BAP – Optimisation Methods for Economic Analysis
Semester III
Assignment
Total Marks: 30
Instructions:
• Answer all questions
• Deadline: 17 November
• Submission: Hard copy in class on 17th November
1. A student derives utility from consuming two goods: digital books (Q1 ) and electronic
gadgets (Q2 ). Her preferences are represented by the utility function
U (Q1 , Q2 ) = Q1 Q2
The price of digital books is p1 = 1 per unit, and the price of electronic gadgets is
p2 = 4 per unit. Her total budget is B = 120.
Q: Set up and solve the utility maximisation problem to find her utility-maximising
bundle (Q∗1 , Q∗2 ). (4 marks)
2. Evaluate the following limit, if it exists:
x−8
lim
x→−8 x2 − 64
Give clear reasoning for your conclusion. (3 marks)
3. Consider a production technology with capital K and labour L. An isoquant corre-
sponding to output level Q = 2144 is given by
16K 1/4 L3/4 = 2144
dL
(a) Using implicit differentiation, find the slope of this isoquant, , treating L as
dK
a function of K. (3 marks)
(b) Evaluate the marginal rate of technical substitution (MRTS of L for K) at the
point where K = 256 and L = 108. Briefly explain the economic meaning of this
MRTS value at that point. (4 marks)
1
4. Consider the function y = f (x) defined on the interval (0, 6) by
2x, 0 ≤ x < 2,
f (x) = 1, 2 ≤ x < 4,
6, 4≤x<6
On the interval (0, 6), identify all points at which the function f (x) is discontinuous.
For each such point, explain why the function is discontinuous. (4 marks)
5. A health-conscious student consumes two goods: a basic nutrition powder (c1 ) and
fitness accessories (c2 ). The price of nutrition powder is Rs. 1000 per unit, and the
price of fitness accessories is Rs. 2000 per unit. Her total monthly allowance for these
two goods is Rs. 60,000. Her preferences are represented by the Cobb–Douglas utility
function
1/4 3/4
U (c1 , c2 ) = c1 c2 .
(a) Write down her budget constraint (budget line) in terms of c1 and c2 . (2 marks)
(b) Suppose the price of nutrition powder doubles from Rs. 1000 to Rs. 2000 per
unit, while the price of fitness accessories and her allowance remain unchanged.
Illustrate graphically how her budget line changes in the (c1 , c2 ) space. Clearly
label the intercepts before and after the price change. (3 marks)
6. (a) Consider the function
g(v) = (v − 2)4 .
Find all stationary points of g(v) and compute the stationary value(s). Using
the nth derivative test (or higher-order derivative test), determine whether the
stationary point corresponds to a relative maximum, relative minimum or a point
of inflexion. (3 marks)
(b) Let Q = f (L, K) be a production function that is linearly homogeneous (i.e.,
homogeneous of degree 1) in labour L and capital K. State Euler’s theorem for
a linearly homogeneous function in two variables and prove it for this production
function Q = f (L, K). (4 marks)