 00 (x) = −θx−θ−1
−θx−θ−1
γ = − x=θ
x−θ

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Problem 3: Given the following utility function, determine the output level (x) that
corresponds to the minimum and maximum utility for the consumer.

1
W (x) = x3 − 6x2 + 9x + 1, x ∈ [ , 5]
2

1
(A) Minimum: , Maximum: 5
2
(B) Minimum: 1, Maximum: 5
(C) Minimum: 3, Maximum: 5
(D) Minimum: 5, Maximum: 1
(E) None of the above

Solution: C

Taking first order conditions,

W 0 (x) = 3x2 − 12x + 9 = 3(x − 1)(x − 3) = 0

Hence, x = 1 and x = 3 are stationary points, with a utility value of W (1) = 5 and W (3) = 1

1
We now examine the boundary points: W ( ) = 4.125, W (5) = 21.
2
Hence the maximum utility occurs when x = 5 and minimum utility occurs when x = 3.

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Problem 4: Determine the interval that the utility function is convex given the following
marginal utility:
U 0 (x) = U (3 − U ), x>0

(A) 0 < U < 1.5

(B) 1.5 < U < 3
(C) 3 < U < 6
(D) U > 6
(E) None of the above

Solution: A,C,D,E

Differentiating with respect to x yields

∂ 2U ∂U ∂U
= (3 − U ) − U
∂ 2x ∂x ∂x
∂U
= (3 − 2U )
∂x
= (3 − 2U )U (3 − U )

Hence, if U > 0, U 00 (x) > 0 for 0 < U < 1.5 and U > 3. The function is convex for
0 < U < 1.5 and U > 3.

As the question is asking which of the interval is convex, and all the solutions are valid
(except for B), I will accept all solutions (except for B).

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Problem 5: The marginal propensity to consume is often used to quantify induced consump-
tion. It is given that national income (y) and consumption (x) is related via the following
equation:
x
x = ey
dy
Find an expression for (i.e the marginal propensity to consume).
dx

(For clarity, note that the right hand side of the equation refers to the exponential func-
tion, e raised to the power of xy .)

x−y
(A)
x ln x
xy
(B)
x ln x
x
(C)
y
(D) xy
(E) None of the above.

Solution: A

Differentiating both sides with respect to x, we get the following:

x d x
 
1 = e y
dx y
dy
 y.1 − x. 
x
1 = e y dx
y2
x dy x
y 2 = y.e y − x. .e y
dx
x
dy y(e y − y)
 
= x
dx x.e y
 xy
dy e −y

= x y
x
dx y
.e
dy x−y
=
dx x ln x

x x
The last line follows from the fact that ln x = since x = e y .
y

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Problem 6: Given the following function f (x), find the values of p and q for which the
derivative f 0 (1) exists.

 x2 + 3x + p if x ≤ 1
f (x) = 
qx + 2 if x > 1

(A) p = 3, q = 5
(B) p = 5, q = 3
(C) p = 3, q = 3
(D) p = 5, q = 5
(E) No value of p and q makes it possible for f to be differentiable at x = 1.

Solution: A

First, we need to ensure for continuity:

f (1) = 4 + p, so f (1) exists.
lim− f (x) = 4 + p, so the left limit exists.
x→1
lim f (x) = q + 2, so the right limit exists.
x→1+
For the limit to exist and hence continuity, 4 + p = q + 2.
Therefore, we have p = q − 2 — Eq(1)

f (1 + h) − f (1)
Next, we check differentiability. f (x) is differentiable at x = 1 if lim exists.
h→0 h
The left limit is:
f (1 + h) − f (1) (1 + h)2 + 3(1 + h) + p − 4 − p
lim− = lim−
h→0 h h→0 h
2
1 + h + 2h + 3 + 3h − 4
= lim−
h→0 h
h2 + 5h
= lim−
h→0 h
= lim− h + 5
h→0
= 5

The right limit is:

f (1 + h) − f (1) q(1 + h) + 2 − 4 − p
lim+ = lim+
h→0 h h→0 h

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 q + qh − 2 − p
= lim+
h→0 h
q + qh − 2 − q + 2
= lim+
h→0 h
qh
= lim+
h→0 h
= q

The last line follows from the fact that p = q − 2.

