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ME-1 Solutions For Seminar 3

(1) The function Q = L3 – 6L2 + 9L has two horizontal intercepts at (0,0) and (3,0) and two critical points that are a local maximum at (1,4) and a local minimum at (3,0). It does not have a global maximum but does have a global minimum of 0. The function cannot represent a short-run production function. (2) For a firm with demand P = 40 – 2Q and costs TC = 1/2Q^2 + 5Q + 10, total revenue and profit are maximized at an output of Q = 7 units, with maximum total revenue of $200 and maximum profit of $

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26 views12 pages

ME-1 Solutions For Seminar 3

(1) The function Q = L3 – 6L2 + 9L has two horizontal intercepts at (0,0) and (3,0) and two critical points that are a local maximum at (1,4) and a local minimum at (3,0). It does not have a global maximum but does have a global minimum of 0. The function cannot represent a short-run production function. (2) For a firm with demand P = 40 – 2Q and costs TC = 1/2Q^2 + 5Q + 10, total revenue and profit are maximized at an output of Q = 7 units, with maximum total revenue of $200 and maximum profit of $

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Mathematics for Economists - 1

Solutions for Seminar 3:

Question 1:

For a function Q = L3 – 6L2 + 9L with L ≥ 0

a) Find a vertical intercept


If L=0 then Q (0) = 0
Hence a vertical intersect is (0, 0)

b) Find all horizontal intercepts


L3 – 6L2 + 9L = 0
L (L2 – 6L + 9) = 0
Either L = 0 and one horizontal intercept is (0, 0)
Or L2 – 6L + 9 = 0
By the formula for quadratic equation: L = 3
Another horizontal intercept is (3, 0)
c) Find all local maximums and minimums

dQ/dL = 3L2 – 12L + 9


3L2 – 12L + 9 = 0
L2 – 4L + 3 = 0
By the formula for quadratic equation:
L = 3 or L = 1

d 2Q
2
= 6 L − 12
dL

6(1) – 12 = – 6 < 0
L = 1 is local maximum,
Q (1) = 1 – 6 +9 = 4

6(3) – 12 = 6 > 0
L = 3 is local minimum,
Q (3) = 27 – 6 (9) + 9 (3) = 0
d) Sketch a graph of the function

e) Does this function have the global maximum


or the global minimum?

Global minimum 0 at points L = 0 and L = 3.


No global maximum.
f) Can this function be a short-run production
function if defined for all L ≥ 0?

A short-run production function should satisfy


the Law of Diminishing Returns.

That is for all L large enough it should be the


d 2Q
case that dL2  0.

But for our function:


d 2Q
2
= 6 L − 12  0 for all L > 2.
dL

Therefore our function can’t be a short-run


production function if defined for all L ≥ 0.
Question 2:

For a product produced by a firm demand is given


by the expression: P = 40 – 2Q.
Fixed cost is 10. Variable costs of producing Q
units are VC (Q) = ½ Q2 + 5Q.

(i) Expressions for curves:


a) Find expressions for total, average and
marginal costs.
TC = VC + FC = ½ Q2 + 5Q + 10
AC = TC/Q = ½ Q + 5 + 10/Q
MC = dTC/dQ = Q + 5

b) Find expressions for total, average and


marginal revenue.
TR = P Q = (40 – 2Q) Q = 40Q – 2Q2
AR = TR/Q = 40 – 2Q
MR = dTR/dQ = 40 – 4Q
c) Sketch the graph for demand, marginal
revenue and marginal cost curves.
(ii) Total revenue maximization:
a) Find an output that maximizes the total
revenue.
TR = P Q = 40Q – 2Q2
dTR
MR = dQ = 40 − 4Q

MR = 0
40 – 4Q = 0
10 – Q = 0
Q = 10

b) How big the total revenue will be at this


output?

TR = 40Q − 2Q 2
TR = 40 10 − 2 102 = 400 − 200 = 200
c) How big the profit will be at this output?

Profit = TR – TC
TR = 200
TC = ½ Q2 + 5Q + 10
TC = ½ (102) + 5(10) + 10 = 50 + 50 +10 = 110
Profit = 200 – 110 = 90

d) How big the marginal revenue will be at this


output?
MR = 0
e) Compute the point elasticity of demand at this
output.

Demand is given by the expression: P = 40 – 2Q


dQ D P
Point elasticity of demand: E =
D

dP Q D

dP dQ 1
= −2  =
dQ dP −2

Q =10, P = 40 − 20 = 20

dQD P 1 20
Thus E D
= D
= − = −1
dP Q 2 10

f) Explain the economic reasons for the values


found in d) and e) above.

Revenue is always maximized at the point where


MR=0 and demand is unit–elastic.
(Otherwise one can increase the revenue by
producing slightly more or slightly less.)
(iii) Profit maximization
a) Find an expression for the profit.

Profit = TR – TC
1 2 
Profit = 40Q − 2Q −  Q + 5Q + 10 
2

2 
1
Profit = 40Q − 2Q 2 − Q 2 − 5Q − 10
2
5 2
Profit = − Q + 35Q − 10
2

b) Find an output that maximizes this expression.

dProfit 5
= −2  Q + 35 = −5Q + 35
dQ 2
−5Q + 35 = 0
5Q = 35
Q=7
c) Find an output that maximizes the profit by
equating marginal revenue and marginal cost.

MR = dTr/dQ = 40 – 4Q
MC = dTC/dQ = Q + 5
40 – 4Q = Q + 5
35 = 5Q
Q=7

As expected, this is the same output that


maximizes profit.

d) How big is the maximum possible profit?

5 2
MaxProfit = 35  7 −  7 − 10 = 112.5
2
Question 3:

Partial derivatives:

a) z = x2y + xy2 + 20

With respect to x: 2xy + y2


With respect to y: x2 + 2xy

b) z = 3xy – x2y2 + 23

With respect to x: 3y – 2xy2


With respect to y: 3x – 2x2y

c) z = 3x3y – 4/x + 2y1/2

With respect to x: 9x2y + 4/x2


With respect to y: 3x3 + y -1/2

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