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ECON7150
Assignment Instructions: • All answers to the assignment must be neatly hand written. This can be done on paper or directly onto a file using a tablet. • Save your assignment as one pdf document. If it is written on paper, you should scan it into a single file. If you do not have access to a flatbed scanner you can use a phone app such as “Adobe Scan” or “Microsoft Office Lens”. • Submit your assignment on Blackboard through Turnitin. • Make sure you show all steps, key formulae, and workings clearly. Final solutions should be simplified as much as possible and either highlighted or circled. Round to the nearest hundredth if necessary. • 100 Marks - 30% of overall assessment 1. (15 marks) Suppose that a decision maker has $100. They need to choose how many kilos of chocolate (c) and vegetables (v) they will purchase. Chocolate costs $2 per kilo and vegetables cost $1 per kilo. They are choosing c and v to maximise the utility function U(c, v) = 5 α cα + 1 α vα where α is a constant and 0 < α < 1. a) (5 marks) Formally write down the decision maker’s optimisation problem and the asso- 1 2ciated Lagrangian. b) (5 marks) Write down the first order conditions and find the values of c and v that satisfy those conditions. Your answer should be a function of α. c) (5 marks) Check the second order conditions for the solution(s) you found in part (b). Do these values of c and v solve the decision maker’s problem? 2. (16 marks) Define A = 5 w 1 w −1 3 −2 −3 4 , B = −1 2x y y − x 4 1 3y − 1 1 5 , C = 1 0 z − 2 3 −1 z 7 3 2 a) (4 marks) For what value(s) of w is the matrix A singular? b) (4 marks) Treating x and y as constants, find the determinant of the matrix B. c) (8 marks) Treating z as a constant, find the inverse of the matrix C. [Hint: check your answer by plugging in simple values for z and making sure that the product of C and its inverse is the identify matrix.] 3. (12 marks) Consider the function f(x, y) = (y − 3)ey2−4x2 . a) (6 marks) Find all stationary points of f(x, y). b) (6 marks) Classify any points you found in part a) as either saddle points, local maxima, or local minima. 4. (15 marks) A firm produces q1 units of good 1 and q2 units of good 2. The firm is a price taker and faces prices $100 per unit of good 1 and $50 per unit of good 2. The firm’s cost of producing q1 and q2 in dollars is C(q1, q2) = 5q 2 1 + 2q1q2 + 4q 2 2 a) (3 marks) Write down the firm’s profit maximization problem in terms of x and y. b) (6 marks) Use the first order conditions and find the values of x and y that solve the firm’s problem. [Note: For this problem, we are not assuming that the quantities need to be a whole numbers. They can be any positive real number.] c) (6 marks) Use the second order conditions to show that the solution from part b) is a maximum. 5. (18 marks) Consider the problem max − 3x+ 4y subject to 5x2 + 2y2 = 10 (a) (3 marks) Write down the Lagrangian for this problem. 3(b) (9 marks) Write down the first order conditions for the optimisation problem and find all values of x and y that satisfy those first order conditions. (c) (6 marks) Check the second order conditions to classify the solution(s) you found in part (b). Do these values of x and y solve the problem?