M.A.

ECONOMICS SUMMER SEMESTER

COURSE 002. INTRODUCTORY MATHEMATICAL ECONOMICS
Final Examination
Maximum Marks: 70. Time Allowed: 2 12 hours.
Instructions. Answer 3 of the 4 questions in Part I, and one question
from Part II. Part I carries 46 32 marks, equally divided between 3 questions.
Part II carries 23 31 marks. The breakup of marks across parts of a question
is provided after each question.
PART I
(Answer 3 questions from Part I).
1. Let E be a subspace of a vector space V , and E be its orthogonal complement. Let P be the orthogonal projection onto E and Q be the orthogonal
projection onto E . Think of these simply as linear transformations or operators; for this question, it may help to use these to operate on typical vectors
in V (and also to visualize these operations).
(i). Define orthogonal complement.
(ii). Show that P 2 = P , Q2 = Q. (For an operator T , T 2 is defined by
T 2 (v) = T (T (v)), v V ).
(iii). What is the operator P + Q equal to?
(iv). What is the operator P Q equal to?
(v). Show that (P Q) is its own inverse.
(1 95 , 3, 3, 3, 5)
(2). (i). Compute eigenvalues and eigenvectors for the rotation matrix
cos sin
sin cos

(2)(ii). Let V be an n-dimensional vector space over the field <, and let V
be the vector space comprised of all linear transformations with domain V
and codomain <. Let E = {v1 , ..., vn } be a basis in V . Define the following n
linear transformations T1 , T2 , ..., Tn in V : for j = 1, 2, ..., n, if a vector x V
P
has the representation x = ni=1 xi vi in terms of the basis E, then Tj (x) = xj ,
the scalar multiplying vj in the representation. Show that {T1 , ..., Tn } is a
basis in V . (i.e. this is a linearly independent set that spans V ).
(5 59 , 5, 5).
(3). Consider the second order differential equation
1

D2 x(t) + x(t) = 0, where D2 x(t) is the second derivative of x w.r.t. t.

(i). Derive an equivalent system of 2 first order differential equations.
(ii). Find the unique solution to the second order differential equation subject
to the side conditions x(0) = 0, Dx(0) = 1. Dx(0) refers to the derivative of
x w.r.t. t evaluated at t = 0. (You could solve this problem by solving the
system of 2 first order differential equations, if you wish).
(4, 11 59 )
(4). Consider a modified predator-prey type of model given by the system of
differential equations
Dx1 = ax1 (1 x2 ) + bx1 (1 x1 )
(1)
Dx2 = cx2 (1 x1 )
(2), a, b, c > 0.
While the evolution of the predator Dx2 is as in the Lotka-Volterra model,
the evolution of the prey Dx1 is subject to an additional, congestion effect.
(i) Consider the equilibrium (x1 , x2 ) = (1, 1). Construct a Liapunov function
V (x1 , x2 ) to establish that this equilibrium is stable. You must show that the
function V that you construct satisfies the properties of a Liapunov function.
It is helpful to think of functional forms along the lines of the standard LotkaVolterra model.
(ii). What is the set S = {x = (x1 , x2 )|DV (x(t))Dx(t) = 0} ?
(iii). Find the largest invariant set contained in S, and thereby try to show
that x = (1, 1) is an asymptotically stable equilibrium.
(10, 2, 3 59 ).
PART II
.
Answer either question (5) or question (6).
(5). Consider the Cournot duopoly with firms 1 and 2. Firm 1s profit
function is 1 (x, c) and Firm 2s profit function is 2 (x), where x = (x1 , x2 )
is the profile of output choices and c > 0 is Firm 1s constant average cost
of production. Assume that 1 and 2 are twice continuously differentiable.
Given c, let x(c) = (x1 (c), x2 (c))  (0, 0) be a Cournot-Nash equilibrium.
(a) Write down the first order conditions characterizing x(c).
(b) Let
a1 Dx1 x1 1 (x(c), c) < 0

and

a2 Dx2 x2 2 (x(c)) < 0

b1 Dx1 x2 1 (x(c), c) < 0

and

b2 Dx2 x1 2 (x(c)) < 0

and

If |a1 | > |b1 | and |a2 | > |b2 |, then show that the equilibrium output levels
for some open neighborhood of c can be expressed as differentiable functions
x1 (.) and x2 (.).
2

(c) Assuming Dx1 c 1 (x(c), c) = 1, use (a) and (b) to derive the effects
of a small perturbation of c on the equilibrium output choices.
(d) Interpret the result in (c).
(6, 8, 7, 2 13 )
(6). Consider a profit-maximizing electricity producer that has to choose a
generation capacity k 0 and a generation plan (x1 , . . . , xn ) for the next
n periods such that xi [0, k] for every period i. Suppose the regulator
announces prices (p1 , . . . , pn )  0 for the n periods, C(x1 , . . . , xn ) is the cost
of a generation plan (x1 , . . . , xn ) and F (k) is the cost of setting-up capacity
k.
(a) Set up the firms problem. Make appropriate assumptions about the
problem and derive the Kuhn-Tucker characterization of a solution (k; x1 , . . . , xn ).
(b) Let the optimal choices be such that k > 0 and x1 (0, k). Characterize such a solution and interpret it.
(c) Let the optimal choices be such that k > 0 and x1 = k. Characterize
such a solution and interpret it.
(d) Characterize an optimum capacity k > 0 and interpret it.
(6, 6, 6, 5 31 )