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Class 17

This document contains solutions to exercises presented in a class on basic mathematical economics. It includes solutions to optimization problems involving consumers with utility functions maximizing utility subject to budget constraints. Lagrange multipliers are used to find the critical points and optimal consumption bundles for different scenarios involving two goods and linear utility functions and budget constraints.

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Andrey Moura
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110 views2 pages

Class 17

This document contains solutions to exercises presented in a class on basic mathematical economics. It includes solutions to optimization problems involving consumers with utility functions maximizing utility subject to budget constraints. Lagrange multipliers are used to find the critical points and optimal consumption bundles for different scenarios involving two goods and linear utility functions and budget constraints.

Uploaded by

Andrey Moura
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BEE1020 Basic Mathematical Economics

Dieter Balkenborg, Jack Rogers Juliette Stephenson

Class Exercises Week 17 19-23/02/2007

Department of Economics University of Exeter

Exercise 1 A consumer with utility function u (x; y) = (x + 1) (y + 1) has a budget b = 100, while the prices are px = 20, py = 40. Write down the Lagrangian for the problem and nd its partial derivatives. Assume that only the budget constraint is binding. Which Lagrange multipliers must then be zero? What system of equations must be satised and what is its solution? Is the solution reasonable? Exercise 2 A consumer with utility function u (x; y) = (x + 1) (y + 1) has a budget b = 44, while the prices are px = 100, py = 16. Write down the Lagrangian for the problem and nd its partial derivatives. Assume that only the budget constraint is binding. Which Lagrange multipliers must be then be zero? What system of equations must be satised and what is its solution? Is the solution reasonable? Exercise 3 What is the consumer optimum in the last exercise? Exercise 4 The highway department is planning to build a picnic area for motorists along a major highway. It is to be rectangular with an area of 5; 000 square yards and is to be fenced o on the three sides not adjacent to the highway. What is the least amount of fencing that will be needed to complete the job? a) Identify this problem as a constraint optimization problem. What objective function f (x; y) is to be maximized / minimized subject to what constraint g (x; y) 0? b) Write down the Lagrangian L (x; y) for this problem. c) Find the solution to the three equations a) @L = 0 b) @L = 0 c) g (x; y) 0. @x @y Exercise 5 A consumer has the following utility when he consumes x units of apples and y units of oranges: u (x; y) = x2 + 4x y 2 + 16y Suppose the consumer has a budget of 3.20 to be spend on oranges and apples. Each apple and each orange costs 0.40. Use the method of Lagrange to nd the optimal consumption bundle: a) Write down the budget constraint and the Lagrangian. Assume that only the budget constraint is binding. b) Write down the rst-order conditions for a critical point for the Lagrangian. Find a condition for a critical point that does not involve the Lagrange multiplier. c) Use the latter condition and the budget constraint to nd a candidate for the optimum. (One can show that it is indeed the optimum.)

BEE1020 Basic Mathematical Economics

Dieter Balkenborg, Jack Rogers Juliette Stephenson

Homework -Solution Week 17 19-23/02/2007

Department of Economics University of Exeter

Exercise 1 Use the Lagrangian method to maximize the function f (x; y) = xy subject to the constraint x + 2y 200 Exercise 2 A consumer has the utility function u (x; y) = 5x2 + 6xy + y 2 + 38x + 18y a) Determine the marginal utility for the two commodities. Is more always better for the consumer? b) The consumer has a budget of 40. A unit of the rst commodity costs 10 and a unit of the second 5. Write down the budget equation. c) The consumer wants to maximize his utility subject to his budget constraint. Write down the Lagrangian for this problem. d) Calculate the rst order conditions for a critical point of the Lagrangian. e) Assume only the budget constraint binds. Derive a linear equation to be satised by a critical point that does not involve the Lagrange multiplier for the budget constraint. f) Use the equation from e) and the budget equation to nd the constrained optimum.

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