Assignment 1

Mohammed Bouaddi

American University in Cairo

October 14, 2022

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Each Question worth 10 marks
I. A …rm has the following production function

f (x, y ) = xy

With the following cost and technology constraints

2x + 3y 6 60
x + y 6 10

where x and y are labor and capital.

Find the optima of the following function and discuss their nature:
minima, maxima or saddle point.

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Answer:
L = xy λ1 (2x + 3y 60) λ2 (x + y 10)

df (x, y )
= y 2λ1 λ2 = 0 (1)
dx
df (x, y )
= x 3λ1 λ2 = 0 (2)
dy
2x + 3y 6 60 (3)
x + y 6 10 (4)
λ1 > 0, λ2 > 0 (5)
Case 1: Both constraints are binding: λ1 > 0 and λ2 > 0.
y 2λ1 λ2 = 0 (1)
x 3λ1 λ2 = 0 (2)
2x + 3y = 60 (3)
x + y = 10 (4)
The critical point is: (x = 30, y = 40, λ1 = 70, λ2 = 180) , not a
solution because it contradict λ1 > 0 and contradicts x > 0.
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Case 2: First constraint is binding and the second constraint is not
binding: λ1 > 0 and λ2 = 0.

y 2λ1 = 0 (1)
x 3λ1 = 0 (2)
2x + 3y = 60 (3)

The critical point is: (x = 15, y = 10, λ1 = 5): It is not a solution since
it doesn’t ful…l the constraint x + y < 10 .
Case 3: First constraint is not binding and the second constraint is
binding: λ1 = 0 and λ2 > 0.

y λ2 = 0 (1)
x λ2 = 0 (2)
(x + y 10) = 0 (4)

The critical point is: (x = 5, y = 5, λ2 = 5): It is a solution since it

doesn’t contradict the constraint 2x + 3y = 25 < 60.
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
 0 1
0 1 1
jH j = @ 1 0 1 A =2>0
1 1 0
Thus the point (x = 5, y = 5, λ2 = 5) is a maximum.
Case 4: Both constraints are not binding: λ1 = 0 and λ2 = 0.

y = 0 (1)
x = 0 (2)

The critical point is: (x = 0, y = 0, λ1 = 0, λ2 = 0): It is a solution

since it doesn’t contradict the constraint x + y < 10 and
2x + 3y = 25 < 60. It is a saddle point.

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Solve the following problems
II. max f (x, y ) = xy 2 x such that 2x + 3y = 12

Answer:
L = xy 2 x λ (2x + 3y 12)
dL (x, y )
= y2 1 2λ = 0 (1)
dx
dL (x, y )
= 2xy 3λ = 0 (2)
dy
dL (x, y )
= (2x + 3y 12) = 0 (3)
dλ
From 1 and 2, we have
y2 1
= λ (4)
2
2
xy = λ (5)
3
2x + 3y 12 = 0 (6)
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
From 4 and 5, we have
y2 1 2 y2 1
= xy =) x = 3 (7)
2 3 4y
Substitute in 6 to get
y2 1
2 3 + 3y = 12 (8)
4y
y2 1
+y = 4 (9)
2y
Equation 8 times 2y gives:
y2 1 + 2y 2 = 8y (10)
Rearrange to get
3y 2 8y 1=0
2
∆ = ( 8) 4 3 ( 1) = 76
p p
2 8 76 4 19
3y 8y 1 = 0 =) y = =
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Substitute in the constraint, we get the following optima:
1
p 4
p
19 1
p p
4 + 19
4 + 2 19, 3 and 4 2 19, 3 .
Bordered Hessian
0 1
0 2y 2
H = @ 2y 2x 3 A
2 3 0

p p
Case 1: (x , y ) = 4 + 1
2 19, 4 3
19

0 p 1
0p 2 4 3 19 2 p
B p C
jH j = @ 2 4 19
8 + 19 3 A = 12 19 < 0
3
2 3 0

p p
Thus the point (x , y ) = 4 + 1
2 19, 4 3
19
is a minimum.

MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
 p p
Case 2: (x , y ) = 4 1
2 19, 4 +3 19
0 p 1
0p 2 4 +3 19 2 p
B p C
jH j = @ 2 4 + 19 8 19 3 A = 12 19 > 0
3
2 3 0
p p
Thus the point (x , y ) = 4 1
2 19, 4 +3 19 is a maximum.

