ECON 207-03 / Fall 2015-2016

M. Kerem YKSEL
HW #1 (due 30.09.2015)
1. The Method of Least Squares If we are given n data points in the
plane: (x1 ; y1 );
; (xn ; yn ); and a straight line whose equation is given
by y = mx + b, then we can write the aggregate distance from the n points
to the line as
S = (mx1 + b

y1 )2 +

+ (mxn + b

yn )2 :

Consider calculating S for a number of dierent lines, so that S becomes

a function of m and b :
S(m; b) =

n
X

(mxi + b

yi )2 :

i=1

The line which best ts the n data points should be the line whose parameters m and b minimize the total discrepency S.
Given the above scheme, nd the equation of the line which best ts the
data points: f(0; 4); (3; 4); (6; 6); (5; 0)g :
1. Synder and Nicholson (hereafter, SN), 2.3: Suppose that f (x; y) = xy.
Find the maximum value for f if x and y are constrained to sum to 1.
Solve this problem in two ways: by substitution and by using the Lagrange
multiplier method.
2. SN, 2.4: The dual problem to the one described in Problem 2.3 is
minimize x + y
subject to xy = 0:25:
Solve this problem using the Lagrangian technique. Then compare the
value you get for the Lagrange multiplier with the value you got in Problem
2.3. Explain the relationship between the two solutions.
3. SN, 2.7: Consider the following constrained maximization problem:
maximize y = x1 + 5lnx2
subject to k x1 x2 = 0;
where k is a constant that can be assigned any specic value.
(a) Show that if k = 10, this problem can be solved as one involving only
equality constraints.
(b) Show that solving this problem for k = 4 requires that x1 =

1.

(c) If the xs in this problem must be non-negative, what is the optimal

solution when k = 4? (This problem may be solved either intuitively
or using the methods outlined in the chapter.)
(d) What is the solution for this problem when k = 20? What do you
conclude by comparing this solution with the solution for part (a)?
4. SN: 2.10 [The Cobb-Douglas Function]:.One of the most important
functions in economics is the CobbDouglas function:
y = x1 x2 ;
where

and

are positive constants that are each less than 1.

(a) Show that this function is quasi-concave using a brute forcemethod

by applying Equation 2.114.1
(b) Show that the CobbDouglas function is quasi-concave by showing
that any contour line of the form y = c (where c is any positive
constant) is convex and therefore that the set of points for which
y > c is a convex set.
(c) Show that if + > 1 then the CobbDouglas function is not concave
(thereby illustrating again that not all quasiconcave functions are
concave).
5. SN: 2.11 [The Power Function]: Another function is the power function:
y=x ;
where 2 [0; 1] (at times we will also examine this function for cases where
can be negative, too, in which case we will use the form y = x to ensure
that the derivatives have the proper sign).
(a) Show that this function is concave (and therefore also, quasi-concave).
Notice that the
= 1 is a special case and that the function is
strictly concave only for < 1.
1 Otherwise

recall:

Denition 1 Lef f : S
Rn ! R be a function dened on a convex set S. The the lower
contour set LK of f is dened as
LK = fx 2 S : f (x)

Kg:

Denition 2 A function f (x) dened on a convex subset U 2 Rn is quasiconcave if its lower

contour set LK is a convex set for any constant K.
Proposition 3 A function f (x) dened on a convex subset U 2 Rn is quasiconcave i
f (tx + (1

t)y)

minff (x); f (y)g;

for every x; y 2 U and t 2 [0; 1]:

(b) Show that the multivariate form of the power function

y = f (x1; x2 ) = x1 + x2 ;
is also concave (and quasi-concave). Explain why, in this case, the
fact that f12 = f21 = 0 makes the determination of concavity especially simple.
(c) One way to incorporate scaleeects into the function described in
part (b) is to use the monotonic transformation
g(x1; x2 ) = y = x1 + x2

where is a positive constant. Does this transformation preserve the

concavity of the function? Is g quasi-concave?
6. Solve the following questions from Simon and Blume2 (hereafter, SB):
16.1 (p.386), 17.1, 17.3 (p.402, 404), 18.2, 18.4-5 (p.423), 18.12 (p. 434),
18.15 (p. 436) and 18.17 (p. 439).

2I

already mailed these notes under the name simonblume_16_18.pdf.