Question 1:

Solution:
a). TR=1400Q-6Q
2
and TC=1500+80Q
= TR-TC
=1400Q-6Q-(1500+80Q)
=-6Q
2
+1320Q-1500

= -12Q+1320
now when = 0
-12Q+1320=0
Q=110 critical value

= -12 <0 second derivative <0
relative maxima and concave nature

= -6(110)
2
+1320(110)-1500 = 71100


b). Q
1
= 21-0.1P
1
Q
2
=50-0.4P
2


TC=2000+10Q given Q=Q
1+
Q
2



Under discrimination:
MC=MR
1
=MR
2


MC = TC = 10

TR
1
= (210-10Q
1
) = 210Q
1
-10Q
1
2


MR
1
= 210-20Q
1
= 10 = MC
Q
1
= 10; P
1
= 110
TR
2
= (125-2.5Q
2
)Q
2
= 125Q
2
2.5Q
2
2

MR
2
= 125 5Q
2
= 10 = MC
Q
2
= 23; P
2
= 67.5

= 322.5

Case of Non- Discrimination:
P=P
1
=P
2



Thus,
Q = 21 0.10 P
1
+ 50 0.4P
2

0.5P = 71 Q
P = 142 2Q
TR= P.Q
= (142- 2Q) Q
= 142Q - 2Q
2

MR = 142 4Q = MC = 10
Q = 33 ; P = 76
= TR TC
= 178
Question 2
Solution 2:
Given: 25K
3/5
L
2/5
= 5400

= 25 K
3/5
. 2/5 . L
-3/5
+ 25.3/5. L
2/5
K
-2/5
.

= 0
= 10K
3/5
/ L
2/5
+ 15L
2/5
/K
2/5
.

= 0
=

b).
At K = 243 & L = 181
MRTS =

Question 3:
Solution 3:
TP = 90K
2
- K
3
Test FOC to find critical value
TP= 180K 3K
2
= 0
= 3K (60-K) = 0
K=0 or K=60 critical values


Test SOC to determine optimization
TP = 180-6K
When
K=0 TP = 180>0 convex , minima
K=60 TP = -180<0 concave, maxima
TP = 108000
Point of Inflexion TP = 180-6K =0
K=30 concavity changes
K< 30 TP > 0 convex TP = 54000
K >30 TP < 0 concave

Graphical Representation

TP:




MP:
0
20000
40000
60000
80000
100000
120000
0 20 40 60 80 100
Y-Values
Y-Values


AP:


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Continuous Evaluation II:

-3000
-2000
-1000
0
1000
2000
3000
0 10 20 30 40 50 60 70 80
Y-Values
Y-Values
0
500
1000
1500
2000
2500
0 10 20 30 40 50 60 70 80
Y-Values
Y-Values
Question: The prices of Inputs K and L are given as Rs. 12 per unit and Rs. 3 per
unit respectively, and a firm operates with the production function Q=25K
0.5
L
0.5

a. What is the minimum cost of producing

1250 units of output?
b. Demonstrate that the maximum output that can be produced for this
budget will be the 1250 unit specified in part (a) using Hessian.

Solution:
a.
Cost function TC= 12K+3L
Now Optimizing TC with the constraint Q=25K
0.5
L
0.5


TC = 12K+3L + (Q 25K
0.5
L
0.5
)

(1)

(2)

From (1) and (2)
=

= 4 (3)

Using (3) with constraint equation

Q= 25K
0.5
(4K)
0.5
=50 K

GIVEN Q=1250 units; 1250=50K;
K=25; L=100
C=12K+3L=600



b. Output Q = 25K
0.5
L
0.5

Budget Constraint: 600=12K+3L
Using Lagranges Multiplier
Q= 25K
0.5
L
0.5
+(600-12K-3L)
Constraint Optimization:

12 = 0

Using (1) and (2)
=

= 4K=L


Thus we have two equations
0=4K-L
600=12K+3L


D B = C

D=
D
1
= K=

D
2
= L=

Q=25(25)
0.5
(100)
0.5
=25*5*10=1250


Using SOC,
We derive Bordered Hessian from the above equations

[H
1
]<0 ;
[H
2
]=

=
=

(at L=100 and K=25) > 0

[H
3
]=

Thus [H
2
]>0 and [H
1
] and [H
3
] are of same sign and negative definite thus
maximum output.


Question 2: Use Eulers theorem to show that if Q=F(L,K) is homogenous of
degree k and if the firm pays labour and capital according to its marginal
product so that

and

, then the firm receives positive 0

and negative profits according to whether k<1 ; k=1 or k>1.
Solution:
Eulers Theorem

L.

+ K.

=k t
k-1
F (L, K)



For Linear homogenous function
L.

+ K.

= F (L, K)


TC= WL+RK
TR=P.Q
Now,
W=

R=

Thus,
TC=

=P [L.

+ K.

]
=P F (L, K)
=P
=TR
Thus no profit no loss when k=1


When k<1 ,
TC= P. [L.

+ K.

]
=P . kt
k-1


= P kt
k-1


Since k<1 ,


P kt
k-1
< TR , Thus TC<TR so positive profit
Similarly ,
When k>1 , TC>TR , so negative profit.






Question 3: Given U=Ax
b
y
c
:
a. Find the conditions under which this is a linearly homogenous function.
b. Apply Eulers Theorem if these conditions hold true.
Solution:

(a).
Condition for Linear Homogeneity:
U(kx , ky)=k
1
U(x,y)
Thus, U(kx, ky)= A(kx)
b
(ky)
c
=Ax
b
y
c
k
b+c
=Ax
b
y
c
k
1


Comparing Corresponding Terms:
k
b+c
=k
1 ;
b+c=1

U(kx, ky)= Ax
b
y
c
k
b+c

Taking k=1/x
U(x,y)=Ax
b
y
c

= A

(b).
Eulers Theorem

= U(x,y)

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