Homework 7

Mathematics for Economics

Do the following question in the textbook

Section 8.4. #2 and #8 in page 272-273

Section 8.5. #6 in page 278

1. Does the extreme value theorem imply that the problem has the maximum? If it does,
explain why. We assume that u(x, y) is continuous and that px and py are prices of goods
x and y.
max u(x, y) s.t. px x + py y ≤ I and x ≥ 0, y ≥ 0.
(x,y)

2. A firm has the following total-cost and demand functions:

1 3
C = Q − 7Q2 + 111Q + 50
3
Q = 100 − P.

a. Write the total profit function π in terms of Q.

b. Find the profit-maximizing Q∗ .
c. Find the maximum profit.

3. When f is continuous, and p = 1 and w = 1, do the following problems have the

maximum?
√
max π = p L − wL. (1)
L
max π = pL2 − wL. (2)
L

4. Suppose that a firm incurs the total cost C(q) when it produces q > 0, and that marginal
cost (MC) and average cost (AC) are defined as follows:
dC(q)
MC = C 0 (q) =
dq
C(q)
AC = (per-unit cost)
q

1
 Assume that AC is U-shaped with respect to q (like a convex function). Show that when
AC is at the minimum point, AC = MC. (hint: find the minimum point of AC).

5. Suppose a airline firm has two types of customers, one for business trips (market 1) and
the other for tourists (market 2). Tourists are more sensitive to price, and thus the
demand curves are

q1 = 100 − p1 for market 1

q2 = 100 − 2p2 for market 2.
The cost function of the firm is

C(Q) = 20Q, where Q = q1 + q2 .

a. What is the profit of the firm: π(q1 , q2 )?

b. Using the first-order condition, find (q1∗ , q2∗ ) and (p∗1 , p∗2 ). Which ticket is more expen-
sive?
c. What is the maximum profit?