Econ 211

Sample Questions

Question 1.
a) Write the Lagrange function L for the following problem:
y = 4 x1 x2 − 2 x12 + x22 subject to 3 x1 + x2 − 5 = 0

b) Find the stationary value from the Lagrange function L.

c) Determine whether the stationary value is a maximum, minimum or neither; based on the sign
L11 L12 g1
of the Hessian matrix of the Lagrange function L21 L22 g2 .
g1 g2 0

Solution:

a) L = 4 x1 x2 − 2 x12 + x22 + λ (3 x1 + x2 − 5)

b)
L1 = 4 x2 − 4 x1 + 3λ = 0
L2 = 4 x1 + 2 x2 + λ = 0 From L1 : 3λ = 4 x1 − 4 x2 , from L2 : λ = −4 x1 − 2 x2
Lλ = 3 x1 + x2 − 5 = 0
Using these two expressions for λ: 3(− 4 x1 − 2 x2 ) = 4 x1 − 4 x2
− 12 x1 − 6 x2 = 4 x1 − 4 x2
− 2 x2 = 16 x1
x2 = −8 x1
Plug this into Lλ : 3 x1 − 8 x1 − 5 = 0
− 5 x1 = 5 ⇒ x1* = −1 ⇒ x2* = −8(−1) = 8
Stationary value is ( x1* , x2* ) = (−1,8)
c)
L11 = −4,
L12 = 4
L11 L12 g1 − 4 4 3
L21 = 4 4 3 −4 3
L21 L22 g2 = 4 2 1 = 3 − = 3(4 − 6) − (−4 − 12) = 10 > 0
L22 = 2 2 1 4 1
g1 g2 0 3 1 0
g1 = 3
g2 = 1
Since the sign from the matrix is positive, (-1,8) is a maximum.

Econ 211 O.Mesta Page 1 of 9

Question 2.
Use the sign of the second order total differential to check whether the following function is
convex or concave. (Hint: d 2 y = f11dx12 + 2 f12 dx1dx2 + f 22 dx22 for any pair dx1 , dx2 whenever at
least one of dx1 or dx2 is nonzero.)
f ( x1 , x2 ) = 13 − 3( x1 + x2 ) defined on R+2+
2

Circle your final answer:

convex concave strictly convex strictly concave

Solution:
f1 = −6( x1 + x2 ) d 2 y = f11dx12 + 2 f12 dx1dx2 + f 22 dx22
f 2 = −6( x1 + x2 ) = −6dx12 + 2(− 6 )dx1dx2 − 6dx22
f11 = −6 (
= −6 dx12 + 2dx1dx2 + dx22 )
f12 = −6 = f 21 = −6(dx1 + dx2 ) ≤ 0
2

f 22 = −6
Concave (Theorem 11.7)

Econ 211 O.Mesta Page 2 of 9

Question 3:

Use Hessian matrix of second order partial derivatives for the following function to show
f f12 
whether it is (strictly)concave/convex. (Hint: H =  11  )
 f 21 f 22 
f ( x1 , x2 ) = ( x1 + 2 x2 ) defined on R+2+
2

Circle your final answer:

convex concave strictly convex strictly concave

Solution:
f1 = 2(x1 + 2 x2 )
f 2 = 4( x1 + 2 x2 )
f11 = 2
f12 = 4 = f 21
f 22 = 8

Check leading principal minors:

H 1 = f11 = 2 > 0 ⇒ not concave (Theorem 11.9)
f11 f12 2 4
H2 = = = 0 ⇒ not strict.
f 21 f 22 4 8

We need to check all principal minors:

H 1* = f11 and f 22 , both are > 0
H 2* = H 2 = 0

So the function satisfies the positive semi-definite conditions: H 1* ≥ 0 , and H 2* ≥ 0 . It means

that the function is convex but not strictly convex.

Econ 211 O.Mesta Page 3 of 9

Question 4:
y = 2 x13 − 3 x1 x2 + x12 − 2 x22 + 44
a) Find all stationary points.
b) Classify each stationary point as a maximum, minimum, or saddle point using Hessian matrix
f f12 
of second order partial derivatives H =  11  .
 21
f f 22 

Solution:
a) First order conditions:
f1 = 6 x12 − 3 x2 + 2 x1 = 0
3
f 2 = −3 x1 − 4 x2 = 0 ⇒ 4 x2 = −3 x1 ⇒ x2 = − x1
4
 3 
6 x12 − 3 − x1  + 2 x1 = 0
plug it into f1 :  4 
17 17
⇒ 6 x12 + x1 = 0 ⇒ x1 (6 x1 + ) = 0
4 4
17 17
⇒ x1 = 0 and (6 x1 + ) = 0 ⇒ x1 = −
4 24
17
⇒ x1 = 0 and x1 = −
24
 17 17 
There are two stationary points: ( x1* , x2* ) = (0,0) and ( x1* , x2* ) =  − , 
 24 32 

b)
Econ 211 O.Mesta Page 4 of 9
  17 17 
According to theorem 11.9 part 2, the hessian is negative definite. It means that  − ,  is a
 24 32 
local maximum. It is local because the sign of f11 depends on x1 .