Hence, we have q = 5. Also, from continuity conditions, we find that p = 3.

Problem 7: Determine the value of an asset that is determined from the following integral.
Z 0
x2 ex dx
−∞

(A) 1
(B) 2
(C) 3
(D) 4
(E) None of the above

Solution: B

We will integrate by parts. Choose f (x) = x2 and g 0 (x) = ex . Then, f 0 (x) = 2x and
g(x) = ex .
Z Z
x2 ex dx = x2 ex − 2 xex dx

Now, we will integrate the remaining integral by parts. Choose f (x) = x and g 0 (x) = ex .
Then, f 0 (x) = 1 and g(x) = ex .
Z  Z 
x2 ex dx = x2 ex − 2 xex − ex dx

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 = x2 ex − 2(xex − ex )
= ex (x2 − 2x + 2) + C

Hence, Z 0
x2 ex dx = 1(0 − 0 + 2) − 0 = 2
−∞

Problem 8: Given that p is a constant parameter, find the area of the region bounded by
the following 2 curves:

y 2 = 2px

x2 = 2py

(A) p2
2
(B) p2
3
4
(C) p2
3
5 2
(D) p + 2
3
(E) None of the above

Solution: C

We first equate the 2 curves:

x4 = 4p2 y 2
x4 = 4p2 .(2px)
x4 = 8p3 x
x(x3 − 8p3 ) = 0

Hence, the points of intersection are (0, 0) and (2p, 2p).

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The area of the shaded area can be determined from the following integral:

Z 2p q
x2
2px − dx
0 2p

Since
Z q
x2 q Z
1/2 1 Z 2
2px − dx = 2p x dx − x dx
2p 2p
q 2 1 x3
= 2p x3/2 −
3 2p 3

We have
Z 2p q
x2 q 2 1 (2p)3
2px − dx = 2p (2p)3/2 −
0 2p 3 2p 3
8 2 4 2
= p − p
3 3
4 2
= p
3

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Problem 9: Let X(t) denote the total value of investments. The growth rate of the invest-
ments has the following relationship over time:

Ẋ(t)
= tX(t)
X(t)

Find X(t) as a function of t.

(A) −2t2 − 2
(B) 2t2 + 2
−2
(C)
t
2
t +2
(D)
t
(E) None of the above

Solution: E

We first separate the variable by rearranging terms:

dX(t)
= tdt
X(t)2

Integrating both sides, we get:

Z Z
X(t)−2 dX(t) = t dt
t2
−X(t)−1 + c1 = + c2
2
1 t2 + 2c2 − 2c1
− =
X(t) 2
−2
X(t) = 2
t +c

The answer is ”None of the above.”

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Problem 10: The dimensions of a rectangular box are measured to be 15cm, 20cm and
30cm. Each measurement is correct to within 0.1 cm. Use differentials to estimate the largest
possible error (in cm3 ) when the volume of the box is calculated from these measurements.

(A) 100

(B) 125

(C) 135

(D) 625

(E) None of the above

Solution: C

If the dimensions of the box are x, y, z, its volume is V = xyz. Hence,

∂V ∂V ∂V
dV = dx + dy + dz = yz dx + xz dy + xy dz
∂x ∂y ∂z

To find the largest error in volume, we use dx = dy = dz = 0.1, and x = 15, y = 20, z = 30.

Hence. dV = (20)(30)(0.1) + (15)(30)(0.1) + (15)(20)(0.1) = 135

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Problem 11: Consider the following production function: f (x, y) = ln(x5 y 2 ) + ln(xy 4 ).
Which of the following statements is true.

(A) f (x, y) is homogenous and homothetic.

