MEC-203: QUANTITATIVE METHODS Tutor Marked Assignment Course Code: MEC-203 Asst. Code: MEC-203/TMA/2023-24 Total Marks: 100 Note: Answer all the questions. Questions in Section A carry 20 marks each (to be answered in about 500 words each) Questions in Seetion B carry 12 marks each (to be answered in about 300 words each). Word limits do not apply to the numerical questions. Section A 1. a) Explain the necessary and sufficient conditions in case of unconstrained optimisation, b) Consider a consumer who buys two goods, x and y with utility function u(x, y) = 2Vx + y. The consumer's income is 20 and price of y is 4. Compute the optimal consumption bundle when the price of x is equal to 1 using constrained optimisation. (10+ 10 = 20) 2. With respect to the applications of dynamic optimisation, explain the optimal rate of extraction of exhaustible resources by monopoly. Section B 3. What is a discontinuous function? Discuss the two types of discontinuous functions along with their diagrams. 4, Explain the concept of a stationary point and inflexion point. Is a stationary point always a point of inflexion? Why or why not? (6 +6 =12) 5. What do you understand by the term ‘joint distribution’ and ‘marginal distribution”? Discuss with the help of an example. 6.What is a sample? Explain with the help of an example. Discuss any two types of sampling techniques. (6+6=12) 7) Write short notes on the following: @GX4=12) (i) One-tailed and two-tailed tests (ii) One to one and onto functions (iii) Hyperbola (iv) Local minimaCopyright with Kunj Publication only Not for resale Ph. 8006184581 (Call Us) MEC-203: QUANTITATIVE METHODS Course Code: MEC-203 Asst. Code: MEC-203/TMA/2023-24 Total Marks: 100 isclamerfSpecial Note: These are us sh sample ofthe AmawersSolutions 1 some ofthe Questions given nthe Asignmens. 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Questions in Section A carry20 marks each (to be answered in about 500 words each) Questions in Section B carry 12 marks each (to be answered in about 300 words each). Word limits do not apply to the numerical questions, Section A 1. a) Explain the necessary and sufficient conditions in case of unconstrained optimisation. Unconstrained Optimization: Necessary and Sufficient Conditions Unconstrained Optimization refers to the process of finding the maximum or minimum of a function without any constraints on the variables. In other words, we seek to locate the global maximum or minimum of the objective function within the entire domain of the variables. The search for optimal solutions is crucial in various fields, including mathematics, engineering, economics, and machine learning. To identify the optimal points, we rely on necessary and sufficient conditions, which play a vital role in understanding the behavior of a function and finding its extrema. = Necessary Conditions for Unconstrained Optir 1. Critical Points: Critical points are the potential candidates for local extrema (maximum or minimum) of a function. These points occur where the derivative of the function is either zero or undefined. Mathematically, for a function f(x) of a single variable x, the critical points are obtained by solving the equation P(x) = 0 or f(x) does not exist. For a function f(x) of multiple variables (x_1, x_2, .... x_n), critical points are found by solving the system of equations:Copyright with Kunj Publication only Not for resale Ph. 8006184581 (Call Us af/éx_1 = 0 éf¥éx 2=0... ffdx_n=0 2. First Derivative Test: Once the critical points are identified, we can apply the first derivative test to determine whether each critical point corresponds to a local maximum, a local minimum, or a saddle point. The first derivative test states that if f(x) > 0 to the left of a critical point and f(x) <0 to the right, then the critical point corresponds to a local maximum, Conversely, if £(x) <0 to the left and £(x) > 0 to the right, the critical point is a local minimum. If £(x) does not change sign across the critical point, it represents a saddle point. For an unconstrained problem, we can treat the absence of constraints as a trivial constraint, such as f(x) = g(x) where g(x) is a constant function. By introducing a Lagrange multiplier 4, we can analyze the critical points of the funetion L(x, 2) = f(x) -2* 6%) Taking partial derivatives with respeetto each variable and A, we can identify the critical points for the function L(x, 4) and then examine these points to find the optimal solution for the original unconstrained problem. While fiécessaty Conditions provide potential Solutions, they do Aot guarantWe that the points found are indeed local extrema. Sufficient conditions help verify whether a. critical point is a local maximum, local minimum, or neither. 1. Second Derivative Test: As mentioned earlier, the second derivative test is applicable for functions of a single variable If the second derivative is positive at a critical point, it is a local minimum, and if the second derivative is negative, itis a local maximum. However, the second derivative test does not provide conclusive results for points where the second derivative is zero or does not exist. 2. Higher-Order Derivatives: To determine the nature of critical points where the second derivative test is inconclusive, we can turn to higher-order derivatives. The third derivative (and higher) can offer valuable insights into the behavior of the function around critical points. For example, if the third derivative is positive at a critical point, it suggests a concave-up behavior, indicating a local minimum. If the third derivative is negative, it suggests a concave-down behavior, indicating a local maximum. 