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III. max f (x, y ) = xy 2 x such that 2x + 3y = 12, x > 0 and y < 3

Answer:

L = xy 2 x λ1 (2x + 3y 12) λ2 (y 3) + δx

Kuhn-Tucker conditions:

dL (x, y )
= y2 1 2λ1 + δ = 0 (1)
dx
dL (x, y )
= 2xy 3λ1 λ2 = 0 (2)
dy
dL (x, y )
= (2x + 3y 12) = 0 (3)
dλ
x> 0 and y < 3 (4)
λ2 (y 3) = 0 (5)
δx = 0 (6)
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
Notice that the last two constraints are not binding. It follows that
λ2 = δ = 0.
The Kuhn-Tucker conditions reduce to:
dL (x, y )
= y2 1 2λ1 = 0 (7)
dx
dL (x, y )
= 2xy 3λ1 = 0 (8)
dy
dL (x, y )
= (2x + 3y 12) = 0 (9)
dλ
Equations 7, 8 and 9 are the same as equations 1, 2 and 3 in question II.
1
p 4
p
19
It follows, that we have the following critical points 4 + 2 19, 3
p p
and 4 21 19, 4 +3 19 .
p p p
Case 1: (x , y ) = 4 + 12 19, 4 3 19 and λ1 = 13 9
4
9 19 =
0.492 84
This point veri…es constraints x > 0 and y < 3 but not λ1 > 0: it is not a
solution. p p p
Case 2: (x , y ) = 4 21 19, 4 +3 19 and λ1 = 49 19 + 13 9
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
This point veri…es constraints x > 0, y < 3 and λ1 > 0: it is a solution.

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IV. f (x, y ) = xy 2 x such that 2x + 3y = 12, x > 10 and y < 3
Answer:
Since the last two constraints are not binding, we get the same critical
1
p 4
p
19
points as in questions II and III: (x , y ) = 4 + 2 19, 3 and
p p
(x , y ) = 4 12 19, 4 +3 19 .
p p p
Case 1: (x , y ) = 4 + 12 19, 4 3 19 and λ1 = 13 9
4
9 19 =
0.492 84 p
This point contradicts the constraint x > 10 since x = 4 + 12 19 < 10 It
also contradicts λ1 > 0.
p p p
Case 2: (x , y ) = 4 12 19, 4 +3 19 and λ1 = 13 4
9 + 9 19
p
This point contradicts the constraints x > 10 since x = 4 12 19 < 10.
Conclusion: There is no solution.

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V. max f (x, y ) = xy 2 x such that 2x + 3y 6 12

Answer:

L = xy 2 x λ (2x + 3y 12)
Kuhn-Tucker conditions:
dL (x, y )
= y 2 1 2λ = 0 (1)
dx
dL (x, y )
= 2xy 3λ = 0 (2)
dy
2x + 3y 12 6 0, λ > 0 (3)
λ (2x + 3y 12) = 0 (4)
Case 1: The constraint is not binding (2x + 3y 12 < 0). Thus, λ = 0
and we get from the …rst order conditions that:
y2 1 = 0 =) y = 1
2xy = 0 =) x = 0
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
Therefore, there are two solutions (x , y ) = (0, 1) and
(x , y ) = (0, 1) since they both verify the constraint 2x + 3y 12 < 0.
Case 2: The constraint is binding (2x + 3y 12 = 0). Thus, λ > 0 and
we get from the same …rst order conditions as in Equations 6,7 and 8 are
the same as equations 1, 2 and 3 in question II:

y2 1 2λ = 0
2xy 3λ = 0
2x + 3y 12 = 0

It follows, that we have thep following critical points

p p p
(x , y ) = 4 + 21 19, 4 3 19 and (x , y ) = 4 1
2 19, 4 + 3 19 .

p p
Case 2.1: (x , y ) = 4 + 12 19, 4 3
19

From the …rst equation we have

p 2
4 19
y2 1 3 1
y2 1 2λ = 0 =) λ = = = 0.492 84 < 0
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This contradicts λ > 0. . Therefore,
p p p
(x , y , λ ) = 4 + 12 19, 4 3 19 , 4 3 19 is not a solution.
p p
Case 2.2: (x , y ) = 4 12 19, 4 +3 19
From the …rst equation we have
p 2
4 + 19
y2 1 3 1
y2 1 2λ = 0 =) λ = = >0
2 2
This solution veri…es λ > 0. Therefore,p !
2
1
p p
4 + 19
4 + 19
3 1
(x , y , λ ) = 4 2 19, 3 , 2 is a solution.

MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
VI. max f (x, y ) = xy 2 x such that 2x + 3y > 12, x > 0 and y < 3

Answer:

L = xy 2 x λ1 (12 2x 3y ) λ2 (y 3) + δx

Kuhn-Tucker conditions:

dL (x, y )
= y2 1 + 2λ1 + δ = 0 (1)
dx
dL (x, y )
= 2xy + 3λ1 λ2 = 0 (2)
dy
2x + 3y > 12, λ1 > 0, λ1 (12 2x 3y ) = 0 (3)
y < 3, λ2 = 0 (4)
x > 0, δ = 0 (5)
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
Since the last two constraints are not binding (λ2 = δ = 0), we get:
dL (x, y )
= y2 1 + 2λ1 = 0 (6)
dx
dL (x, y )
= 2xy + 3λ1 = 0 (7)
dy
2x + 3y > 12, λ1 > 0, λ1 (12 2x 3y ) = 0 (8)
Case 1: The constraint is not binding (2x + 3y 12 > 0). Thus, λ1 = 0
and we get from the …rst order conditions that:
y2 1 = 0
2xy = 0
We get
y2 1 = 0 =) y = 1
2xy = 0 =) x = 0
Therefore, we have two critical values: (x , y ) = (0, 1) and
(x , y ) = (0, 1). However the two contradict the constraint
2x + 3y 12 > 0.
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
Case 2: The constraint is binding (2x + 3y 12 = 0). Thus, λ1 > 0 and
we get from the …rst order conditions that:

y2 1 + 2λ1 = 0
2xy + 3λ1 = 0
2x + 3y 12 = 0
From equations 1, 2 and 3 we have
y2 1
= λ1
2
2
xy = λ1
3
12 3y
x =
2
It follows that
y2 1 2
= xy
2 3
12 3y
x =
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Substitute the second equation in the …rst, we get
y2 1 2 12 3y
= y
2 3 2
y2 1
= (4 y) y
2
y2 1
= 4y y 2 (times 2) y 2 1 = 8y 2y 2
2
It follows that
3y 2 8y 1=0
∆ = ( 8)2 4 3 ( 1) = 76
p p p p
8 76 4 19 8 + 76 4 + 19
y= = or y = =
6 3 6 3
p
p p
12 3 4 19
Case 2.1: If y = 3p19 then 4
p
x = 12 p2
3y
= 2
3
= 8 + 19
2 and
λ1 = 32 xy = 32 8 + 2 19 4 3 19 = 4 199 13 > 0.
p p p
The point (x , y , λ1 ) = 8 +2 19 , 4 3 19 , 4 199 13 veri…es the constraints
x > 0, y < 3 and λ1 > 0: it is a solution.
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
 p
p p
4 + 19 12 3y 12 3 4 + 3 19 8 19
Case 2.2: if y = 3p then
p
x = 2p = 2 = 2 and
2 28 19 4 + 19 4 19 +13
λ1 = 3 xy = 3 2 3 p = < 0.
p 9 p
8 19 4 + 19 4 19 +13
The point (x , y , λ1 ) = 2 , 3 , veri…es the
9
constraints x > 0 and y < 3 but not λ1 > 0: it is not a solution.
Conclusion: Therepis one psolution
p
8 + 19 4
(x , y , λ1 ) = 2 , 3 19 , 4 199 13 .

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VII. f (x, y ) = xy 2 x such that 2x + 3y 6 12, x > 10 and y < 3

Answer:

L = xy 2 x λ1 (2x + 3y 12) λ2 (y 3) λ3 (10 x)

Kuhn-Tucker conditions:
dL (x, y )
= y2 1 2λ1 λ3 = 0 (1)
dx
dL (x, y )
= 2xy 3λ1 λ2 = 0 (2)
dy
2x + 3y 6 12, λ1 > 0, λ1 (12 2x 3y ) = 0 (3)
y < 3, λ2 = 0 (4)
x > 10, λ3 = 0 (5)

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Case 1: The constraint is not binding (2x + 3y 12 < 0): Thus, λ1 = 0
and we have also λ2 = λ3 = 0, we get from the …rst order conditions that:

y2 1 = 0 =) y = 1
2xy = 0 =) x = 0

Therefore, there are two critical points (x , y ) = (0, 1) and

(x , y ) = (0, 1) but both contradict x > 10.
Case 2: The constraint is binding (2x + 3y 12 = 0). Thus, λ1 > 0 and
we have also λ2 = λ3 = 0, we get from the …rst order conditions that:

y2 1 2λ1 = 0
2xy 3λ1 = 0
2x + 3y 12 = 0

It follows, that we have

p
thep following
p
critical points
8 + 19 4 19 4 19 13
(x , y , λ ) = 2 , 3 , 9 and
p p p
8 19 4 + 19 4 19 +13
(x , y , λ ) = 2 , 3 , 9 .
MB (Business School) Econ 4061 - Mathematical Economics October 14, 2022 1/1
 p p p
8 + 19 4 19 4 19 13
Case 2.1: (x , y , λ ) = 2 , 3 , 9
p p p
Therefore, (x , y , λ ) = 8 +2 19 , 4 3 19 , 4 19 13
9 is not a solution it
p
also contradicts x > 10 since x = 8 + 2 19 < 10.
p p p
Case 2.2: (x , y , λ ) = 8 2 19 , 4 + 3 19 , 4 19 +13
9
This solution contradicts λ > 0.
Conclusion: There is no solution.

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