Mathematical Applications in Economics ECON 262 Practice Set 1

Q1). Use the second derivative test or the graphical analysis to determine whether the following functions are convex or concave or both? a) f(x)=x2 b) f(x)=x4 c) f(x)=log(x) d) f(x)=x e) f(x)= ln(x+5) f) f(x)= -2x3 + 4x2 + 9x 15 at x=3 g) f(x)= (5x2 8)2 at x=3 Q2). The following functions comprise of both convex and concave regions. Compute the regions of convexity and concavity for the following functions i.e identify the range of x for which the following functions are convex and concave: a) f(x)= x3 b) f(x)= x7 7x c) f(x)= x4 8x3 + 18x -11 Q3) A manufacturer produces gizmos at a cost of $5 each. The manufacturer computes that if each gizmo sells for x dollars, (15 x) gizmos will be sold. What is the manufacturers profit function? What price should the manufacturer charge to maximize profit? Q4) Find the relative maxima and/or minima of y : a) y= -2x2 + 8x + 25 b) y= x3 + 6x2 + 7 c) y= (1/3) x3 3x2 + 5x + 3 d) y= 3x3 36x2 + 135x 13

e) y= 2x4 16x3 + 32x2 + 5 f) y= x4 8x3 80x2 + 15 Q5) A firm has the following total cost and demand functions: C= (1/3) Q3 7Q2 + 111Q + 50 Q= 100 P a) Does the total cost function satisfy the coefficient restrictions imposed on a cubic cost function for it to make economic sense? b) Write down the total revenue function R in terms of Q c) Formulate the total profit function in terms of Q d) Find the profit maximizing level of output Q* e) What is the maximum profit? Q6). For each of the following pairs of functions g and h write out the composite function gh and hg in as simple a form as possible. Use the chain rule to compute the derivative of all the composite functions from the derivatives of the two component functions. a) g(x) =x2 + 4 b) g(x)=x3 h(z)= 5z-1 h(z)= (z-1)(z+1)

Q7). Use the chain rule to find dy/dx for the following: a) y= (3x2 13)3 b) y= (8x3 5)9 c) y= (ax + b)4 Q8). Calculate an expression for the inverse of each of the following functions. Using the inverse function theorem compute the derivative of its inverse function at the point f (1). a) y= 3x+6 b) y= 1/(x+1) c) y=x2/3 Q9). Suppose the total cost of manufacturing x units of a certain product is: C(x)= 2x2 + 6x + 12 Use differentials to approximate the cost of producing the 36th unit.

Q10) The production function of a firm is given by F(x) = x where x is the amount of labor used. The initial level of labor input is 50 units. The firm increases the amount of input used by 3 units. Compute the change in the level of output and the new level of total output of the firm using approximation by differentiation. Q11) Let an average revenue function be AR = 8000 23Q + 1.1Q 2 0.018Q 3 . Follow the steps below to prove that this AR curve is negatively sloped. a) Denote the slope of AR by S. Write the expression for S b) Find the maximum value of S, S MAX , by using the second derivative test. c) Then deduce from the value of S MAX that the AR curve is negatively sloped. Q12). Given C=2000 + 0.9 Yd where Yd = Y-T and T=300 + 0.2 Y, find the marginal propensity to consume (MPC). Note: C=consumption Yd= disposable income T= tax rate Q13) Find the MR functions for each of the following demand functions and evaluate them at Q=4 and Q=10. a) Q= 36 2P b) 44 - 4P- Q=0 Q14). The demand function is given by: Q= 20 5P a) Find the inverse function b) Estimate the price elasticity of demand of both functions at P=2 and P=3

Q15) Refer to the figure given below:

The figure shows that on a linear demand function, price elasticity of demand equals -1 when marginal revenue (MR) equals 0, elasticity is less than -1 when MR is positive and elasticity is greater than -1 when MR is negative. Now suppose we have a firm that is currently operating at a price quantity combination (P, Q) at which the point price elasticity of demand for its product is equal to -1.20. The demand curve facing the firm is assumed to be linear: Q= a bP The firm can maximize its total revenue by cutting its price to the level where the point price elasticity of demand is unitary. What will be the percentage change in price that would accomplish the revenue-maximizing outcome?