Mathematics for Economists (ECB1WIS)
Standard solutions
Midterm exam – December 10, 2024
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© Utrecht University School of Economics 2024
Mathematics for Economists Midterm Exam Solutions, Page 2 of 11 December 10, 2024
General grading note:
• Throughout this exam, the points are subtracted where the mistake is made and the rest is
graded as if the numbers are correct. In case a mistake leads to a significantly easier job for the
student, additional points can be subtracted.
Questions
1. (10 points) AVERAGE AND MARGINAL PRODUCTS
For the following Cobb-Douglas production function
Q = F (K, L) = 18K5/6 L1/6
find the general expressions for average and marginal products of both labor and capital. After-
ward, calculate the values for average and marginal products of labor and capital when K = 64 and
L = 729.
Solution: Finding the average product of capital: [2.5 p]
Q 18K5/6 L1/6 18L1/6 K =64,L=729 18 · 3
APK = = = =======⇒ APK = = 27
K K K1/6 2
Finding the average product of labor: [2.5 p]
Q 18K5/6 L1/6 18K5/6 K =64,L=729 18 · 32
APL = = = =======⇒ APL = ≈ 2.37
L L L5/6 243
Finding the marginal product of capital: [2.5 p]
∂F (K, L) 5 15L1/6 K =64,L=729 15 · 3
MPK = = 18L1/6 · K −1/6 = =======⇒ MPK = = 22.5
∂K 6 K1/6 2
Finding the marginal product of labor: [2.5 p]
∂F (K, L) 1 3K5/6 K =64,L=729 3 · 32
MPL = = 18K5/6 · L−5/6 = 5/6 =======⇒ MPL = ≈ 0.4
∂L 6 L 243
Grading notes:
• Out of 2.5 points awarded per part of the answer, 1 point is awarded for the correct for-
mula, 1 point is awarded for the correct simplification, and 0.5 points are awarded for
correctly filling in the values of capital and labor.
Mathematics for Economists Midterm Exam Solutions, Page 3 of 11 December 10, 2024
2. (10 points) PROFIT MAXIMIZATION
A firm can produce quantity q of a product at cost
1 3 21 2
C (q) = q − q + 34q − 25.
3 4
The firm faces the demand function
q = 100 − 4p
where p is the price of the product. Calculate the output that maximizes their profit and state the
maximum profit.
Solution: We need to find the inverse demand function so we are able to write the profit func-
tion:
1
q = 100 − 4p =⇒ p = 25 − q [1 p]
4
The profit function is then: [2 p]
1 1 3 21 2
π = p · q − C (q) =
25 − q · q − q − q + 34q − 25
4 3 4
1 2 1 3 21 2 1
= 25q − q − q + q − 34q + 25 = − q3 + 5q2 − 9q + 25
4 3 4 3
FOC: [3 p]
π ′ (q) = − q2 + 10q − 9 = 0
(q − 1)(q − 9) = 0
q1∗ = 1 ∧ q2∗ = 9
SOC:
π ′′ (q) = −2q + 10 [1 p] =⇒ π ′′ (1) = −2 · 1 + 10 = 8 > 0 [1 p]
=⇒ π ′′ (9) = −2 · 9 + 10 = −8 < 0 [1 p]
The profit is maximized when q = 9. The value for profit is then:
1
π (9) = − · 93 + 5 · 92 − 9 · 9 + 25 = 106 [1 p]
3
Grading note:
• Students can also set MR = MC to find the profit-maximizing output, as long as it is
done correctly.
Mathematics for Economists Midterm Exam Solutions, Page 4 of 11 December 10, 2024
3. (12 points) CONSTRAINED OPTIMIZATION
Using the Lagrange method, find the minimum value of
f ( x, y) = 2x2 + 3xy + 3y2
subject to
3x + y = 130.
Note that you do not have to find the value of the function at the optimum.
