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Review Exercises 2023 PXThanh
Review Exercises 2023 PXThanh
year. Annual revenue is predicted to be $50 million commencing at the end of the third year. If
the interest rate is 6% compounded annually, find
a) the present value of the building costs;
b) the present value of the operating costs at the end of n years (n > 2);
c) the present value of the revenue after n years (n > 2);
d) the minimum value of n for which the net present value is positive.
11. An annuity yields an income of $R at the end of each year for the next n years. If the
interest rate is r% compounded annually, show that the present value is
𝑟 −𝑛
1 − (1 + )
100𝑅 ( 100 )
𝑟
a) Find the annual income if the interest rate is 6.5%, the present value is $14000 and
the annuity is paid for 15 years. Give your answer correct to two decimal places.
b) Write down a general expression, in terms of r and R, for the present value if the
annuity is to be paid in perpetuity.
12. A project requiring an initial outlay of $A produces a return of $a at the end of every year
for n years.
a) Show that the internal rate of return, r, satisfies the equation
100𝑎 𝑟 −𝑛
𝐴= [1 − (1 + ) ]
𝑟 100
b) Find the internal rate of return of a project which requires an initial outlay of $1000000 and
gives a return of $10000 in perpetuity.
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13. If the average cost function of a good is 𝐴𝐶 = + 2𝑄 + 9 find an expression for TC.
𝑄
What are the fixed costs in this case? Write down an expression for the marginal cost function.
144
14. A firm’s average cost function is given 𝐴𝐶 = + 𝑄 + 2.
𝑄
a) Find, to the nearest whole number, the value of 𝑄 at the lowest point on the graph of 𝐴𝐶
plotted against 𝑄 in the interval 0 < 𝑄 < 24.
b) Find the expression for the variable cost and the state the value of the fixed cost.
15. A firm’s demand function is given by 𝑃 = 100 − 4√𝑄 − 3𝑄
a) Write down an expression for total revenue, TR, in terms of Q.
b) Find an expression for the marginal revenue, MR, and find the value of MR when 𝑄 = 9.
c) Use the result of part b) to estimate the change in TR when Q increases by 0.25 units from its
current level of 9 units and compare this with the exact change in TR.
16. A firm’s short-run production function is given by
𝑄 = 10𝐿 + 6𝐿2 − 0.1𝐿3 .
a) Write down expressions for the marginal product of labour and average product of
labour.
b) Determine the value of L which maximises the average product of labour.
Phan Xuân Thành September 7, 2023
17. The supply function of a good is given by 𝑃 = 𝑄2 + 2𝑄 + 8. Find the price elasticity of
supply when 𝑃 = 128 and hence estimate the percentage change in supply due to a 5%
increase in price. Is supply elastic, inelastic or unit elastic at this price?
18. A firm’s production function is given by
𝑄 = 10√𝐾𝐿 + 3𝐿
with 𝐾 = 90 and 𝐿 = 40.
a) Find the values of the marginal products, 𝑀𝑃𝐾 and 𝑀𝑃𝐿 .
b) Use the results of part a) to estimate the overall effect on Q when K increases by 3 units and
L decreases by 2 units.
c) State the value of the marginal rate of technical substitution and give an interpretation of this
value.
19. Find and classify the stationary points of the each of the following functions
a) 𝑓 (𝑥, 𝑦) = 𝑥 3 + 𝑥 2 − 𝑥𝑦 + 𝑦 2 + 10. b) 𝑓 (𝑥, 𝑦) = (2𝑥𝑦 + 𝑦 2 )𝑒 𝑥 .
20. A firm’s production function is given by
𝑄 = 2𝐿1/2 + 3𝐾1/2
where Q, L and K denote the number of units of output, labour and capital, respectively. Labour
costs are $2 per unit, capital costs are $1 per unit and output sells at $8 per unit. If the firm is
prepared to spend $99 on input costs, find the maximum profit and the values of K and L at
which it is achieved.
21. The demand function for a firm’s domestic and foreign markets are
𝑃1 = 50 − 4𝑄1 𝑃2 = 40 − 5𝑄2
and the total cost function is
𝑇𝐶 = 50 + 12𝑄, where 𝑄 = 𝑄1 + 𝑄2 .
Determine the prices needed to maximize profit with price discrimination.
22. A firm’s production function is given by 𝑄 = 𝐴𝐾𝐿 where A is a positive constant. Unit
costs of capital and labour are $2 and $1, respectively. The firm spends a total of $1000 on
these inputs.
a) Write down the cost constraint.
b) Write down expressions for the marginal products of capital and labour.
c) Use the fact that at the maximum output, the ratio of the input prices is equal to
the ratio of their marginal products to show that L = 2K.
d) Use your answers to parts a) and c) to find the values of K and L which maximise output.
23. A firm’s production function is given by
1 1
𝑄 = 10𝐾 2 𝐿4 .
Unit capital and labour costs are $4 and $5, respectively, and the firm spends a total of
$60 on these inputs. Find the values of K and L which maximise output.
24. A consumer’s utility function is 𝑈 = ln 𝑥1 + 2 ln 𝑥2 . Find the values of 𝑥1 and 𝑥2 which
maximise U subject to the budgetary constraint 2𝑥1 + 3𝑥2 = 18.
