Phan Xuân Thành September 7, 2023

Review exercises 2023

1. The supply and demand functions of a good are given by
𝑃 = 𝑄𝑆 + 8, 𝑃 = −3𝑄𝐷 + 80
where 𝑃, 𝑄𝑆 and 𝑄𝐷 denote price, quantity supplied and quantity demanded, respectively.
a) Find the equilibrium price and quantity if the government imposes a fixed tax of $36 on each
good.
b) Find the corresponding value of the government’s tax revenue.
2. A firm’s fixed costs are 8, variable costs per unit are 2 and the demand function is 𝑃 = 8 −
𝑄 where 𝑃 and 𝑄 denote price and quantity, respectively. Find an expression for profit, 𝜋, in
terms of 𝑄 and hence sketch a graph of π against 𝑄.
a) For what values of 𝑄 does the firm break-even?
b) Calculate the maximum profit.
c) Describe the effect on the graph of the profit function due to a decrease in fixed
costs.
3. A prize fund is set up with a single investment of $5000 to provide an annual prize of $500.
The fund is invested to earn interest at a rate of 7% compounded annually. If the first prize is
awarded one year after the initial investment, find the number of years for which the prize can
be awarded before the fund falls below $500.
4. Determine the present value of an annuity, if it pays out $2500 at the end of each year in
perpetuity, assuming that the interest rate is 8% compounded annually.
5. A project requires an initial investment of $50000. It produces a return of $40000 at the end
of year 1 and $30000 at the end of year 2. Find the exact value of the internal rate of return.
6. A project requires an initial outlay of $80000 and produces a return of $20000 at the end of
year 1, $30000 at the end of year 2, and $R at the end of year 3. Determine the value of R if the
internal rate of return is 10%.
7. An individual decides to invest in one of two projects, A and B, which both require the same
initial outlay of $10000. Project A yields $11500 in three years’ time whereas Project B yields,
$12 100 in four years’ time. Calculate the internal rate of return for each project. What advice
can you give if the prevailing market rate of interest is 4.8%?
8. A project requiring an initial outlay of $200000 is guaranteed to produce a return of $145000
in one year’s time and $80000 in two years’ time. Calculate the net present value of the project
if the discount rate is 4.5% compounded semiannually.
9. An annuity pays out $20000 per year in perpetuity. If the interest rate is 5% compounded
annually, find
a) the present value of the whole annuity;
b) the present value of the annuity for payments received, starting from the end of the
30th year;
c) the present value of the annuity of the first 30 years.
10. An engineering company needs to decide whether or not to build a new factory. The costs
of building the factory are $150 million initially, together with a further $100 million at the end
of the next two years. Annual operating costs are $5 million commencing at the end of the third
Phan Xuân Thành September 7, 2023

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.
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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

𝐶 = 𝑎(𝑌 − 𝑇) + 𝑏 (consumption; 0 < 𝑎 < 1, 𝑏 > 0)

𝑇 = 𝑡𝑌 (taxation; 0 < 𝑡 < 1)
where 𝐼 ∗ , 𝐺 ∗ , 𝑋 ∗ , 𝑀 ∗ denote investment, government expenditure, exports, imports,
respectively.
𝑌
a) Express this system in the form 𝐴𝑥 = 𝑏, where 𝑥 = [𝐶 ] and 𝐴 and 𝑏 are 3 × 3 and
𝑇
3 × 1 matrices to be stated.
b) Use Cramer’s rule to solve this system for 𝑌.
c) Find the autonomous investment multiplier for 𝑌 and deduce that 𝑌 increases as 𝐼 ∗
increases.
35. Consider the macroeconomic model defined by
national income 𝑌 = 𝐶 + 𝐼 + 𝐺∗ (𝐺 ∗ > 0)
consumption 𝐶 = 𝑎𝑌 + 𝑏 (0 < 𝑎 < 1, 𝑏 > 0)
investment 𝐼 = 𝑐𝑟 + 𝑑 (𝑐 < 0, 𝑑 > 0)
money supply 𝑀𝑆∗ = 𝑘1 𝑌 + 𝑘2 𝑟 (𝑘1 > 0, 𝑘2 < 0, 𝑀𝑆∗ > 0)
Show that this system can be written as 𝐴𝑥 = 𝑏, where
1 −1 −1 0 𝑌 𝐺∗
−𝑎 1 0 0 𝐶 𝑏
𝐴=[ 0 0 1 −𝑐 ] 𝑥=[ ] 𝑏 = [ ].
𝐼 𝑑
𝑘1 0 0 𝑘2 𝑟 𝑀𝑆∗
Use Cramer’s rule to find 𝑟. Write down the government expenditure multiplier for 𝑟
and deduce that the interest rate, 𝑟, increases as government expenditure, 𝐺 ∗ , increases.
36. An Italian restaurant offers a choice of pasta or pizza meals. It costs $4 to make a pasta
dish, which it sells for $14. The corresponding figures for pizzas are $2 and $10, respectively.
The maximum number of meals that can be cooked in a week is 1100 and the restaurant has a
weekly cost budget of $2500. How many pasta and pizza dishes should be cooked each week to
maximize total profit? What is the maximum profit?
37. A manufacturer produces two models of racing bike, A and B, each of which must be
processed through two machine shops. Machine shop 1 is available for 92 hours per month and
machine shop 2 for 134 hours per month. The manufacture of each bike of type A takes 6 hours
in shop 1 and 4 hours in shop 2. The corresponding times for B are 4 and 10 hours,
respectively. Due to a contract, the manufacturer must produce at least 5 bikes of type B per
month. If the profit is $90 and $75 per bike of type A and B respectively, how should the
manufacturer arrange production to maximize total profit?
38. An insurance company employs full- and part-time staff, who work 40 and 20 hours per
week, respectively. Full-time staff are paid $800 per week and part-time staff $320. In addition,
it is company policy that the number of part-time staff should not exceed one-third of the
number of full-time staff. If the number of worker-hours per week required to deal with the
company’s work is 900, how many workers of each type should be employed in order to
complete the workload at minimum cost?
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:

𝑄𝑆𝑡 = 1.2𝑃𝑡−1 − 12 𝑄𝐷𝑡 = −1.6𝑃𝑡 + 60.

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

Find expressions for 𝑄𝐷 (𝑡) when 𝑃(0) = 2.

44. Consider the two-sector macroeconomic model:

𝑑𝑌
= 0.2(𝐶 + 𝐼 − 𝑌) 𝐶 = 0.8𝑌 + 420 𝐼 = 300
𝑑𝑡

a) Find an expression for 𝑌(𝑡) when 𝑌(0) = 8000.

b) Hence find an expression for the savings function 𝑆(𝑡).
c) Find the time taken for income to fall to 4150, and find the rate of change of income at this
time. Give your answers to the nearest whole number.