ECN 303 - ANALYTICAL PRELIMINARIES

Based on the prerequisite courses you have taken, you are coming to this class with the ability to solve problems
like the ones included on this sheet. If some review is required, please be sure to do so ASAP.

1. a) On graph paper, plot the demand and supply schedules

Qd = 40 – 0.2P, and Qs = 5P
and determine the equilibrium values of P and Q.

2. Determine the linear relationship between these (P,Q) variables:

a) P: 10 20 30 b) P: 0 40
Q: 50 100 150 Q: 200 0

3. Determine the marginal and average profit associated with the following data:
OUTPUT: 0 1 2 3 4 5 6 7 8 9
TOTAL PROFIT: 0 100 250 600 1000 1350 1500 1550 1500 1400

4. DERIVATIVES: For Y = f(X), the derivative is the change in Y divided by the change in X, or the slope of the
function at a particular value of X. What is the derivative in each of the following cases?
i. Y = a (a constant).
ii. Y = b Xa, Use as example Y = 3X2
iii. Y = 6X(3-X2)
iv. Y = (5x3)/(3-4X)
v. Y = 4W+3W2, where W = 3X2

5. USING DERIVATIVES TO SOLVE MAXIMIZATION AND MINIMIZATION PROBLEMS:

Sketch the following curve and find its maximum Y value. Then use the principle of derivatives to show that the
maximum exists.
Y = -3.6+ 2Q - .1Q2
Recall: you need the second derivative to show maximum/minimum.

6. What can you say about the maximum/minimum value(s) in the profit function π = -1 + 9Q - 6Q2 + Q3?

7. PARTIAL DIFFERENTIATION AND MAXIMIZATION OF MULTIVARIABLE FUNCTIONS:

A company produces two goods X and Y. The relationship between its profit (in $'000) and its output of both goods
(thousands) is
π = - 20 + 100X + 80Y - 10X2 - 10Y2 - 5XY
Find the partial derivative of π with respect to X, and then wrt Y.
Then determine the values of the independent variables that maximize π.
(ANS: X = 4.267, Y = 2.933, π = $311 (all in thousands).

8. A company produces two products, and its total cost equals TC = 4X 2 + 5Y2 - XY, where X, Y are output per
hour of each product. Because of its commitments to customers, the amount produced of both products must not be
less than 30 per hour. The president wants to know what output levels of the two products will minimize the firm's
costs, given that the output of the first product plus the output of the second sum to 30 per hour.

Ans: Y = 13.5, X = 16.5. or 27 and 33 units every two hours respectively.

Two methods to solve problem #8: (i) substitution, (ii) constrained optimization (use Lagrange multiplier).
Minimize TC = 4X2 + 5Y2 - XY, subject to X + Y = 30.

Method i. TC = 4(30 -Y)2 + 5Y2 - Y(30 - Y)

= 4(900 - 60Y + Y2) + 5Y2 - 30Y +Y2

= 3600 - 270Y + 10Y2

Now apply the method of Unconstrained optimization. Differentiate.

Method ii. Minimize L = 4X2 + 5Y2 - XY + λ(30 - X - Y)

Differentiate partially with respect to X:

i. δL/δX = 8X - Y - λ = 0

Differentiate partially with respect to Y:

ii. δL/δY = -X + 10Y -λ = 0

and (optional) with respect to λ (alternatively, just rewrite the constraint equal to zero!):
iii. δL/δλ = -X - Y + 30 = 0

We have three variables in three equations. This should be solvable, either by eliminating one variable e.g. λ from i.,
ii. and then solving for X and Y from the two remaining equations, or by setting up a 3x3 matrix system. The
former might be preferable.

This yields: 9X - 11Y = 0

which may be solved simultaneously with iii., multiplied by 9:

9X + 9Y = 270

yielding 11Y + 9Y = 270 = 20Y, i.e. Y = 13.5 and X = 30 - 13.5 = 16.5.