Applied Microeconomics

Problem Set 1 Spring, 2024

1. (24 points) Consider a minimization problem, the objective function is y = f ( x ) :

(1) Explain why the second-order condition for the minimization problem is
f ( x)  0 , that is, f ( x ) is a convex function. (8 points)
(2) Explain why the first-order condition is a necessary but not sufficient condition. (8
points)
(3) Explain why the second-order condition is a necessary but not sufficient condition.
(8 points)

2. (16 points) Find the derivatives of the following functions:

(1) f (x) = 3x4 + 4x3 – 12x2 + 12, find f ( x), f ( x) .
(2) Suppose that f ( x) = a ln x, g ( x) = be x , find the first derivative of f ( x ) g ( x ) .

3. (20 points) Illustrate that given a linear demand schedule with the demand function as
q = a − bp :
(1) Draw the demand curve with p the y-axis and q the x-axis, and derive the slope. (5
points)
(2) eq , p = (q p)( p q) . Show that the points on the upper part of the demand curve
are more elastic than those on the lower part. (8 points)
(3) A flatter demand curve is more elastic than a steeper one. (7 points)(Hint: compare
two points lying on the same ray through the origin on two demand schedule)

4. (16 points) Derive the convenient formula of elasticity: ey , x =  ln y  ln x , and use

the formula to derive the output elasticity of capital and labor, respectively, for the
production function: y = f ( L, K ) = AL0.75 L0.25 . (Hint: given that y = f ( x1 , x2 ) , output
elasticity of input i is defined as ey , xi = (y y) (xi xi ) ).

5. (16 points) Suppose milk produced by the cows is determined by the quantity of three
different kinds of feed, x1 , x2 and x3 . Let y denote milk, the production technology of
milk is described by y = f ( A, x1 , x2 , x3 ) , where A stands for the state of technology.
Derive dy and give an interpretation of each of the terms in the total differential.

6. (8 points) Determine the logical relationship for the following two cases and explain
why it’s the case:
(1) A–an unmarried person; B–a violinist
(2) A–plants will die; B–there is no water.