Solution: Build a Lagrangian function
L( x, y, λ) = 2x2 + 3xy + 3y2 − λ(3x + y − 130) [1 p]
Compute the partial first derivatives and construct the first-order condition:
∂
(1) : L( x, y, λ) = 4x + 3y − 3λ = 0 [2 p]
∂x
∂
(2) : L( x, y, λ) = 3x + 6y − λ = 0 [2 p]
∂y
∂
(3) : L( x, y, λ) = −(3x + y − 130) = 130 − 3x − y = 0 [2 p]
∂λ
Solve x and y by finding the expression for λ from (2) and filling it in (1): [3 p]
λ = 3x + 6y
4x + 3y − 3(3x + 6y) = 0
4x + 3y − 9x − 18y = 0
−15y − 5x = 0
1
(4) : y = − x
3
Substitute (4) into (3): [1 p]
1
130 − 3x + x = 0
3
8 195
130 − x = 0 =⇒ x ∗ = = 48.75
3 4
Filling the solution for x ∗ back into (4): [1 p]
1 195 65
y∗ = − · = − = −16.25
3 4 4
Grading notes:
• Subtract a maximum of 1 point when the FOC(s) is/are not set equal to 0.
• Alternatively, students can rewrite (1) and (2) and divide them by each other to find that
x ∗ = y∗ . In general, they can use any mathematically correct method to solve the system.
Mathematics for Economists Midterm Exam Solutions, Page 5 of 11 December 10, 2024
4. (12 points) CONVEXITY OF FUNCTIONS OF TWO VARIABLES
Verify that the function
f ( x, y) = 5x2 − 7xy + 6y2 − 3x + 12y + 11
is convex. Also, without explicitly finding the critical point, classify it and comment whether it is
a global or local critical point.
Solution:
f x = 10x − 7y − 3 [1.5 p]
f xx = 10 [1 p]
f xy = −7 [1 p]
f y = −7x + 12y + 12 [1.5 p]
f yy = 12 [1 p]
f yx = −7
2
f xx · f yy − f xy = 10 · 12 − (−7)2 = 71 [2 p]
Because f xx > 0, f yy > 0, and the determinant is larger than 0 for any x and y, the function is
convex. [2 p]
Because the function is convex, the critical point is a global minimum. [2 p]
Mathematics for Economists Midterm Exam Solutions, Page 6 of 11 December 10, 2024
5. (10 points) IMPLICIT DIFFERENTIATION
You are given the function z = g( x, y) = 5x3 y2 + 2x4 − 4y3 − 8x + 2y − 4. Find the value of the
function at the point where x = 1 and y = −2. Additionally, by applying implicit differentiation,
dy of the level curve passing through this point. Note that you need to prove the rule
find the slope dx
of implicit differentiation.
Solution: The value of the function at this point is g(1, −2) = 5 · 1 · (−2)2 + 2 · 1 − 4(˙ − 2)3 − 8 ·
1 + 2 · (−2) − 4 = 38. [1 p]
We prove the rule of implicit differentiation: [4 p]
∂z ∂z
dz = dy + dx = 0
∂y ∂x
∂z ∂z
dx = − dy
∂x ∂y
∂z dx ∂z
=−
∂x dy ∂y
∂z
dx ∂y
= − ∂z
dy
∂x
Afterward, we calculate the partial derivatives:
∂z
= 15x2 y2 + 8x3 − 8 [2 p]
∂x
∂z
= 10x3 y − 12y2 + 2 [2 p]
∂y
Filling in the partial derivatives into dx/dy:
dx 10x3 y − 12y2 + 2
=−
dy 15x2 y2 + 8x3 − 8
For x = 1 and y = −2, the solution is, then:
dx −20 − 48 + 2 −66 11
=− =− = = 1.1 [1 p]
dy 60 + 8 − 8 60 10
Grading notes:
• Alternatively, students can first fill in the solutions for partial derivatives in the formula
for total differential and then find dx
dy .
