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Mathematics for Economists 3610-E/3610-E-V

Black-board exercises

Chapters 4-5
1. Suppose that the relationship between gross income Y and total income
tax T , for taxpayers with incomes between 80K and 120K, is given by
T = a(bY + c)p + kY,
where a, b, c, p, k are positive constants. Find an expression for the marginal
tax rate, dT /dY . Evaluate it when Y = 100000 and the constants are
a = 0.0000338, b = 0.81, c = 6467, p = 1.661, k = 0.053.
2. Let C(Q) be the total cost of producing Q units of a commodity. The
quantity C(Q)/Q is called the average cost of producing Q units. Find an
d
expression for the rate of change of the average cost, i.e., dQ
(C(Q)/Q).
3. Consider the following macroeconomic model for determining national income in closed economy: Y = C + I and C = f (Y ), where Y is the
national income (goes either to consumption C or to investment I) and
C is the consumption function. The two equations define Y as a differentiable function of I. Assume that f 0 (Y ) (0, 1). Find expressions for
dY /dI and d2 Y /dI 2 (i.e., Y 0 and Y 00 ).
4. Let D(p) denote the demand function for a product. By selling D(p) units
at price p, the producer earns revenue R(p) given by R(p) = pD(p). Find
an expression for the elasticity of R(p) w.r.t. p, ER , as a function of the
elasticity of D(p) w.r.t. p, ED .
5. Poisson random variable X with parameter > 0 is characterized by the
so-called probability mass function
f (x; ) = P rob(X = x) =

x e
x!

for x = 0, 1, 2, ..., where x! = 1 2 . . . x (0! = 1). For example, X =


the number of phone calls received at an info desk per hour, and = the
Most

of the problems come from the textbook.

average number of phone calls received per hour.


In econometrics, the likelihood function, based on a sample of n independent observations from this distribution (or any other distribution with a
probability mass (or density) function f ), x1 , x2 , . . . , xn , is given as
l() = f (x1 ; ) f (x2 ; ) . . . f (xn ; ) =

n
Y

f (xi ; )

i=1

that is, it is the product of the n individual probability mass functions


(the so-called joint probability), where the parameter is considered as
an argument of the function l. The log-likelihood function is simply
L() = ln(l()).
(a) Show that L() can be written as
n + ln()

n
X

xi

i=1

n
X

ln(xi !)

i=1

(b) Based on the previous part, find the derivative of L w.r.t. .


(c) Assume you observe the following five values from a variable that
follows a Poisson distribution with parameter (which is unknown)
x1 = 8, x2 = 9, x3 = 11, x4 = 13, x5 = 10. For these five observations, sketch a graph (by hand or in Mathematica/calculator)
of the log-likelihood function for [0.01, 20]. For what is the
log-likelihood function maximized (roughly)?
(this value is obtained
Note: Log-likelihood is maximized for = x
by solving the equation L0 () = 0). The idea behind the maximumlikelihood estimation is to choose in such a way that it maximizes
the likelihood of observing the data we actually observed.
6. Differentiate the following functions of t (a, b, c, d are constants, n is a
natural number):
(a)
f (t) =
(b)

at + b
ct + d

g(t) = tn (a t + b)

(c)
h(t) =

at2

1
+ bt + c

7. Suppose that y is a differentiable function of x given by


x + y 3 = y 5 x2 + 2y
for all x in a given interval I. Find an expression for y 0 =
2

dy
dx .

8. It has been shown that the demand Q for butter in Stockholm during
1925-1937 was related to price P by the equation
Q P 1/2 = 38
Find Q0 = dQ/dP by implicit differentiation.
9. Bernoulli random variable X with parameter p (0, 1) is defined as

1 with prob. p
X=
0 with prob. 1 p
hence its probability mass function can be written as
x

p
,
f (x; p) = px (1 p)1x = (1 p)
1p
for x = 0, 1. Imagine you observe a sample of size n from this distribution.
(a) Show that the log-likelihood function, L(p), (see Exercise 5 of Section
1) can be written as
L(p) = n ln(1 p) +

n
X

xi (ln(p) ln(1 p))

i=1

(b) Based on the previous part, find the derivative of L w.r.t. p.


