Tutorial Exercise IV: Static Optimization
1). A firm produces two goods, denoted by A and B. The cost per day is
C ( x, y ) 0.04 x 2 0.01xy 0.01 y 2 4 x 2 y 500 when x units of A and y units of B are
produced (x>0, y>0). The firm sells all it produces at prices 13 per unit of A and 8 per unit of B.
a). Show that the profit function is 𝜋(𝑥, 𝑦) = 9𝑥 + 6𝑦 − 0.04𝑥 + 0.01𝑥𝑦 − 0.01𝑦 −
500.
b). Determine the values of x and y at which π ( x, y ) attains its maximum.
2). Find the functions x* ( r ) and y * ( r ) such that x x* ( r ) and y y * ( r ) that solve the problem
max f ( x, y, r ) max( x 2 xy 2 y 2 2rx 2ry) where r is a parameter. Verify that
x, y x, y
f * (r ) f * ( x* ( r ), y* (r ), r )
* .
r r x x ( r ), y y* ( r )
3). Classify the stationary points as local minimum, local maximum and saddle point of
a). f ( x, y , z ) x 2 2 y 2 3 z 2 2 xy 2 xz
b). f ( x1 , x2 , x3 , x4 ) 20 x2 48 x3 6 x4 8 x1 x2 4 x12 12 x32 x42 4 x23
4). (a) Solve the problem max x 4 y z subject to x 2 y 2 z 2 216 and
x 2 y 3z 0 .
(b) Change the first constraint to x 2 y 2 z 2 215 and the second to
x 2 y 3z 0.1 . Estimate the corresponding change in the maximum value
function.
5). Consider the problem (assuming m 4 )
max U ( x1 , x2 ) 1 ln(1 x1 ) 1 ln(1 x2 ) subject to 2 x1 3 x2 m
2 4
(a) Let x1* ( m) and x2* (m) denote the values of x1 and x2 that solve the problem. Find
these functions and the corresponding Langralge multiplier.
(b) The optimal value U * of U ( x1 , x2 ) is a function of m. find an explicit expression
for U * ( m ) , and show that dU * dm .
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6). Consider the standard utility maximization problem max U ( x ) subject to px = m . Let
U (x) j 1 A j ln( x j a j ) , where a j and
n
Aj are all positive constants such that
A j 1 , and with R m j 1 a j p j 0 .
n n
j 1
(a) Show that if x x* solves the problem max U ( x ) subject to px = m , then
x*j a j RA j p j , j 1, , n
(b) Let U * (p, m) U (x* ) denote the indirect utility function. Verify the Roy’s
Identity.
n n
7). Let Q ( x1 , , xn ) aij xi x j , S ( x1 , , xn ) : x12 xn2 1 . Assume the
i 1 j 1
coefficient matrix A (aij ) of the quadratic form Q is symmetric and prove that Q attains
maximum and mimum values over the set S which are equal to the largest and smallest
eigenvalues of A. (Hint: Consider first the case n 2 . Write Q ( x) as Q ( x) xAx . The
first-order conditions give Ax x .)
8). Consider the problem max(min) x 2 y 2 z 2 subject to x y z 1 . Compute the
Bordered Hessian matrices B2 and B3 . Show that the second-order conditions for a local
maximum are satisfied.
9). Solve the problem max xy x y subject to x 2 y 2 2, x y 1 .
10). (a) By using x and y units of two inputs, a firm produce xy units of a product. The
input factor costs are w and p per units, respectively. The firm wants to minimize
the costs of producing at least q units, but it is required to use at least a units of
first input. Here w a, and q are positve constants. Formulate the nonlinear
programming problem that emerges. Reformulate the problem as a maximization
problem, and write down the Khun-Tucker conditions for x , y to solve the
* *
problem.
(b) Explain why x* y * q if ( x* , y* ) is optimal, and solve the problem. (Hint:
consider two cases.)
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11). Consider the problem max f ( x, y ) xy subject to g ( x, y ) ( x y 2)2 0 . Explain why
the solution is ( x, y ) (1,1) . Verify that the Kuhn-Tucker conditions are not satisfied for
any , and that the constraint qualification does not hold at (1,1) .
12). Solve the following nolinear programming problems:
(a) max xy subject to x 2 y 2, x 0, y 0
(b) max x α y β subject x 2 y 2, x 0, y 0 , where >0, >0, and +1.
13). A model for studying the export of gas from Russia to the rest of Europe involves the
following optimization problem:
max[ x y 12 ( x y ) 2 14 x 13 y ] subject to x 5, y 3, x 2 y 2, x 0, y 0
Sketch the admissible set S in the xyplane, and show that the maximum cannot occur at
an interior point of S. Solve the problem.
14). (a) Solve the problem max x 2 y 2 z 2 subject 2x 2 y 2 z 2 a 2 and x y z 0
(b) Verify the Envelope result is this case.
15). Consider the problem max(min) x 2 y 2 subject to r 2 2 x 2 4 y 2 s 2 where 0 r s .
(a) Solve the maximization problem and verify the envelope result in this case.
(b) Reformulate the minimization problem as a maximization problem, solve it and verify
the envelope result in this case.
(c) Give a geometric interpretation of the problem and its solution.