3. Convexity and Concavity: Convexity and coneavity play a crucial role in analyzing the behavior of a function and determining the nature of its critical points. A function is convex if its second derivative is non-negative over its entire domain, and concave if its second derivative is non-positive over the domain. Convex functions have the property that any local minimum is also a global minimum, and concave functions have the property that any local maximum is also a global maximum.Copyright with Kunj Publication only Not for resale Ph, 8006184581 (Call Us * Optimization Algorithms: In practice, finding analytical solutions to unconstrained optimization problems can be challenging or even impossible, especially for complex functions or high-dimensional spaces. Therefore, numerical optimization algorithms are often employed to approximate the optimal solution. Some common optimization algorithms include: 1. Gradient Descent: Gradient descent is an iterative optimization algorithm that leverages the gradient (first derivative) of the objective function to find the local minimum. Starting from an initial guess, the algorithm takes steps in the opposite direction of the gradient to gradually approach the optimal solution. 2. Newton's Method: Newton's method is another iterative optimization algorithm that utilizes the first and second derivatives of the function to find critical points. It makes use of the tangent line approximation and requires the computation of both the and second derivatives at each iteration. 3. Quasi-Newton Methods: Quasi“Newton methods, such as the Broyden-Fletcher- Goldfarb-Shanno (BFGSY algorithm, aré modifications of Newton's method that approximate the Hessian matrix (matrix of second derivatives) to avoid computing it explicitly at each iteration. These methods strike a balance between the efficiency of gradient descent and the accuracy of Newton's method, CONCLUSION: Unconstrained optimization is a fundamental problem with broad applications in various fields. To find the optimal solutions for such problems, necessary and sufficient conditions are crucial tools for understanding the behavior of the objective function and its critical points,Necessary conditions help identify potential solutions, while sufficient Conditions verify whether these points are local extrema, In practice, optimization algorithms are often employed to numerically approximate optimal solutions, especially for complex functions or high-dimensional spaces. By combining theoretical principles with practical algorithms, unconstrained optimization becomes powerful tool for solving real-world problems and making data-driven decisions, b) Consider a consumer who buys two goods, x and y with utility function u(x, y) 2Nx + y. The consumer's income is 20 and price of y is 4. Compute the optimal consumption bundle when the price of x is equal to 1 using constrained optimisation. Dynamic optimization is a powerful analytical tool that allows us to study decision- making processes over time, considering how actions in the present can impact future outcomes. One crucial application of dynamic optimization is the study of the optimal rate of exhaustible resource extraction by monopolies. In this context, a monopoly refers to a single entity that controls the entire supply of a particular exhaustible resource, such as oil, minerals, or natural gas, The monopoly's objective is to maximize its profits while accounting for the finite nature of the resource and theCopyright with Kunj Publication only Not for resale Ph, 8006184581 (Call Us impact of extraction on future prices and demand. This essay explores the principles and techniques involved in determining the optimal rate of resource extraction by a monopoly, considering the interplay of factors like resource scarcity, demand dynamics, and discounting. The Hotelling Rule: The Hotelling Rule, named after economist Harold Hotelling. is a fundamental concept in the dynamic optimization of exhaustible resource extraction. It suggests that a profit-maximizing monopolist will aim to deplete the resource at a rate such that its price increases over time at the same rate as the rate of discounting. This means that the resource's real price (adjusted for inflation and other factors) should remain constant over time, allowing the monopoly to achieve an optimal balance between present and future profitability, iscounting and Time Preferences: Discounting is a central element in dynamic optimization models. It reflects the idea that people and firms typically value present benefits more than future benefits. In the context of exhaustible resource extraction, discounting captures the trade-off between the Fevenue gained from immediate extraction and the potential for higher prices and profits in the future, ‘The choice of the discount rate significantly influences the optimal extraction rate. A higher discount rate places greater emphasis on present benefits, leading to faster depletion of the resource. Conyérsely, alower discount tate promotes more conservative extraction to take advantage of potential future price increases. Resource Scarcity and Demand Dynamies: Resource scarcity plays a crucial role in determining the optimal extraction rate, As the resource, becomes scarcer, its price tends to rise faster, making it more profitable for the monopoly to slow down the extraction rate. The monopolist'must anticipate how changes in the resource's availability will affect market dynamics and future demand, Moreover, demand