Phan Xuân Thành September 7, 2023
1
25. A firm’s production function is given by 𝑄 = √𝐾𝐿 + ln(𝐾𝐿3 ).
4
a) Write down expressions for the marginal product of labour and marginal product of
capital.
b) The firm currently uses 18 units of capital and 50 units of labour, and decides to reduce the
level of labour to 49 units. Estimate the corresponding increase in capital if output is to remain
unchanged.
26. A firm’s unit capital and labour costs are $4 and $1, respectively. If the production function
is given by 𝑄 = √𝐿𝐾 and total input costs are $120, use the method of Lagrange multipliers to
find the levels of K and L which maximise output. Verify that the ratio of marginal products to
price is the same for both inputs at the optimum.
27. A firm’s production function is given by 𝑄 = 16√𝐾 + 6√𝐿 where Q, K and L denote
output, capital and labour, respectively. The cost of providing each unit of capital and labour is
$80 and $27, respectively. Find the number of units of capital and labour if the firm wishes to
minimise total costs while satisfying a production quota of 102 units of output.
𝐾2 𝐿
28. A firm’s production function is given by 𝑄 = where K and L denote capital and
𝐾+4𝐿
labour, respectively.
a) Show that this production function is homogeneous of degree 2.
b) Calculate the marginal products, 𝑀𝑃𝐾 and 𝑀𝑃𝐿 and hence verify that Euler’s theorem
holds for this function.
The firm currently uses 40 units of capital and 15 units of labour.
c) Calculate the marginal rate of technical substitution and give a brief interpretation of
this number.
d) The firm decides to reduce capital by 0.5 units. Use the small increments formula to
estimate the increase in labour needed to increase the total output by 1 unit.
10
29. a) Find the consumption function given that 𝑀𝑃𝐶 = 20 + 3/4 and that consumption is 420
𝑌
when 𝑌 = 16.
b) If the marginal cost is 𝑀𝐶 = 15 + 3𝑄2 , find an expression for the variable cost per unit.
30. A firm’s marginal revenue and marginal cost functions are given by
𝑀𝑅 = 240 − 0.6𝑄2 and 𝑀𝐶 = 150 + 0.3𝑄2
If fixed costs are 50, determine the maximum profit.
31. Find the producer’s surplus at 𝑄 = 9 for the following supply functions
a) 𝑃 = 12 + 2𝑄 b) 𝑃 = 20√𝑄 + 15
32. Find the consumer’s surplus for the demand function 𝑃 = 50 − 2𝑄 − 0.01𝑄2 when
a) 𝑄 = 10 b) 𝑄 = 11
33. The demand function is given by 𝑃 = 74 − 𝑄𝐷2 and the supply function is 𝑃 = (𝑄𝑆 + 2)2 .
Calculate the consumer’s and producer’s surplus under pure competition.
34. Consider the following macroeconomic model
𝑌 = 𝐶 + 𝐼∗ + 𝐺 ∗ + 𝑋 ∗ − 𝑀∗ (equilibrium of national income)
Phan Xuân Thành September 7, 2023
39. A fruit farmer supplies raspberries and blueberries to a leading supermarket. She is
contracted to supply at least 100kg of raspberries and 50kg blueberries each week. The
supermarket requires that the total weight of fruit delivered must be at least 200kg. In a typical
week she can harvest a maximum of 200 kg of raspberries and 300 kg of blueberries. The cost
of supplying a kilo of raspberries is $4.40, and the corresponding figure for blueberries is
$3.10.
a) Formulate this as a linear programming problem if the farmer’s strategy is to minimise total
cost.
b) Sketch the feasible region.
c) Write down the coordinates of the corners of the feasible region.
d) How many kilos of raspberries and blueberries should the farmer supply each week to the
supermarket?
e) The selling prices of a kilo of raspberries and a kilo of blueberries are $8 and $10,
respectively. Work out the maximum weekly profit that the supermarket could make.
𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡
40. Consider the two-sector model: {𝐶𝑡 = 0.3𝑌𝑡−1 + 2800
𝐼𝑡 = 0.2𝑌𝑡−1 + 200
Given that 𝑌0 = 50, find the expression for 𝑌𝑡 , 𝐶𝑡 and 𝐼𝑡 . Is this system stable or unstable?
41. Consider the two-sector model:
𝑑𝑌
= 0.5(𝐶 + 𝐼 − 𝑌) 𝐶 = 0.6𝑌 + 600 𝐼 = 0.2𝑌 + 400
𝑑𝑡
Find an expression for 𝑌(𝑡) when 𝑌(0) = 8000. Is this system stable of unstable?
42. Consider the supply and demand equations:
Assuming that the equilibrium conditions prevail, find an expression for 𝑃𝑡 when 𝑃0 = 70. Is
this system stable of unstable?
43. Consider the market model:
𝑑𝑃
𝑄𝑆 = 4𝑃 − 3 𝑄𝐷 = −2𝑃 + 13 = 0.4(𝑄𝐷 − 𝑄𝑆 )
𝑑𝑡
𝑑𝑌
= 0.2(𝐶 + 𝐼 − 𝑌) 𝐶 = 0.8𝑌 + 420 𝐼 = 300
𝑑𝑡