(c) Solve equation L0 (p) = 0 for p.
(d) Assuming you observe the following n = 4 values from a variable that
follows a Bernoulli distribution with parameter p (unknown) x1 = 0,
x2 = 1, x3 = 0, x4 = 0, sketch a graph of L(p) for p [0.01, 0.99].
For which p is the log-likelihood function maximized (roughly)?
Answers:
1.
T 0 (Y ) = abp(bY + c)p1 + k
and for a = 0.0000338, b = 0.81, c = 6467, p = 1.661, k = 0.053,
T 0 (100000) = 0.137. Extra: In Figure 1, functions T (Y ) and T 0 (Y ) are
shown.
2.
d
dQ

C(Q)
Q


=

C 0 (Q)Q C(Q) 1
Q2

marg. cost

z }| {

1
C 0 (Q) C(Q)

Q
Q
| {z }
ave. cost

Note: the rate of change of the average cost is positive if the marginal cost
exceeds the average cost.
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Figure 1: Left: T (Y ) from Exercise 1 of Section 1 for a = 0.0000338, b = 0.81,


c = 6467, p = 1.661, k = 0.053. Right: T 0 (Y ) with the same parameters.
3. To find Y 0 , we first differentiate both sides w.r.t. I:
Y

= f (Y ) + I

= f 0 (Y )Y 0 + 1

Y f (Y )Y

Y0

1
= (1 f 0 (Y ))1
1 f 0 (Y )

Now Y 00 :
Y 00

1(1 f 0 (Y ))2 (f 00 (Y )Y 0 )

Y 00

(1 f 0 (Y ))2 f 00 (Y )Y 0
=(1f 0 (Y ))1

Y 00
Y 00

z}|{
Y0
Y 00
= (1 f 0 (Y ))3 f 00 (Y ) =
(1 f 0 (Y ))3
=

Answers:
Y0 =

(1 f 0 (Y ))2 f 00 (Y )

1
1 f 0 (Y )

and Y 00 =

f 00 (Y )
(1 f 0 (Y ))3

Note that Y 0 is always greater than 1 (1 unit increase in the investment


will lead to more than 1 unit increase in the national product).
4. According to the definition
ER

p d
R(p)
R(p) dp
p
d
R(p)
pD(p) dp

=
=

Lets find

d
dp R(p)

d
R(p) = D(p) + pD0 (p)
dp
4

Hence
ER

p
 (D(p) + pD0 (p))
pD(p)


z }| {
p
1 + D0 (p)
D(p)

ED

Answers:
ER = 1 + ED ,

ED = D0 (p)

where

p
D(p)

5. (a) We have
L()

n
Y

ln(l()) = ln

!
f (xi ; )

= ln

i=1

=
=
=

ln e

n
Y
xi

n
Y
xi e

xi !

i=1

!
n

n
Y
xi

= ln e
+ ln
xi !
x!
i=1 i
 xi 
n
X

n +
ln
= n +
[xi ln() ln(xi !)]
xi !
i=1
i=1
i=1
n
X

n + ln()

n
X

xi

i=1

n
X

ln(xi !)

i=1

(b) From the previous part we see that


n

L0 () = n +

1X
1X
xi 0 = n +
xi
i=1
i=1

(c) See Figure 2. For = 10.2 (the sample mean).


6. (a)
0

f (t)


=

Answer: f 0 (t) =

at + b
ct + d

0
=

a(ct + d) (at + b)c


ad bc
=
2
(ct + d)
(ct + d)2

adbc
(ct+d)2

(b)
g 0 (t)

0

tn (a t + b) = (atn+1/2 + btn )0

a(n + 1/2)tn1/2 + bntn1

Answer: g 0 (t) = a(n + 1/2)tn1/2 + bntn1

In[2]:=

-lambda * 5 + Log @lambdaD * Hx1 + x2 + x3 + x4 + x5 L -

L@lambda_ , x1_, x2_, x3_, x4_, x5_D :=

HLog @Factorial @x1DD + Log @Factorial @x2DD + Log @Factorial @x3 DD +


Log @Factorial @x4DD + Log @Factorial @x5 DDL

In[3]:=

Plot@L@lambda, 8, 9, 11, 13, 10D, 8lambda, 0.01, 20<D


-10

-20

-30
Out[3]=

-40

-50

-60
5

10

15

20

Figure 2: Log-likelihood function from Exercise 5 of Section 1.