dynamics are an essential consideration in the monopolist's decision-making process. Fluctuations in demand over time can impact the resource’s price elasticity, affecting the response of consumers to changes in price. The monopolist must anticipate how demand elasticity will evolve and adjust the extraction rate accordingly. Resource Technological Change and Substitutability: Technological advancements and the development of substitute resources can significantly impact the optimal extraction rate, Technological progress can make extraction more efficient, potentially altering the trade-off between present and future extraction. The availability and competitiveness of substitute resources influence the monopolist’s decisions as well. When substitute resources become economically viable, the monopolist may adjust the extraction rate to account for potential shifts in demand and profitability.Copyright with Kunj Publication only Not for resale Ph, 8006184581 (Call Us Uncertainty and the Option Value: Uncertainty is a crucial factor that complicates the monopolist’s decision-making process. Uncertainty can arise from factors such as changing market conditions, geopolitical risks, or technological advancements. In the presence of uncertainty, the monopolist faces an "option value" in holding onto the resource rather than extracting it immediately. By keeping the resource in the ground, the monopolist retains the flexibility to adjust the extraction rate in response to changing circumstances. This option value is particularly significant when the future is highly uncertain and offers the potential for substantial profits if conditions favor delaying extraction, Environmental Considerations: The optimal rate of resource extraction should also account for environmental considerations, Monopolies, like any resource extractors, have a responsibility to manage their operations sustainably and minimize negative ecological impacts. Failure to consider environmental factors can lead to long-term economic and social costs, as well as reputational damage. Incorporating environmental Costs into the optimization model can lead to a more balanced approach to-resouree extraction, which considers not only the immediate financial gains but also the long-term well-being of society and the environment. Conclusion: In conclusion, the application of dynamic op\ ion principles to the optimal rate of exhaustible resource extraction by a monopoly provides valuable insights into the complex decision-making process faced by resource owners. The Hotelling Rule, discounting, resource scarcity, demand dynamics. technological change, and uncertainty all play critical roles.in determining the.extraction rate. A profit-maximizing monopolist ttust consider various factors, including the finite nature of the resource, future price expectations, market demand, technological advanééments, and environmental impacts. Striking the right balance between immediate profits and sustainable resource management is essential for the long-term viability of both the monopoly and the wider society. By incorporating these considerations into their decision-making, monopolies can make more informed choices that lead to better economic outcomes and environmental sustainability 2. With respect to the applications of dynamic optimi rate of extraction of exhaustible resources by monopoly. n, explain the optimal Dynamic optimization refers to the study of decision-making processes over time, where decisions are interdependent and change in response to evolving circumstanc One crucial application of dynamic optimization lies in understanding the optimal rate of extraction of exhaustible resources by monopolistic entities. Monopoly refers to a market structure where a single producer or firm controls the supply of a particular good or service, allowing it to set prices and quantity levels without competition, In the context of exhaustible resources, such as minerals, fossil fuels, or rare metals, the monopoly's ability to control extraction rates can significantly impact theCopyright with Kunj Publication only Not for resale Ph, 8006184581 (Call Us economy, environment, and future availability of these resources. This essay explores the concept of dynamic optimization in the context of a monopolistic entity extracting exhaustible resources, focusing on understanding the optimal rate of extraction. |. Model of the Monopolist's Extraction Problem: The optimal rate of exhaustible resource extraction by a monopoly can be analyzed using a dynamic optimization framework, particularly through the Hotelling rule. The Hotelling rule is a principle derived from Harold Hotelling's work in the 1930s, which describes the optimal extraction path for a non-renewable resource under competitive conditions. For a monopoly, the analysis becomes more complex, as the firm has the power to influence the resource price and quantity extracted. The Monopolist's Objective Function: The monopolist’s primary objective is to maximize its long-term profits over a finite time horizon. This objective function can be represented as: Max J [P(Q_t)- C(Q_0] *dt Where: P(Q_1) represents the price of the resource as a function of the quantity extracted Qv: C(Q represents the cost function associated with extraction, which may include operational, environmental, and regulatory costs. J[] * dt denotes the integral over time, representing the time horizon for extraction decisions. Resource Extraction Constraints: The monopolist faces constraints on the rate of resource extraction. These constraints are twofold: a. Physical Extraction Rate Constraint: The rate of extraction must not exceed the available stock of the exhaustible resource. This constraint ensures that extraction occurs within the limits of the finite resource reserve. b. Technical and Economic Constraints: The monopolist must consider the resource extraction technology, market demand, and any regulatory restrictions in determining the extraction rate. Il. The Hotelling Rule for Monopoly: To find the optimal rate of resource extraction, the monopolist must apply the Hotelling rule, adapted to a monopoly setting. The Hotelling Rule for Competitive Extraction:Copyright with Kunj Publication only Not for resale Ph. 8006184581 (Call Us) Ina competitive market, the Hotelling rule states that the resource price should increase over time at a rate equal to the real interest rate. This occurs because the opportunity cost of leaving the resource in the ground is the potential interest earned by investing the resource value elsewhere. Mathematically, the competitive Hotelling rule is given by: dP/dt =r Where: dP/dt represents the rate of change of the resource price over time. r represents the real interest rate. Adapting the Hotelling Rule to Monopoly: In the case of a monopoly, the monopolist can control the resource price by adjusting the extraction rate. As the resource becomes scarcer, the monopolist can slow down extraction to drive up the pric€ and increase its profits. This behavior alters the relationship between resource price and extraction rate. The modified Hotelling rule for monopoly becomes: dP/dt HB *(1/E) Where: B represents the monopolist’s market power or pricing behavior. A higher B indicates a gféater ability to manipulate prices. E represents the elasticity of resource demand. A higher E means the demand is more responsive to price changes. |. Solving the Monopoly's Dynamic Optimization Problem: To find the optimal rate of extraction, the monopolist must solve the dynamic optimization problem represented by its objective function subject to the resource extraction constraints. The Monopolist's Euler Equation: The monopolist's Euler equation is a differential equation that results from the dynamic optimization problem. It equates the marginal benefit of extracting an additional unit of the resource with the discounted marginal cost of future extraction, ‘The Buler equation for the monopolist is given by: PQD+PQH/CQH=5 Where: P'(Q_1) represents the derivative of the price function with respect to quantity.Copyright with Kunj Publication only Not for resale Ph. 8006184581 (Call Us C(t) represents the derivative of the cost function with respect to quantity. 8 represents the discount rate, which accounts for the time preference of the monopolist. Solving the Euler Equation: The monopolist can solve the Euler equation to determine the optimal rate of resource extraction over time. This involves finding the path of extraction that maximizes the objective function while satisfying the extraction constraints, IV. Implications of the Optimal Extraction Rate: Understanding the optimal rate of extraction by a monopoly has several important implications: = Resource Depletion and Price Dynamic: ‘The monopolist's pricing behavior andextraetion rate significantly impact the pace of resource depletion. A more-aggressive extraction policy can lead to faster depletion and higher prices in the short term. However, this can also result in higher environmental costs and potential future scarcity. =_ Market Power and Rent Capture: Monopolists can capture economic rents by setting prices above their marginal costs. As the resource becomes scarcer, the monopolist can exercise its market power to increase prices and extract higher profits. This can lead to wealth concentration and potential market inefficiencies. = Enyironmental and Social Considerations: ‘The mOnopolist’s extfdction decisions can have adverse environmental consequence: Higher extraction rates may lead to increased carbon emissions, habitat destruction, and ecosystem disruption. Striking a balance between economic interests and sustainable resource management becomes crucial. = Technological Advancements and Substitutability: The dynamic nature of optimization allows the monopolist to respond to technological advancements and potential resource substitutes. If new technologies emerge or viable substitutes are found, the monopolist may adjust its extraction strategy accordingly. ‘Conclusion: In conclusion, the application of dynamic optimization to analyze the optimal rate of exhaustible resource extraction by a monopoly reveals the complexity of this problem. ‘The monopolist's market power and pricing behavior significantly influence the extraction trajectory and resource price dynamics. Understanding the implications of these decisions is crucial for ensuring sustainable resource management, mitigatingenvironmental impacts, and promoting long-term economic stability. Policymakers must consider these factors when regulating monopolistic entities’ extraction activities to strike a balance between short-term profit maximization and long-term resource sustainability. Section B 3. What is a discontinuous function? Discuss the two types of discontinuous functions along with their diagram: A sort of mathematical function known as a discontinuous function is one that has a leap, a break, or a hole in its graph at one or more locations within its domain, This type of function is also known as a "hole function.” At these instances, the function is no longer continuous, which indicates that there is either an abrupt