Sample Final

Duration: 90 min
Out of 40 pts

1. a) Let X = {x R+ : x 5}. Prove that X is compact.

b)Let f : X R, such that for each x X, f (x) = 2x2 . Prove that f is
continuous.
c) Argue whether or not f attains its maximum on set X.
2. Think of a consumer who has a current wealth of I. This agent would
live and consume for two periods. He should decide on how to choose c1 , c2 ,
subject to c1 0, c2 0. He invests his money in a bank with an interest
rate of r, that is if you invest $2 today you would get $2(1 + r) tomorrow. He
has the following utility function over the consumption flow to be maximized:
u(c1 , c2 ) = 2lnc1 + 3lnc2

a) Formulate the constrained optimization problem of this agent.

b) Check if the objective function is concave and constraint functions are
convex.
c) Write down the Kuhn-Tucker conditions for the above problem.
d) Find the solution of this problem by solving for Kuhn-Tucker conditions.
Now assume that our agent lives for 3 periods (0, 1, 2). So he has to
optimize for c0 , c1 , c2 . Suppose he has the following utility function over the

consumption flow to be maximized:

1/2

u(c0 , c1 , c2 ) = c0 + 2lnc1 + 3lnc2

e) Formulate the Bellman equation that links period 0 to period 1.
f) Notice that you have alraedy solved the problem for periods 1 and 2 at
part (c).
Now suppose that a wealth of w0 is avaliable at the very beginning (t = 0).
Given your solution from (c), write an expression for the value functions you
specified at (e) in terms of only w0
g) Now, by using your answer to part (f), also solve the first period problem and obtain an expression for c0 , c1 and c2 only in terms of I and r.
3. Let M = {1, 2, 3} and W = {a, b, c}. Let the preference profile R be
as follows:

R1

R2

R3

Ra

Rb

Rc

Find the men-optimal and women-optimal stable matchings via GaleShapey Algorithm and check that those are indeed stable.