• Subtract 1 point when a student incorrectly starts canceling out terms in the final ex-
pression or when they lose the minus sign while rearranging the expression.
• Subtract half a point (a) when the student sets a derivative equal to zero (per derivative),
(b) when the student makes a mistake in calculating derivative (per term), (c) when a
student makes a mistake in notation, (d) when a student forgets to set the total differ-
ential equal to zero.
Mathematics for Economists Midterm Exam Solutions, Page 7 of 11 December 10, 2024
6. (9 points) INVERSE FUNCTIONS
For the following function
3x + 2 1
y = f (x) = , x>
7x − 1 7
show that it is monotonic and find an explicit formula for the inverse.
Solution: Monotonicity:
dy 3(7x − 1) − (3x + 2)7 − 3 −
21x − 14
21x 17
=− [2 p]
= 2
= 2
dx (7x − 1) (7x − 1) (7x − 1)2
dy
Because dx is negative for x > 71 , the function is monotonically decreasing. [2 p]
Finding the inverse: [5 p]
3x + 2
y=
7x − 1
y(7x − 1) = 3x + 2
7xy − y = 3x + 2
7xy − 3x = y + 2
x (7y − 3) = y + 2
y+2
x=
7y − 3
Grading notes:
• Students do not have to use first derivative to prove monotonicity if they provide an ex-
planation that shows a good understanding of behavior of the function.
Mathematics for Economists Midterm Exam Solutions, Page 8 of 11 December 10, 2024
7. (5 points) PROOF OF THE INVERSE FUNCTION RULE
If y = g( x ) and x = h(y) are inverses of each other – i.e. x = h( g( x )) and y = g(h(y)), prove the
inverse function rule. Note that this question is considered more difficult.
Solution: We start with the definition of an inverse function: [1 p]
x = h( g( x ))
We can find the derivative of both sides of the expression: [1 p]
d d
x= h( g( x ))
dx dx
The left-hand side is equal to 1 and we can apply the chain rule to the right-hand side: [2 p]
1 = h′ ( g( x )) · g′ ( x )
By rearranging the expression and filling in y = g( x ), we get the inverse function rule: [1 p]
1
h′ (y) = ■
g′ ( x )
Grading notes:
• Alternatively, students can start with y = g(h(y)) to express the rule as the inverse of
g ′ ( x ).
• Award 1 point if the student correctly writes out the inverse function rule, even if every-
thing else is incorrect.
8. (4 points) LIMITS
Solve the following limit:
4x3 − 7x2 + 5000
lim
x →−∞ 3x4 + 15x2 − 11x − 1
Solution:
0 0
0
4x3 2 3 2
4x3 − 7x2 + 5000 x4
− 7xx4
+ 5000
x4
4x
7
4 − 7x
7
+ 5000
>
0
lim = lim = lim x x4 x4 = =0
x →−∞ 3x4 + 15x2 − 11x − 1 x →∞ 3x4 15x2 11x x →∞ 0 3
x4
+ x4
− x4
− x14 2
0 0
3 + 15xx4
− 11x − 14
x4
7
x
Grading notes:
• Students can also divide every term by x3 and reach the same answer.
• 1 point is awarded for recognizing which method needs to be used to deal with the in-
determinate, 1 point for the correct pick of the degree, 1 point for correctly canceling out
the terms, and 1 point for the correct final result.
Mathematics for Economists Midterm Exam Solutions, Page 9 of 11 December 10, 2024
9. (4 points) PROOF OF THE PRODUCT RULE
Formally, a derivative is defined as the following limit:
f ( x + h) − f ( x )
f ′ ( x ) = lim
h →0 h
Finish the proof of the product rule using the formal definition of a derivative. Note that this
question is considered more difficult.
