CRUZ, CHARMAINE M.

BSE 3-2

1.) Example 5 let the national-income model be written in the form

Y-C-I0-G0=0
C--(Y-T) =0
T--Y= 0

SOLUTION:
1 -1 0

|J|=
= - 1 1 = 1- +

- 0 1

2.) Find the point elasticity of demand when q= 10 if p= (120-2q)0.5.

Calculate the point elasticity of demand for the demand schedule P= 60- 0.2 Q
Where price is (i) zero, (ii) 20, (iii) 60 (IV). 60
SOLUTION:
P= 60- 0.2 Q
Q=300-5P (Inverse function)

When P= 0
Q=300-5(0) =300
The point elasticity will be

e= (-1) ( ) = -1 ( )=0
.

When P= 20
Q=300-5(20) = 200
The point elasticity will be

e= (-1) () = -1 ( .) = = 0.5

When P= 40
Q=300-5(40) = 100
The point elasticity will be

e= (-1) () = -1 ( )= =2
.

3.) In a basic Keynesian macroeconomic model it is assumed that Y= C + I where I= 250 and C=
0.75 Y. What is the equilibrium level of Y? What increase in I would be needed to cause Y to
increase to 1200?

SOLUTION:
Y= C + I
=0.25Y + 250
0.25Y=250

Y=1000 (Equilibrium level of income)

Y= K I
Where K= investment multiplier

1
K= 1

MPC= (0.75Y) = 0.75

1 1
K= 10.75 =0.25 = 4
Y=1200-1000=200

200= 4I (divide both sides by 4)

I= 50 (required increase in I)

4.) For the production function Q= 20K0.5 L0.5

(i) Derive a function for MPL, and
(ii) Show that MPL decreases as one moves along an isoquant by using more L.

SOLUTION:

.
(i) MPL= L = 10K0.5 L -0.5 =
.

(ii) If MPL is multiplied in numerator and denominator by 20.5

20.5 100.5 200.5 L0.5

MPL= (2L0.5) ( )= = =
L0.5 2L

5.) A multiplant monopoly operates two plants whose total cost schedules are
TC1 = 36 + 0.003q13 TC2= 45 +0.005q23
If its total output is sold in a market where the demand schedule is p=320-0.1q, where q= q1+q2, how
much should it produce in each plant to maximize total profits?

SOLUTION:
TR = PQ = (3200.1q) q
=320q 0.1q2
Substituting (q1+q2) for q
TR= 320 (q1+q2) - 0.1 (q1+q2)2
TR =320q1+320q2- 0.1q12-0.2 q1q2-0.1q22
Subtracting the two total cost schedules
=TR- TC1- TC2
= 320q1+320q2- 0.1q12-0.2 q1q2-0.1q22 (36+0.003q13)-(45+ 0.005q23)
= 320q1+320q2- 0.1q12-0.2 q1q2-0.1q22 -36-0.003q13 -45- 0.005q23

First- order conditions for a maximum require

= 320- 0.20q1 0.2q2 -0.009q12=0

q

And

= 320- 0.20q1 0.2q2 -0.015q22=0

q2

Subtract
-0.009q12+ 0.015q22 =0
0.009
q22=(0.015) q12= 0.6q12

q2= (0.6 q12)

= 0.07746q1

320- 0.20q1 0.2(0.07746q1) -0.009q12=0

320-0.20q1-0.15492 q1-0.009q12=0
0= 0.009q12+0.35492 q1-320

0.35492 (0.35492)2 4(0.009)(320)

=
0.018

0.35492 11.64598
=
0.018
0.354923.412619
= 0.018
 .
q1= .

=169.87
Substituting
q2= 0.07746q1
q2 =0.07746(169.87) = 131.58

(11)(22)= (3.25766) (4.1474) = 13.51 > 0.04= (0.2)2 = (12)2

q1=169.87
q2= 131.58

6.)

Fy 24 t
Fy= 4y
According to Eulers equation,

24t= (4y)

Since the second derivative is y,

24 t=4y
 24 = 4"
12t2 +c1 =4y
Integrate,

(12 2 + 1 ) = 4

4t3 +c1t+c2=4y

Equals to
1 2
Y=t3+ +4
4

2
Y (0) = =1 or c2=4
4

1
Y (1) 1+ +1=3 or c2= 4
4

Y (t) = t3 +t+1

7.)

SOLUTION:
q1=120-0.8p1+0.5p2
0.8p1=120+0.5 p2-q1
p1=150+0.625p2-1.25q1

TR=p1q1
= (150+0.625p2-1.25q1) q1
TR =150 q1+0.625 p2q1-1.25q12

MR1= =150+0.625p2-2.5q1
q

The effect of a change in p2 on MR1 is the partial derivative of

=0.625

8.) Explain the Ramsey Continuous Model and its corresponding Intertemporal Efficiency
Condition

According to the intertemporal efficiency condition, K (t) is a stock variable, while its time of change
investment is a flow variable. Base on the context of dynamic optimization, capital stock K (t) is a
state variable, while the consumption is affected by investment is the control variable.
9.)

Find the Present Value of Hamiltonian

ANSWER:

Hp=e-pe U C + [f (k) C K] -

(1) = e-pt U C =0

(2) = f (k) or [f (k)- ] =0

(3) = TVC =

Explain the Application of Partial Differentiation in the concept of Wage Efficiency Model

Y=f [e (w) L]
Y=f (effective labor)
Effective labor= e (Wage)

Increase in Wage could lead to increase in LP, thus, increase in Output

>0 (increase in input or output)

eL

2
< 0 (Increase in input; decrease in output)
eL

10.) A multiplant monopoly operates two plants whose total cost schedules are
TC1 = 36 + 0.003q13 TC2= 45 +0.005q23
If its total output is sold in a market where the demand schedule is p=320-0.1q, where q= q1+q2, how much
should it produce in each plant to maximize total profits?

SOLUTION:
TR = PQ = (3200.1q) q
=320q 0.1q2
Substituting (q1+q2) for q
TR= 320 (q1+q2) - 0.1 (q1+q2)2
TR =320q1+320q2- 0.1q12-0.2 q1q2-0.1q22

Subtracting the two total cost schedules

=TR- TC1- TC2
= 320q1+320q2- 0.1q12-0.2 q1q2-0.1q22 (36+0.003q13)-(45+ 0.005q23)
= 320q1+320q2- 0.1q12-0.2 q1q2-0.1q22 -36-0.003q13 -45- 0.005q23

First- order conditions for a maximum require

= 320- 0.20q1 0.2q2 -0.009q12=0

q

And

= 320- 0.20q1 0.2q2 -0.015q22=0

q2

Subtract
-0.009q12+ 0.015q22 =0
0.009
q22=(0.015) q12= 0.6q12

q2= (0.6 q12)

= 0.07746q1

320- 0.20q1 0.2(0.07746q1) -0.009q12=0

320-0.20q1-0.15492 q1-0.009q12=0
0= 0.009q12+0.35492 q1-320

0.35492 (0.35492)2 4(0.009)(320)

=
0.018

0.35492 11.64598
=
0.018
0.354923.412619
= 0.018

.
q1= .

=169.87
Substituting
q2= 0.07746q1
q2 =0.07746(169.87) = 131.58

(11)(22)= (3.25766) (4.1474) = 13.51 > 0.04= (0.2)2 = (12)2

q1=169.87
q2= 131.58