Economics 601 Harvey Lapan

Microeconomic Analysis I Fall 2012

Problem Set No. 1 Due by: Friday, August 25

1.1. Graph the sets { } { } , , , A B C D C D below and decide whether or not they are convex.
( ) ( ) { }
, : 0, 0, 2 4 , 0 ; A x y x y x y Max x w = > > + + ( s

6, w> a scalar
( ) ( ) { }
, : 0, 0, 2 4 ,0 2 ; B x y x y x Max x y w = > > ( + s

10 w> , a scalar
( ) { }
, : 0, 0, 2 12 ; C x y x y x y = > > + s
( ) { }
, : 0, 0, 2 12 ; D x y x y x y = > > + s

NOTE: ( ) ( ) ( ) 4 ,0 0, 4; 4, 0 4 4 Max x x Max x x for x ( = s ( = >



1.2. Set A in problem set 1.1 can represent a budget set for someone who has income w and faces prices
( ) ( ) , 1, 2
x y
p p = if he buys no more than 4 units of good x, but must pay a price of 2
x
p = for all
units of x purchased in excess of 4. Similarly, set B can be thought of as a similar case, except that
the price of x is 2 for the first 4 units of x, whereas the price declines to 1
x
p = on all units of x
purchased in excess of 4. Suppose you want to maximize the function: U xy = .

a. Find the maximum for (x,y) in set A and relate your answer to the value of w. Can you be sure a
local maximum is a global maximum?
b. What difficulties do you encounter in finding a maximum for (x,y) in set B? Is every local
maximum necessarily a global maximum?
c. Find the optimum for (x,y) in set B and relate your answer to the value of w.

1.3. Consider the function
2
: f
++
specified as ( )
( )
1 2 1 2
, , 0 f x x x x
| o
o o
|
(
= + >

.
a. Derive restrictions on o and | which ensure that f is concave.
b. Derive restrictions on o and | which ensure that f is quasiconcave.
c. Derive restrictions on o and | which ensure that f is convex.

1.4 Suppose we have two functions
2
, : f g
++
: ( )
1 2 1 2
, f x x x x
o |
= , ( )
1 2 1 2
, g x x x x
q |
= . Assume all
parameters ( ) , , , o | q | are positive.
a. If ( ) , o | and ( ) , q | are such that f and g are concave, is ( ) f g + necessarily concave?
b. If ( ) , o | and ( ) , q | are such that f and g are convex, is ( ) f g + necessarily convex?
c. If ( ) , o | and ( ) , q | are such that f and g are quasi-concave, is ( ) f g + necessarily quasi-concave?
Explain your answer to each part.



1.5. For the following three versions of the function : f S discuss whether Weierstrass theorem applies
and indicate the global maximum and minimum (if they exist):

(i) S = and
4
( ) f x x =

(ii) (0,1) S = and ( ) f x x =

(iii) [ 4, 4] S = and
3
8
, 2
( )
2
2
x
x
f x
x
a x

=
=

, a a scalar.

1.6. Let ( )
1 2
, f x x be a concave function, and assume ( )
2
1 2
, x x D R e c .
a. Must a global maximum exist in D for ( )
1 2
, f x x ?
b. If we find
( )
* *
1 2
, x x is a local maximum, can we conclude it is a global maximum?
c. Define a new function: ( ) ( ) ( )
1 2 1 2
, , g x x H f x x where : H R R . Suppose H is differentiable
and 0
dH
df
> everywhere. Is the function ( )
1 2
, g x x necessarily concave?
d. Same assumptions as (b) and (c). Will
( )
* *
1 2
, x x be a local maximum for ( )
1 2
, g x x ? Will it be a
global maximum? Explain your answer.

1.7. Consider the problem of
( ) ( )( ) ( ) { }
, ,
. . 1 ; 2 10; , , 0
x y z
Max xyz s t x y z w x y x y z + + s + s >

a. Set up the Lagrangean function and find the FOC.

b. Solve for the optimal values of the variables { } , , x y z as well as for the Lagrangean multipliers for
each constraint. Does each constraint always bind? Relate your answers to the value of w.

1.8. Consider the problem of
( ) ( ) { }
, ,
ln ln . . 10; , 0
x y z
Max x y s t x y x y + + s > :

a. What is the solution to this constrained optimization problem? Find the solution using the
Lagrangean function and the Kuhn-Tucker (K-T) conditions. Is there a unique solution to the K-T
conditions?

b. Suppose the domain is rewritten as: ( )
3
10 0 x y > . Does this change the domain of the
original problem or the point in the domain that maximizes the objection function?
i. Write the Langrangean as: ( ) ( ) ( )
3
ln 10 L ln x y x y = + +
If
( )
* *
, x y solves the constrained optimization problem, can you find a
*
so that
( )
* * *
, , x y
solve the Kuhn-Tucker conditions? Explain your answer.

c. Leave the domain as originally given, but write the objective function as:
( ) ( ) ( ) ( ) ( )
3
, ln ln 2ln 5 f x y x y = + . Is this function concave? How does the point
that solves the constrained optimization problem compare to the solution to (a)?

i. If you write the Lagrangean function, does every ( ) , , x y ' ' ' that solves the Kuhn-Tucker
conditions represent a maximum to the constrained optimization problem? If not, why not?