(c)
h0 (t)


=

1
at2 + bt + c

0

= ((at2 + bt + c)1 )0

= 1(at2 + bt + c)2 (2at + b) =

2at + b
+ bt + c)2

(at2

Answer: h0 (t) = (at22at+b


+bt+c)2
7. Step 1) (differentiate w.r.t. x)
1 + 3y 2 y 0 = 5y 4 y 0 2x + 2y 0
Step 2) (solve for y 0 )
1 + 2x = (5y 4 + 2 3y 2 )y 0
And hence
y0 =
Answer: y 0 =

1 + 2x
5y 4 + 2 3y 2

1+2x
5y 4 +23y 2 .

8. After differentiating both sides w.r.t. P , we obtain


1
Q0 P 1/2 + Q P 1/2
2
Q0

1
= QP 1 multiply the RHS by P 1/2 P 1/2 = 1
2
6

=38

Q0
Q0

z }| {
1
= QP 1/2 P 1/2 P 1
2
1
19
= 38P 3/2 = 3/2
2
P

Answer: Q0 = 19/P 3/2


9. Bernoulli distribution
(a) We have

L(p) = ln(l(p))

ln

ln

ln

ln



x1
 x2
xn 
p
p
p
(1 p)
(1 p)
. . . (1 p)
1p
1p
1p
!
 xi

n
Y
p
(1 p)
1

p
i=1
xi !
n 
Y
p
n
(1 p)
1p
i=1
Pn xi !

i=1
p
property : ax ay = ax+y
(1 p)n
1p


= n ln(1 p) +

n
X

xi (ln(p) ln(1 p))

i=1

(b) Based on the previous part


n

L0 (p)

X
n
+
xi
1 p i=1

X
1
n
+
xi
1 p p(1 p) i=1

1
1
+
p 1p

(c) We have

n
1
+
1 p p(1 p)

L0 (p) = 0
n
X
xi = 0

i=1
n

1X
n +
xi
p i=1

1X
xi
p i=1

Pn

i=1

xi

=x

(d) See Figure 3. For p = 0.25, which is the sample mean.


7

Figure 3: Log-likelihood function from Exercise 9 of Section 1.

Chapters 6-7
1. Consider the graphs (i)-(vi) of function f (x) from Figure 4. Based on the
figure, fill out the missing parts of Table 1.

limxa f (x)
limxa+ f (x)
Value of f at a
Is limxa f (x) = f (a), i.e.,
is f left-cont. at a?
Is limxa+ f (x) = f (a), i.e.,
is f right-cont. at a?
Is f cont. at a?
limx f (x)

(i)

(ii)

Graph
(iii)
(iv)

Skip

Skip

Skip

(v)

(vi)

Skip

Table 1: Questions/Answers to Exercise 1 of Section 2 based on Figure 4. NA


= Not Applicable, Y = Yes, N = No.

2. Calculate the following limits:


(a) limx2

3x2 +3x18
x2

Figure 4: Graphs of f (x) for Exercise 1 of Section 2.

(b) limh0
(c) limx
(d) limx2

h+11
h

3x2 +x1
x2 +1

x4 4x3 +5x2 4x+4


x3 2x2 4x+8

(e) limx

x5 x4 x

3. Find the mistake in


x2 + 3x 4
2x + 3
2
1
= lim
= lim =
x1 2x2 2x
x1 4x 2
x1 4
2
lim

4. Assume that a, b are constants. Find

ax + b cx + b
lim
x0
x
5. Show that
lim

p
n

 a
1
xn + a1 xn1 + . . . + an1 x + an x =
n

6. Find limx f (x), where f (x) =

xp
ax ,

a > 1, p fixed.

7. Suppose f (x) is a continuous function from [a, b] to [a, b]. Based on The
Intermediate-Value Theorem, justify that the equation f (x) x = 0 has
at least one solution in [a, b]. (Hint: define g(x) = f (x) x and apply the
theorem to g.)
8. If a function f is continuous in the interval I and differentiable in the
interior of I, then we have the following implication:
if f 0 (x) < 0, then f is strictly decreasing on I
Provide the proof of this statement. (Hint: check the proof of a similar
statement for the strictly increasing f that you can find in the theory
slides from Ch.7.)

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