Practice Set 3

V. Bardis

1. Suppose Lan's firm produces q units of output using L units of labour and K units of capital. Her firm's
production function is q = F(L,K) = 10ln(L+1) +5 ln(K+1).

a) Find and interpret the first-order partial derivatives of the function.

b) Find the equation of the tangent plane to the graph of the function at the point (L,K) = (20,10)

c) Suppose Lan initially considered using the input combination (L,K)=(20,10) but then changed her mind and
decided to increase labour by 4 units and increase capital by 2 units. Calculate the change in output due to these
changes in the input amounts.

d) Use the equation of the tangent plane you found in part (c) to estimate the change in output when we start with
(L,K)=(20,10) and then labour is increased by 4 units increase capital is increased by 2 units
2. Suppose Pat's firm produces q units of output using L units of labour and K units of capital. Her firm's
production function is q = F(L,K) = ln(L+1)+ K.

a) Find and interpret the first-order partial derivatives of the function.

b) Is this function linear in variable L? Is the function linear in variable K?

c) Find the equation of the tangent plane to the graph of the function at the point (L,K) = (20,10)

d) Use the tangent plane equation to estimate the change in output if Pat initially considered using the input
combination (L,K)=(20,10) but then changed her mind and decided to increase labour by 4 units and increase
capital by 2 units.
3. The quantity of ground coffee Andrea buys each month (X) depends on her income (I), the price of coffee (Pc)
and the price of sugar (Ps) such that X = 2I /(3Pc + 2Ps ).

a) Find tangent plane to the graph of Andrea's demand function at the point where I = 50, Pc = 2 and Ps = 2.
Then use the tangent plane to estimate the change in the amount of good X Andrea will demand if her
income rises by 2 dollars and each price increases by 45 cents.

b) Find the partial elasticities of the function.

c) Use the partial elasticities you found in part (b) to estimate the percent change in quantity of coffee
Andrea demands if every variable increases by 1%.

d) Use the partial elasticities you found in part (b) to estimate the percent change in quantity of coffee
Andrea demands if each price decreases by 2% and Andrea's income increases by 1%.
4. If Donald deposits P dollars in investment account X, the money after t years will grow to become F dollars
according to the function

where r is the annual (nominal) rate of interest.

a) Find the equation of the "tangent plane" at the point where (P, r, t) = (1000, 0.03, 8). Then use the equation to
estimate the value of F if the interest rate increases from 0.03 to 0.04 and the number of years Donald invests in
the account increases from 8 to 9 years given F(1000, 0.03, 8) ≈ 1271.25.

b) Starting at the point given in part (a), use the partial elasticities of the function to estimate the percent change
in F if P rises by 3%, r stays constant and t increases 2%.
5. Answer the following

1/3 7/3
a) Consider the two-variable function z = F( x, y) = x y
Suppose x increases by 0.2 and y increases by 0.3 starting at the point where x = 1 and y = 1. Use the
tangent plane equation to estimate the change in the value of the function. What is your estimate
of the new function value?

b) Consider the three-variable function q=F(x,y,z) = z ln(1+y/x). Estimate the percent change in the value of
the function if each variable increases by 1%.
6. For each function given below find (i) its first-order differential and then the equation of the tangent
plane to its graph at the point where the value of each independent variable is equal to 1.

2-x-y
a) z = f(x,y) = 1/x + 1/y + e

b) z = g(x,y,s) = ln(x+s) + y

c) z = v(x, y) = y ln(x) + x ln(y)

d) z = h(x, y, s, t) = (x+s)/(y+t)