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Tutorial Exercise - 4

This document contains 15 tutorial exercises on static optimization problems. The exercises cover a range of optimization techniques including: finding profit maximizing output levels; determining functions that maximize an objective subject to constraints; classifying stationary points; solving constrained maximization problems using Lagrange multipliers; solving utility maximization problems; applying Kuhn-Tucker conditions; and verifying envelope results.

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30 views

Tutorial Exercise - 4

This document contains 15 tutorial exercises on static optimization problems. The exercises cover a range of optimization techniques including: finding profit maximizing output levels; determining functions that maximize an objective subject to constraints; classifying stationary points; solving constrained maximization problems using Lagrange multipliers; solving utility maximization problems; applying Kuhn-Tucker conditions; and verifying envelope results.

Uploaded by

Belaynew
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial Exercise IV: Static Optimization

1). A firm produces two goods, denoted by A and B. The cost per day is
C ( x, y )  0.04 x 2  0.01xy  0.01 y 2  4 x  2 y  500 when x units of A and y units of B are
produced (x>0, y>0). The firm sells all it produces at prices 13 per unit of A and 8 per unit of B.
a). Show that the profit function is 𝜋(𝑥, 𝑦) = 9𝑥 + 6𝑦 − 0.04𝑥 + 0.01𝑥𝑦 − 0.01𝑦 −
500.
b). Determine the values of x and y at which π ( x, y ) attains its maximum.
2). Find the functions x* ( r ) and y * ( r ) such that x  x* ( r ) and y  y * ( r ) that solve the problem

max f ( x, y, r )  max( x 2  xy  2 y 2  2rx  2ry) where r is a parameter. Verify that


x, y x, y

f * (r )  f * ( x* ( r ), y* (r ), r ) 
   * .
r  r x  x ( r ), y  y* ( r )

3). Classify the stationary points as local minimum, local maximum and saddle point of
a). f ( x, y , z )  x 2  2 y 2  3 z 2  2 xy  2 xz

b). f ( x1 , x2 , x3 , x4 )  20 x2  48 x3  6 x4  8 x1 x2  4 x12  12 x32  x42  4 x23

4). (a) Solve the problem max x  4 y  z subject to x 2  y 2  z 2  216 and


x  2 y  3z  0 .
(b) Change the first constraint to x 2  y 2  z 2  215 and the second to
x  2 y  3z  0.1 . Estimate the corresponding change in the maximum value
function.
5). Consider the problem (assuming m  4 )

max U ( x1 , x2 )  1 ln(1  x1 )  1 ln(1  x2 ) subject to 2 x1  3 x2  m


2 4
(a) Let x1* ( m) and x2* (m) denote the values of x1 and x2 that solve the problem. Find
these functions and the corresponding Langralge multiplier.
(b) The optimal value U * of U ( x1 , x2 ) is a function of m. find an explicit expression

for U * ( m ) , and show that dU * dm   .

1
6). Consider the standard utility maximization problem max U ( x ) subject to px = m . Let

U (x)   j 1 A j ln( x j  a j ) , where a j and


n
Aj are all positive constants such that

 A j  1 , and with R  m   j 1 a j p j  0 .
n n
j 1

(a) Show that if x  x* solves the problem max U ( x ) subject to px = m , then

x*j  a j  RA j p j , j  1, , n

(b) Let U * (p, m)  U (x* ) denote the indirect utility function. Verify the Roy’s
Identity.
n n
7). Let Q ( x1 , , xn )   aij xi x j , S  ( x1 , , xn ) : x12    xn2  1 . Assume the
i 1 j 1

coefficient matrix A  (aij ) of the quadratic form Q is symmetric and prove that Q attains

maximum and mimum values over the set S which are equal to the largest and smallest
eigenvalues of A. (Hint: Consider first the case n  2 . Write Q ( x) as Q ( x)  xAx . The
first-order conditions give Ax  x .)
8). Consider the problem max(min) x 2  y 2  z 2 subject to x  y  z  1 . Compute the

Bordered Hessian matrices B2 and B3 . Show that the second-order conditions for a local
maximum are satisfied.
9). Solve the problem max xy  x  y subject to x 2  y 2  2, x  y  1 .

10). (a) By using x and y units of two inputs, a firm produce xy units of a product. The

input factor costs are w and p per units, respectively. The firm wants to minimize
the costs of producing at least q units, but it is required to use at least a units of
first input. Here w a, and q are positve constants. Formulate the nonlinear
programming problem that emerges. Reformulate the problem as a maximization

problem, and write down the Khun-Tucker conditions for  x , y  to solve the
* *

problem.

(b) Explain why x* y *  q if ( x* , y* ) is optimal, and solve the problem. (Hint:


consider two cases.)

2
11). Consider the problem max f ( x, y )  xy subject to g ( x, y )  ( x  y  2)2  0 . Explain why
the solution is ( x, y )  (1,1) . Verify that the Kuhn-Tucker conditions are not satisfied for
any , and that the constraint qualification does not hold at (1,1) .
12). Solve the following nolinear programming problems:
(a) max xy subject to x  2 y  2, x  0, y  0

(b) max x α y β subject x  2 y  2, x  0, y  0 , where >0, >0, and +1.


13). A model for studying the export of gas from Russia to the rest of Europe involves the
following optimization problem:
max[ x  y  12 ( x  y ) 2  14 x  13 y ] subject to x  5, y  3,  x  2 y  2, x  0, y  0

Sketch the admissible set S in the xyplane, and show that the maximum cannot occur at
an interior point of S. Solve the problem.
14). (a) Solve the problem max x 2  y 2  z 2 subject 2x 2  y 2  z 2  a 2 and x  y  z  0
(b) Verify the Envelope result is this case.
15). Consider the problem max(min) x 2  y 2 subject to r 2  2 x 2  4 y 2  s 2 where 0  r  s .
(a) Solve the maximization problem and verify the envelope result in this case.
(b) Reformulate the minimization problem as a maximization problem, solve it and verify
the envelope result in this case.
(c) Give a geometric interpretation of the problem and its solution.

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