QUANTITATIVE METHODS ONE

FIRST SEMESTER
QUESTIONS AND GUIDE TO SOLVING THEM
UNCONSTRAINED OPTIMIZATION – SEVERAL CHOICE VARIABLES
You will be asked to solve for the following in all questions on this topics:
a. Find the critical points
b. Write the Hessian Matrix
c. Classify the critical points in part (a) as local maxima, local minima, saddle point or can’t
tell situation.

THE FOLLOWING ARE THE FREQUENT QUESTIONS

1. 𝐹(𝑥, 𝑦) = 𝑥𝑦 2 + 𝑥 3 𝑦 − 𝑥𝑦
2. 𝐹(𝑥, 𝑦) = 𝑥 4 + 𝑥 2 − 6𝑥𝑦 + 3𝑦²
3. 𝐹(𝑥, 𝑦) = 3𝑥 4 + 3𝑥 2 𝑦 − 𝑦³
4. 𝐹(𝑥, 𝑦) = 𝑥 2 − 6𝑥𝑦 + 2𝑦 2 + 10𝑥 + 2𝑦 − 5
5. 𝐹(𝑥, 𝑦) = 𝑒 2𝑥 − 2𝑥 + 2𝑦 2 + 3
6. 𝐹(𝑥, 𝑦) = −𝑥 2 − 𝑦 2 + 6𝑥 + 2𝑦
7. 𝐹(𝑥, 𝑦) = 𝑥 3 − 𝑦 3 + 9𝑥𝑦
8. 𝐹(𝑥, 𝑦) = 𝑥 2 + 𝑥𝑦 + 2𝑦 2 + 3
9. 𝐹(𝑥, 𝑦) = 8𝑥 3 + 2𝑥𝑦 − 3𝑥 2 + 𝑦 2 + 1
10.𝐹(𝑥, 𝑦) = 𝑎𝑥 2 + 𝑏𝑦 2 + 𝑐
11.𝐹(𝑥, 𝑦) = 3𝑥 3 − 9𝑥𝑦 + 3𝑦³

STEPS TO SOLVE QUESTIONS ON UNCONSTRAINED OPTIMIZATION (several

choice variables)
1. Partially differentiate the function with respect to X. That is, Df/dx or simply Fx. Then
equate the differentiated function of X to zero. That is fx=0, the equation one.

2. Partially differentiate the function with respect to Y. That is, Df/dy or simply Fy. Then
equate the differentiated function of Y to zero. That is fy=0, the equation two.

3. Solve for X or Y in either equation one or two but not both. This process will yield
equation three. Note: always choose the appropriate equation to solve for X or Y.

BY: SARKCESS
Ceteris Paribus
4. Substitute equation three into the equation that was not chosen. For example, if you
have used equation one to solve for X or Y, then you should not substitute equation three
into equation one because it will give you zero. You should substitute equation three into
equation two which was not used to solve for X or Y in order to get a defined set of
critical points. Or, if you have used equation two to solve for X or Y, then you should not
substitute equation three into equation two because it will give you zero. You should
substitute equation three into equation two which was not used to solve for X or Y in
order to get a defined set of critical points.

5. Process 4 will lead you to the necessary critical points. The points must be in the form of
a Cartesian product or bundle. That is, (x, y) for all critical points.

𝑭𝒙𝒙 𝑭𝒙𝒚
6. Write the Hessian Matrix like this:
𝑭𝒚𝒙 𝑭𝒚𝒚
Where:
Fxx is the second differentiation of X or the differentiation of equation one.
Fyy is the second differentiation of Y or the differentiation of equation two.
Fxy is the differentiation of equation one with respect to Y or the cross partial with
respect to Y.
Fyx is the differentiation of equation two with respect to X or the cross partial with
respect to X.

7. From the Hessian Matrix, two Hessian points must be noted:

H1: This is simply Fxx.
H2: This is the determinant of the Hessian Matrix.

8. Substitute the various critical points in the H1 and H2 in order to classify the critical
points as local maxima, local minima, saddle point, or can’t tell.

THE FOLLOWING ARE THE CONDITIONS FOR CLASSIFICATION OF CRITICAL

POINTS:
H1<0 and H2>0 -------- Local maxima
H1>0 and H2>0 -------- Local minima
H1<0 and H2<0 -------- Can’t tell
H1>0 and H2<0 -------- Can’t tell
H1=0 and H2<0 -------- Saddle point
H1=0 and H2>0 -------- Saddle point
H1=0 and H2=0 -------- Can’t tell
H1<0 and H2=0 -------- Saddle point
H1>0 and H2=0 -------- Saddle point

BY: SARKCESS
Ceteris Paribus
 ECONOMIC APPLICATION OF OPTIMIZATION (SEVERAL CHOICE)

1. Mama G, a monopolist producing a single output has two types of customers. If it produces Q₁
units for customers of type 1, then these customers are willing to pay a price of 50 – 5Q₁ dollars
per unit. If it produces Q₂ for customers of type 2, then these customers are willing to pay a price
of 100 – 10Q₂ dollars per unit. The monopolist’s cost of producing Q units of output is 90 + 20Q
dollars.
(a) In order to maximize profits, what outputs should Mama G produce in each market and at
what price?
(b) Write the Hessian and classify if the outputs are maxima, minima, saddle point or can’t tell.

2. Econso airlines has regular flights between Kono and Freetown which it can treat as business
or pleasure travelers as separate markets by demanding advance purchase and Saturday night
stay-over for pleasure travelers. Suppose it denotes a demand function of Q=16 – P for business
travelers and a demand function for Q=10 – P for pleasure travelers and that it has a cost
function for all travelers of C(q)= 10 + Q².
(a) How much should Econso airlines charge in each market to maximize profits? What is the
output levels at each market?
(b) Is profit indeed maximized?

3. A two product firm faces the following demand and cost functions:
Q₁=40 – 2P₁ - P₂ Q₂=35 - P₁ - P₂ C=Q₁² + 2Q₂² + 10
(a) Find the output levels that satisfies the first-order condition for maximum profit.
(b) Check the second-order sufficient condition.
(c) What is the maximum profit?

4. The price function for compacts is P = 17 – 2x (for 0≤x≤9) and price for midsized is q=20-y
(for 0≤y≤20) both in thousand dollars, where x and y are respectively the numbers of compact
and midsized cars produced per unit. If the company’s cost function is C(xy) = 15x + 16y – 2xy
+ 5 thousand dollars, find how many of each car and compact should be produced and the prices
that should be charged in order to maximize profit. Find the maximum profit.

BY: SARKCESS
Ceteris Paribus
5. A monopolistic has the following demand functions for each of its products X and Y:
X= 72 – 0.5Px Y= 120 – Py. The combined cost function is C= x² + xy + y² +35. Where
Px and Py are the prices of X any Y respectively.
(a) Find the profit maximization outputs X and Y and the prices Px and Py.

6. Given the following demand and cost functions of a discriminating monopolist:

Px = 12 – Qx Py= 20 – 3Qy C= a + 2(Qx + Qy), at a=4
(a) Find the output levels that will maximize profits
(b) Suppose the government restricts the discriminatory behavior of the monopolist, what
will be the profit level?

BY: SARKCESS
Ceteris Paribus