Solution:
d u( x + h)v( x + h) − u( x )v( x )
(u( x ) · v( x )) = lim
dx h →0 h
Add and subtract u( x + h)v( x ) to the numerator:
d u( x + h)v( x + h) − u( x + h)v( x ) + u( x + h)v( x ) − u( x )v( x )
(u( x ) · v( x )) = lim
dx h →0 h
...
d u( x + h)v( x + h) − u( x + h)v( x ) u( x + h)v( x ) − u( x )v( x )
(u( x ) · v( x )) = lim + lim
dx h →0 h h →0 h
u( x + h)(v( x + h) − v( x )) v( x )(u( x + h) − u( x ))
= lim + lim
h →0 h h →0 h
v( x + h) − v( x ) u( x + h) − u( x )
= lim u( x + h) lim + lim v( x ) lim
h →0 h →0 h h →0 h →0 h
= u( x ) · v′ ( x ) + v( x ) · u′ ( x ) ■
Grading notes:
• Award 1 point for each line of the proof.
Mathematics for Economists Midterm Exam Solutions, Page 10 of 11 December 10, 2024
10. (24 points) GRAPH SKETCHING
Sketch the graph of the following function:
1 4
y = f (x) = x − 4x2 − 5
2
Solution: Finding the intercept:
x = 0 ⇒ y = −5 [1 p]
Finding critical points: [4 p]
f ′ ( x ) = 2x3 − 8x = 0
= 2x ( x2 − 4) = 0
x=0 ∨ x2 − 4 = 0
x2 = 4
x = ±2
The critical value for x = 0 is f (0) = −5 (already found), the critical value for x = 2 is f (2) =
2 · 2 − 4 · 2 − 5 = −13 [1 p], and the critical value for x = 2 is f (2) = −13 [1 p]. So, the critical
1 4 2
points are (0, −5), (2, −13), and (−2, −13).
Classifying the critical points:
f ′′ ( x ) = 6x2 − 8 [2 p]
′′
f (0) = −8 < 0 ⇒ (0, −5) is a maximum. [1 p]
f ′′ (2) = 6 · 22 − 8 = 16 > 0 ⇒ (2, −13) is a minimum. [1 p]
f ′′ (−2) = 6 · (−2)2 − 8 = 16 > 0 ⇒ (−2, −13) is a minimum. [1 p]
Convexity/concavity of the function:
f ′′ ( x ) = 0
r √
2 2 8 4 4 2 2 3 85
6x − 8 = 0 ⇒ x = = ⇒ x = ± = ±√ = ± ⇒ y = − ≈ −9.44 [2 p]
6 3 3 3 3 9
Points √2 , − 85
9 and − √2 , − 85 are non-critical points of inflection. [0.5 p]
9
3 3
As the second derivative is a quadratic function with a positive leading coefficient (U-shape)
that crosses the x-axis at the non-critical points of inflection: [2 p]
• f ′′ ( x ) > 0 for x < − √2 and x > √2 .
3 3
• f ′′ ( x ) < 0 for − √2 < x < √2 .
3 3
q q
Hence, the function is convex for the domain x ∈ −∞, − 4
3 ∪ 3, ∞
4
and concave for
q q
the domain x ∈ − 43 , 43 . [2 p]
Finding the values of the function when it approaches ∞ and −∞:
Mathematics for Economists Midterm Exam Solutions, Page 11 of 11 December 10, 2024
1 4 2
lim x − 4x − 5 = ∞ [1 p]
x →∞ 2
1 4
lim x − 4x2 − 5 = ∞ [1 p]
x →−∞ 2
We can now draw the graph: [3.5 p]
Figure 1: Graph of y = f ( x ) = 12 x4 − 4x2 − 5
Grading notes:
• For the graph of the function, award 1 point for the generally correct shape of the curve
and half a point per each correctly drawn point.
• Subtract 1 point if the student forgets that the root can be both positive and negative
when calculating critical points.
• Subtract 2 points if a student divides by x when calculating critical points and as a result
does not find one of the points.
End of Solutions
