Final Exam ECON 262
TIME: 2Hr 15min plus 15min uploading time i.e total: 150 min
Marks: 85
Instructions:
i) Take the last digit of your roll no and add 2 to it. This is the value of ‘a’ you will be
filling in throughout the exam.
ii) Start each question from the new page.
iii) Using camscanner or any other app make one file of your paper and submit it on lms
before the due time. The submitted file should have same sequence as the question paper.
Scatter submissions, un-orderly submissions or late submissions will result into penalty
iv) The question paper may look lengthy. It is completely fine. Solve as many questions as
possible within the prescribed time and allocate a reasonable time for completing
submission requirements. Unlike quizzes, no excuses will be accepted for incomplete or
wrong submissions what so ever.
v) If you think lms submissions are giving you technical errors or taking too much time, just
email me the exam within allocated time.
1. (10 marks) The function f is defined, for x > 0, by
𝑓(𝑥) = 𝑎 𝑙𝑛 𝑥 − 𝑏(𝑙𝑛𝑥)2
where a is as defined above and b is a positive number. Show that f has one critical point.
Determine whether it is a local maximum, a local minimum or a point of inflexion.
2. (10 marks) Find the critical point(s) of the function
𝑓(𝑥, 𝑦) = 𝑦 3 − 𝑥 3 − 2𝑥𝑦 + 𝑎.
Where a is as defined above. Also determine whether the point(s) is (are) local minimum, local
maximum, or a saddle point.
3. (10 marks) Suppose that the firm is the only firm producing X and Y(in other words, it has a
monopoly on the goods) and the demands of X and Y are given by
𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑋: 𝑥 = 2 − 𝑝𝑥 + 𝑝𝑦
𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑌: 𝑦 = 13 + 𝑝𝑥 − 2𝑝𝑦
Suppose that the joint total cost is: 𝑇𝐶 𝑥, 𝑦 = 𝑎 + 𝑥 2 − 𝑥𝑦 + 𝑦 2 where a is as defined above.
a) Find the joint profit of firm in terms of x and y.
b) Find the profit maximizing level of x and y.
4. (10 marks) A firm has a production function given by
1 1
𝑞 𝑘, 𝑙 = 𝑘 4 𝑙 12
where k and l are the amounts of capital and labour used.
a) If the prices of capital and labour are a and v per unit respectively, use the method of Lagrange
multipliers to find the values of k and l that will minimize the firm's costs when they produce Q0
level of output in terms of v.
b) Check that it is indeed the minimization level.
5. (10 marks) Draw diagrams to show the following sets and state whether these sets are convex,
and why!
a) 𝑆 = 𝑥, 𝑦 𝑦 = 𝑎𝑥 − 3}
b) 𝑆 = 𝑥, 𝑦 1 ≤ 𝑥 2 + 𝑦 2 ≤ 𝑎
ii. The utility function is given by U(x,y)= xay1-a . Is the utility function homogenous? If
yes, find the degree of homogeneity.
iii.
6. (10 marks) Look at the following question:
7. (25 marks) Consider the following closed goods market where consumption is purely
autonomous. Investment is affected by both income and interest rate. Also, the government
operates on a standard rule that they automatically start expenditure when income falls and cut
expenditure when it rises.
𝑌 =𝐶+𝐼+𝐺
𝐶 = 𝐶0
𝐼 = 𝑎 ∗ 𝐼 𝑌, 𝑟
𝐺 = 𝐺(𝑌)
where
𝐼𝑟 < 0, 0 < 𝐼𝑌 < 1, 𝐺 ′ ≤ 0
a) Find the slope of the IS curve. Is the curve upward or downward sloping?
b) What happens to the slope of the IS curve if the government expenditure is very sensitive to
fluctuations in income? Explain using your answer to a.
Now let’s consider a financial market where the supply of money is automatically increased when
income goes up.
𝑀𝑑 = 𝐿 𝑌, 𝑟 , 𝑀𝑠 = 𝑀(𝑌)
where
𝐿𝑌 > 0, 𝐿𝑟 < 0, 0 ≤ 𝑀𝑌 ≤ 𝐿𝑌
c) Find the slope of the LM curve. Is the curve upward or downward sloping?
d) State the endogenous and exogenous variables in this IS-LM model.
e) What is the impact on of an increase in Consumption on equilibrium values of income and
interest rate?
f) Compare impact of a change in autonomous consumption on equilibrium income and interest
rate in the situation where the Money supply is very sensitive to income with the situation
when it is not.
g) Is it possible to have a situation where the interest rate is not impacted when autonomous
consumption goes up? Explain.
We now assume that we have definite functions for income, government expenditure and money
demand, and money supply.
𝐼 = 𝐼0 + 𝑖1 𝑌 − 𝑖2 𝑟
𝐺 = 𝑔0 − 𝑔1 𝑌
𝑀𝑠 = 𝑚0 + 𝑚1 𝑌
𝑀𝑑 = 𝑙0 + 𝑙1 𝑌 − 𝑙2 𝑟
where all parameters are positive. 0<𝑐1<1,0<𝑖1<1
h) State the equation of the IS curve and find its slope.
i) State the equation of the LM curve and find its slope.
j) Solve for equilibrium values of income and interest rate, Y* and 𝑟∗.
k) Find the impact of an increase in Consumption on Equilibrium Income and Interest Rate and
compare with your answer to part e.
