ECONOMICS 207

FALL 2015
HOMEWORK LAB 9

Problem 1. In the following problems you are given a production function for a firm where
y is the level of output and x is the level of the variable input. You are given the price (p)of
the output and the price (w) of the single variable input. For each problem write down an
equation that represents profit for the firm. Then find the optimal level of input, of output,
of cost and of profit.
a.
output price = p = 20
input price = w = 500
y = output = f (x) = 100x + 20x2 x3
P rof it = py wx = p(100x + 20x2 x3 ) wx

First-order condition:
dP rof it
= p(100 + 40x 3x2 ) w = 0 100 w/p + 40x 3x2 = 0
dx
75 + 40x 3x2 = 0 x = 0 or 15

Second order conditions:

d2 P rof it
d2 P rof it
=
p(40

6x);
(15) 1000 < 0
dx2
dx2
so x = 15 is a profit maximizing input level.
f (15) = 2625
cost = wx = 7500
prof it = 20 2625 7500 = 45000

ECONOMICS 207 FALL 2015 HOMEWORK LAB 9

b.
output price = p = 4
input price = w = 6400
y = output = f (x) = 400x + 100x2 x3
P rof it = py wx = p(400x + 100x2 x3 ) wx

First-order condition:
dP rof it
= p(400 + 200x 3x2 ) w = 0 400 w/p + 200x 3x2 = 0
dx
1200 + 200x 3x2 = 0 x = 20/3 or 60

Second order conditions:

d2 P rof it
d2 P rof it
d2 P rof it
=
p(200

6x);
(20/3)
=
640
>
0;
(60) = 640 < 0
dx2
dx2
dx2
so x = 60 is the profit maximizing input level.
f (60) = 168000
cost = wx = 384000
prof it = 4 168000 384000 = 288000

ECONOMICS 207

FALL 2015

HOMEWORK LAB 9

Problem 2. For each of the following problems you are given a price (p) and the cost
function for a competitive firm. TC stands for total cost and y represents the level of output.
Find the profit maximizing level of output for each case.
a.
price = p = 500
T otal Cost = T C = 500 + 125y 10y 2 + y 3
P rof it = T R T C = py T C.
First-order condition:
dP rof it
= p 125 + 20y 3y 2 = 0 375 + 20y 3y 2 = 0
dy
y = 15 or 0

Second order condition:

d2 P rof it
d2 P rof it
=
20

6y;
(15) = 70 < 0
dy 2
dy 2
so y = 15 is the profit maximizing output level.

ECONOMICS 207 FALL 2015 HOMEWORK LAB 9

b.
p = 600
T C = 600 + 200y 20y 2 + y 3
P rof it = T R T C = py T C.
First-order condition:
dP rof it
= p 200 + 40y 3y 2 = 0 400 + 40y 3y 2 = 0
dy
y = 20 or 0

Second order condition:

d2 P rof it
d2 P rof it
= 40 6y;
(20) = 40 < 0
2
dy
dy 2
so y = 20 is the profit maximizing output level.

ECONOMICS 207

FALL 2015

HOMEWORK LAB 9

c.
p = 596
T C = 800 + 500y 50y 2 + 3y 3
P rof it = T R T C = py T C.
First-order condition:
dP rof it
= p 500 + 100y 9y 2 = 0 96 + 100y 9y 2 = 0
dy
y = 12 or 0

Second order condition:

d2 P rof it
d2 P rof it
=
100

18y;
(12) = 20 < 0
dy 2
dy 2
so y = 12 is the profit maximizing output level.

ECONOMICS 207 FALL 2015 HOMEWORK LAB 9

Problem 3. Find the first and all second order partial derivatives of each of the following
functions. Write down the Hessian matrix in each case and obtain its determinant.
a. z = 30x1/4 y 3/4 6x 3y
z
= (30/4)x3/4 y 3/4 6
x
z
= (90/4)x1/4 y 1/4 3
y
2z
= (90/16)x7/4 y 3/4
x2
2z
= (90/16)x1/4 y 5/4
y 2
2z
2z
=
= (90/16)x3/4 y 1/4
xy
yx

(90/16)x7/4 y 3/4 (90/16)x3/4 y 1/4
H=
(90/16)x3/4 y 1/4 (90/16)x1/4 y 5/4

2
det(H) = (90/16)2 x6/4 y 2/4 (90/16)x3/4 y 1/4 = 0


ECONOMICS 207
1/2 1/3

b. y = 10x1 x2
y
x1
y
x2
y
x3
2y
x21

FALL 2015

HOMEWORK LAB 9

+ 2x21 x2 3x2 x31 + 4x1 x2 5x3 x21 + 3x3

1/2 1/3
x2

+ 4x1 x2 9x21 x2 + 4x2 10x3 x1

1/2 2/3

+ 2x21 3x31 + 4x1

= (10/2)x1

= (10/3)x1 x2
= 5x21 + 3

3/2 1/3
x2

= (10/4)x1

+ 4x2 18x1 x2 10x3

2y
1/2 5/3
= (20/9)x1 x2
x22
2y
=0
x23
2y
1/2 2/3
= (10/6)x1 x2
+ 4 9x21 + 4
x1 x2
2y
= 10x1
x1 x3
2y
=0
x2 x3

3/2 1/3
1/2 2/3
(10/4)x1 x2 + 4x2 18x1 x2 10x3 (10/6)x1 x2
+ 4x1 9x21 + 4 10x1

1/2 2/3
1/2 5/3
H=
(10/6)x1 x2
+ 4 9x21 + 4
(20/9)x1 x2
0
10x1
0
0
We use the third row to make finding the determinant easier




1/2 5/3
det(H) = 10x1 0 10x1 (20/9)x1 x2
0(. . . ) + 0(. . . )


1/2 5/3
= (10x1 )2 (20/9)x1 x2