(B) f (x, y) is neither homogenous nor homothetic.
(C) f (x, y) is homogenous but not homothetic.
(D) f (x, y) is homothetic but not homogenous.
(E) None of the above

Solution: D

We can rewrite the function as f (x, y) = ln(x6 y 6 )

Homogeneity:

f (tx, ty) = ln (t6 x6 · t6 y 6 )

= ln (t12 x6 y 6 )
= ln (t12 ) + ln (x6 y 6 )
= ln (t12 ) + f (x, y)

So, f (x, y) is not homogeneous.

Homotheticity: First, assume that f (x1 , y1 ) = f (x2 , y2 ):

ln (x61 y16 ) = ln (x62 y26 )

Now check whether or not f (tx1 , ty1 ) = f (tx2 , ty2 ):

?
f (tx1 , ty1 ) = f (tx2 , ty2 )
?
ln (t6 x61 · t6 y16 ) = ln (t6 x62 · t6 y26 )
?
ln (t12 ) + ln (x61 · y16 ) = ln (t12 ) + ln (x62 · y26 )
?
ln (x61 y16 ) = ln (x62 y26 )

This last statement is true by our assumption, so f (x, y) is homothetic.

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Problem 12: Consider the following production function:

n
X
z(x1 , x2 , ...xn ) = ai ln(xi )
i=1

where a1 , . . . , an are constants. Find the partial elasticities of z with respect to xi

(A) ai
n
X
(B) ai
i=1
ai
(C)
xi
ai
(D)
z
(E) None of the above

Solution: D

First, recall that:

∂z xi
Eli z =
∂xi z
∂z
To find , we keep all other xj , j 6= i, constant.
∂xi

∂z ai
=
∂xi xi
∂z xi ai x i
= .
∂xi z xi z
∂z xi ai
=
∂xi z z

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 df
Problem 13: Find the value of at t = 3 for the function f (x, y) = xy, with x(t) = 2t
dt
and y(t) = 2t.

(A) 48
(B) 48 ln 2 + 16
(C) 64
(D) 64 ln 2 + 2
(E) None of the above

Solution: B

We will use the chain rule:

df ∂f dx ∂f dy
= +
dt ∂x dt ∂y dt
t
= y.2 ln 2 + 2x

df
At t = 3, x(t) = 8, y(t) = 6. Hence, = 48 ln 2 + 16
dt

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Problem 14: Consider a country with the following tax rate on wealth w :
(bw + c)p
t(w) = a +
w

Given that a, b, c, p are all constant parameters that are strictly positive, find the level(s) of
wealth w such that t0 (w) = 0

(A) 0
(B) c + b
(C) c(p − b)
c
(D)
p−b
(E) None of the above

Solution: E

Differentiating t(w) with respect to w yields

0 bp(bw + c)p−1 .w − (bw + c)p .1

t (w) =
w2
p−1
(bw + c) (pwb − (bw + c))
=
w2
p−1
(bw + c) (bw(p − 1) − c)
=
w2

Since b, c > 0, there is only 1 critical point:

bw(p − 1) − c = 0
c
Hence, w = . The answer is None of the above.
(p − 1)b

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Problem 15: A consumer has the following utility over goods x1 and x2 :
U (x1 , x2 ) = xa1 x1−a
2 , 0<a<1

Find the elasticity of substitution of x1 and x2 .

(A) 1
(B) a
(C) 1 − a
(D) 1 + a
(E) None of the above

Solution: A

First, we find the MRS:

F10 (x1 , x2 )
MRS =
F20 (x1 , x2 )
axa−1
1 x2
1−a
=
(1 − a)xa1 x−a 2
a x2
=
1 − a x1
x2
In order to calculate the elasticity of substitution σx2 x1 , we must find in terms of the
x1
MRS and take the derivative:
x2 1−a
= MRS
x1 a
d(x2 /x1 ) 1−a
=
d(MRS) a
Now, we can calculate the elasticity of substitution:
MRS d(x2 /x1 )
σx2 x1 =
x2 /x1 d(MRS)
a 1−a
= ·
1−a a
= 1

End of Paper

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