change in the value of the function or that the value is undefined. Removable discontinuities and essential discontinuities are the two primary categories of discontinuous functions. Let's talk about each kind while looking at their respective diagrams: 1, Removable Discontinuities (or Point Discontinuities): Removable discontinuities occur when a function has a hole in its graph ata specific point. These points are called removable because it is possible to redefine the function at that point to make it continuous again. The discontinuity can be “filled” by assigning value to the funetion at that point without causing any abrupt jumps or breaks in the graph. In the diagram above, the function has a hole at the point (a, f(a)). The open circle represents the discontinuity, indicating that the function is undefined at that point. However, we can remove the discontinuity by redefining the function at (a, f(a)) su that the graph is continuous at that point. For example, if the function is f(x 1)/(x~ 1), we can redefine f(1) to be 2, and the resulting function will be continuous atx=1sential Discontinuities (or Jump Discontinuities): I discontinuities take place if a function's graph contains a jump or a break at a certain point in the line of the function. Essential discontinuities, on the other hand, cannot be deleted or filled by redefining the function at that point in the same way that removable discontinuities may. The value of the function fluctuates unexpectedly, which causes a gap or an asymptote to appear in its graph in the vertical plane. Inthe diagram.above, the function has,a,jump at the point (a,f(a))."The open circle represents the discontinuity, and there is a gap in the graph at that point, Essential discontinuities can occur due to various reasons, such as division by zero or square root of a negative number. For example, the function f(x) = 1/x has an essential discontinuity atx = 0. As x approaches 0 from the left, f(x) gdes to negative infinity, and as x approaches () from the right, £(0) goes to positive infinity. The function has no defined value at x = 0, resulting in a jump in the graph. Ina nutshell, discontinuous functions are characterized by the presence of breaks jumps, or holes in the graphs of their functions at particular locations within th domains, Essential discontinuities have jumps or gaps that cannot be erased by redefining the function, whereas removable discontinuities have holes that ean be filled by redefining the function. Removable discontinuities have holes that can be filled by redefining the function. When studying and working with functions ina variety of mathematical and real-world contexts, having a solid grasp of the characteristics of these discontinuities is absolutely necessary. 4. Explain the concept of a stationary point and inflexion point. Is a stationary point always a point of inflexion? Why or why not? ARY POINT: In mathematics, a stationary point, also known as a critical point, is a point on the graph of a function where the derivative of the function is equal to zero or isCopyright with Kunj Publication only Not for resale Ph, 8006184581 (Call Us undefined. In other words, it is a point where the slope of the function's graph is either flat (horizontal) or undefined (vertical). Mathematically, let's consider a function f(x) that is continuous on an open interval containing the point. If the derivative of the function f(x) exists at ‘c’ and is equal to zero (£'(C) = 0) or is undefined, then 'c is a stationary point. ‘There are three types of stationary points: 1. Local Maximum: Ata local maximum, the function is increasing before 'c’ and decreasing after 'c.' The graph of the function has a peak at'e,’ and it represents the highest value of the function in a small neighborhood around ‘c.’ . Local Minimum: At a local minimum, the function is decreasing before 'c’ and increasing after'c.' The graph of the function has a valley at'c,’ and it represents the lowest value of the function in a small neighborhood around 'c.’ Inflexion Point: An inflection point is a point on the graph of a function where the concavity changes. At an inflection point, the graph changes from being concave up (shaped like a cup) to concave down/(shaped like an upside-down cup) or vice versa. In other words, it is a point where the second derivative of the function changes sign. Mathematically, let's consider a function f(c) that is continuous on an open interval containing the point ‘¢,' If the second derivative of the fufiction f"(x) exists at ‘e’ and changes sign from positive to negative or from negative to positive, then ‘eis an inflection point. There are three possibilities forthe concavity of the graph at an infleetion point: 1. Concave Up to Coneave Down: The graph changes from being concave up to concave down. At the inflection point, the curve transitions from a "smile" to a "frown." . Concave Down to Concave Up: The graph changes from being concave down to concave up. At the inflection point, the curve transitions from a "frown" to a nary Points and Inflection Points: a stationary point can coincide with an inflection point, these two concepts are distinct and not necessarily the same. A stationary point occurs where the derivative of a function is zero or undefined, while an inflection point occurs where the concavity of the graph changes. Scenario 1: Stationary Point and Inflection Point Coincide In some cases, a stationary point can also be an inflection point. This happens when the second derivative of the function is zero at the stationary point, and the concavity