QUANTITATIVE METHODS MASTERS
Academic year 2024-2025 Page 1
Assignment
Instructions
The final submission must include a PDF document with the solutions to the
questions below. The PDF file with the solutions should be prepared using
Word, and the equations should be typed using the Word equation editor. Please
use the following specifications: font type: Arial; font size: 12; line spacing: 1.5.
Please include your R script as an appendix. Also include as an appendix your
scanned handwritten notes showing the derivation of the results, clearly indicat-
ing which question the notes relate to (e.g. Question 1, part c). The submission
should not exceed 15 pages in total, including figures and the appendices.
The assignment counts for 5 marks out of the total module mark of 10. The
total mark of each question is indicated below. Each part is worth an equal
share of the total question mark.
The final submission deadline for the assignment is Thursday 19 December, 2024
at 16:00.
Important: The documents submitted will be scanned using the anti-plagiarism
software Turnitin. The use of material from other students (from this course or
other courses) will result in failing this assessment.
Question 1 (3 Marks)
A firm produces two goods, A and B. The inverse demand functions for the two
goods are given by:
p = 4400 − 91x − 58y
q = 3100 − 34x − 48y
where p is the price of good A, x is the quantity of good A, q is the price of
good B and y is the quantity of good B.
The cost function for the production of the two goods is given by:
C(x, y) = 9x2 + 8xy + 2y 2 + 900x + 600y + 15000
(a) Derive the firm’s profit function.
(b) Find the combination of x and y that maximises the firm’s profits, and
report the maximum profit. Show that the solution is a maximum.
(c) Plot the profit function in R for values of x and y in the ranges 0 ≤ x ≤ 2x∗
and 0 ≤ y ≤ 2y ∗ where x* and y* are the solutions in b). Comment on the
results.
(The questions continue on the next page)
QUANTITATIVE METHODS MASTERS
Academic year 2024-2025 Page 2
(d) How high do the firm’s fixed costs need to be for the profits to be 25% of
the costs? At what level of fixed costs is the firm making a loss? Using R,
plot the cost and profit functions of the firm as a function of the fixed costs
at the optimal values of x and y calculated in b). Comment on the results.
(e) Assume now that due to a limited supply of raw materials the firm can
at most produce 15 units of the two goods in total. What is now the
firm’s maximum profit, and at which combination of x and y are the profits
maximised? Comment on the results.
(f) Is x + y < 15 a possible solution to the constrained maximisation problem
in e)? Explain your answer.
(g) Interpret the value of the Lagrange multiplier derived in e).
(h) Verify the solutions to b) and e) in R (please include the R output in the
main text and the code in the appendix).
(i) Use R to find how much the firm’s profits increase if the raw material
constraint is relaxed by one unit, and compare your findings to the result
in f).
Question 2 (2 Marks)
A consumer has a budget of 900 euros which can be used to buy two goods, A
and B. Good A costs 3 euros per unit and good B costs 10 euros per unit. The
consumer’s utility when consuming x units of good A and y units of good B is
given by
1 2
U (x, y) = x 3 · y 3 , where x ≥ 0 and y ≥ 0
(a) Use the Lagrange multiplier method to find how many units the consumer
should buy of the two goods to maximise their utility. Show that the solution
is a maximum.
(b) Plot the level curve of the consumer’s utility function in R at the maximum
level of utility found in part a) for values of x between 0 and 300. Include
the budget constraint in the plot and comment on the results.
(c) Verify your answer to part a) using the substitution method, i.e. by defining
y = h(x) and maximising u(x, h(x)) with respect to x.
(d) Assume that the consumer can now use their budget of 900 euros to buy
three goods A, B and C. Good A still costs 3 euros per unit, good B now
costs 6 euros per unit, while good C costs 7.5 euros per unit. The consumer’s
utility when consuming x units of good A, y units of good B and z units of
good C is given by
1 1 1
U (x, y, z) = x 3 · y 3 · z 3 , where x ≥ 0, y ≥ 0 and z ≥ 0
Find the solution to the consumer’s maximisation problem and verify the
solution using R (please include the R output in the main text and the code
in the appendix).