Econ 211 O.Mesta Page 5 of 9

Question 5.
a) Find the eigenvalues of the given matrix A.
2 3 
A =  
 3 − 6

b) Find the eigenvectors of unit length for matrix A.

c) Diagonalize matrix A as follows:

Step (1) (1 mark) Form the orthogonal matrix Q using the eigenvectors from part b)
Step (2) (5 marks) Calculate QT AQ

a)
det ( A − λI ) = 0
2−λ 3
det ( A − λI ) = = (2 − λ )(− 6 − λ ) − 9 = λ2 + 4λ − 21 = 0 ⇒ λ = 3,
3 −6−λ
⇒ λ = −7
⇒ (λ − 3)(λ + 7 ) = 0

b)
Start with λ = 3 , the eigenvector q is found by solving the following equation:

( A − 3λ )q = 0
2 −3 3  q1   − 1 3  q1   0  − q1 + 3q2 = 0 ⇒ q1 = 3q2
( A − 3λ )q =    =    =  
 3 − 6 − 3  q2   3 − 9  q2   0  3q1 − 9q2 = 0

Because of the vector q being unit length: q12 + q22 = 1

 3 
 
1 3  1 
q 10 
q12 + q22 = 1 ⇒ 9q22 + q22 = 1 ⇒ 10q22 = 1 ⇒ q2 = ⇒ 1=
q 
⇒ = 
10 10  q2   1 
 
 10 

Similarly, for λ = −7 the eigenvector q is found by solving the following equation:

( A − (−7)λ )q = 0
2 + 7 3  q1   9 3  q1   0  9q1 + 3q2 = 0
( A − (−7)λ )q =    =    =  
 3 − 6 + 7  q2   3 1  q2   0  3q1 + q2 = 0 ⇒ q2 = −3q1

Because of the vector q being unit length: q12 + q22 = 1

 1 
 
1 3  q1   10 
q1 + q2 = 1 ⇒ q1 + 9q1 = 1 ⇒ 10q1 = 1 ⇒ q1 =
2 2 2 2 2
⇒ q2 = − ⇒   =
10 10  q2   − 3 
 
 10 

Econ 211 O.Mesta Page 6 of 9

c)
 1 3 
 
Step (1) Q =  10 10 
− 3 1 
 
 10 10 
 3 1 
 
It is acceptable if you write Q =  10 10  the final answer from step 2 will still be a
 1 −
3 
 
 10 10 
diagonal matrix with the same eigenvalues on it. The order of eigenvalues on the diagonal might
change.

Step (2)
 1 3   1 3 
 − 
10  2 3  
QT AQ =  10  10 10 
 3 1  3 − 6  − 3 1 
   
 10 10   10 10 
 2−9 3 + 18  1 3 
  
=  10 10  10 10 
6+3 9 − 6  3 1 
  − 
 10 10  10 10 
 −7 21  1 3 
  
=  10 10  10 10 
 9 3  3 1 
  − 
 10 10  10 10 
 − 7 − 63 − 21 + 21 
 
=  10 10 
 9 − 9 27 + 3 

 10 10 
 − 70 
 0 
=  10 
 0 30 

 10 
 − 7 0
=  
 0 3

Econ 211 O.Mesta Page 7 of 9

Question 6.
a) Use implicit function theorem to calculate the value of the derivative dy/dx at the point (3,1)
for the following function:
xy 3 + 2 x 2 y + x 4 y 2 + y 4 − 5 x 3 − 3 = 0

b) Use mean value theorem to calculate the largest possible value for f(18) given that f(x) is
continuous and differentiable on [5,18]. Moreover, it is known that f (5) = 6 and f ′( x ) ≤ 3 .

c) Calculate the present value of V = $1500 per year at an interest rate of 12% for 30 years.

a) The function is defined at (3,1) and

Fy = 3 xy 2 + 2 x 2 + 2 x 4 y + 4 y 3 is defined and non-zero at (3,1):
Fy = (3 × 3)12 + (2 × 32 ) + (2 × 341) + (4 × 13 ) = 193 ≠ 0
Fx = y 3 + 4 xy + 4 x 3 y 2 − 15 x 2 its value at (3,1) is Fx = −14
As a result,
dy F − 14 14
=− x =− =
dx Fy 193 193

b) According to the Mean Value Theorem, there is a point c in [5,18] such that
f (18) − f (5)
f ′(c) = .
18 − 5

Therefore, 13 × f ′(c) = f (18) − f (5) = f (18) − 6

⇒ f (18) = 13 × f ′(c) + 6 ≤ 13 × 3 + 6 = 45
⇒ f (18) ≤ 45
The largest possible value for f(18) is 45.

c) Use the following formula:

  1 T   30

1−     1 −  1  
V  1+ r   1500   1 + 0.12  
PT =   =  = $12,082.77597
1+ r 1− 1 1 + 0.12  1 − 1
   
 1 + r   1 + 0 .12 

Econ 211 O.Mesta Page 8 of 9

Question 7.
Consider the following supply and demand functions for three goods.
q1s = −10 + p1 q1d = 20 − p1 − p3
q2s = 2 p2 q2d = 40 − 2 p2 − p3
q3s = −5 + 3 p3 q3d = 10 + p2 − p3 − p1

Derive the solutions for all three equilibrium prices using the reduced row echelon form.

Solution: Setting supply equal to demand in each market and rearranging gives:

2 p1 + p3 = 30  2 0 1 30 
 
4 p2 + p3 = 40 Matrix form is  0 4 1 40 
p1 − p2 + 4 p3 = 15  1 − 1 4 15 
 

Row operations lead to the following reduced row echelon form:

 205 
1 0 0 
 15 
 0 1 0 140 
 15 
 40 
0 0 1 
 15 

205 140 40
So the equilibrium prices are p1 = , p2 = , p3 =
15 15 15

Econ 211 O.Mesta Page 9 of 9