DSC3707: Solutions for Assignment 03, Semester 1, 2024

Question 1 (10)
Find the general solution of the following recurrence equation, and determine the solution that satisfies the initial
conditions Y0 = 0 and Y1 = 5 :
Yt + Yt−l − 6Yt−2 = o.
(10)

Solution: To find the general solution of the given recurrence equation Yt + Yt−1 − 6Yt−2 = 0, assume a solution
of the form Yt = rt , where r is a constant. Substitute this into the recurrence equation:

rt + rt−1 − 6rt−2 = 0

Multiply through by r2−t to simplify:

r2 + r − 6 = 0

Now, factor the quadratic equation:

(r − 2)(r + 3) = 0

This gives two possible values for r: r = 2 and r = −3.

The general solution is a linear combination of these solutions:

Yt = A · 2t + B · (−3)t

To determine the values of A and B, use the initial conditions Y0 = 0 and Y1 = 5:

Y0 = A + B = 0
Y1 = 2A − 3B = 5

Solve this system of equations:

From the first equation, A = −B. Substitute this into the second equation:

2(−B) − 3B = 5

Solving for B:

−5B = 5

B = −1

Now that we have B, substitute it back into A = −B to find A:

A=1

So, the particular solution that satisfies the initial conditions Y0 = 0 and Y1 = 5 is:

Yt = 2t − (−3)t

Question 2 (15)
An efficient small firm has a cost function

C(q) = q 3 − 10q 2 + 100q + 196,

and a maximum production capacity of 10 units per month. Determine the following:
 a) The firm’s fixed cost. (1)

Solution: Fixed cost, C(0) = 196.

b) The firm’s function. (3)

Solution: Profit function

Π(q) = qC 1 (q) − C(q) NB p = C 1 (q),
= 2q 3 − 10q − 196 when firm is efficient.

c) The firm’s startup point. (3)

Solution: Start-up point: Π(qs ) = Π(0),

2qs3 − 10qs2 − 196 = −196,

2qs2 (qs − 5) = 0,
qs = 5,
ps = C ′ (qs ) = 3(5)2 − 20(5) + 100 = 75,
(qs , ps ) = (75, 5).

d) The firm’s breakeven point. (Hint: The only real solution of 2q 3 − 10q 2 − 196 = 0 is q = 7.) (3)

Solution: Breakeven point: Π(qs ) = 0,

3 2
2qB − 10qB − 196 = 0,
2
(qB − 7)(2qB + 4q + 28) = 0,
qB = 7,
PB = C ′ (qB ),
= 3(7)2 − 20(7) + 100,
= 147 − 140 + 10 = 107.

Therefore, the breakeven point is (qB , PB ) = (107, 7).

e) The firm’s supply set. (5)

Solution: The supply set: The startup price is Ps = C ′ (qs ) = C ′ (5) = 75. The supply set is A
S S
B C
where

A = {(0, p)|0 < p < 75},

B = {(q, p)|P = C ′ (q) = 3q 2 − 20q + 100, 75 ≤ p ≤ 200},
C = {(10, p)|p > 200}.

C ′ (10) = 3(10)2 − 10(10) + 100 = 300.

L=maximum capacity = 10 (given).

Question 3 (10)
A firm manufactures two products, X and Y, and sells these in related markets. Suppose that the firm is the only
producer of X and Y and that the inverse demand functions for X and Y are

pX = 13 − 2x − y, pY = 13 − x − 2y,
where x is the number of units of X sold, and y is the number of units of Y sold. Determine the production levels
that maximise profit, given that the cost function is C(x, y) = x + y. Justify your answer.

Solution: For the proft function π(x, y), we get

π(x, y) = xP X + yP Y − C(x, y),

= x(13 − 2x − y) + y(13 − x − 2y) − (x + y),
= 13x − 2x2 − xy + 13y − yx − 2y 2 − x − y,
= 12x − 2x2 − 2xy + 12y − 2y 2 ,
= −2x2 − 2y 2 − 2xy + 12x + 12y.

For the partial derivatives, we get

∂π
∂x = −4x − 2y + 12,
∂π
∂y = −4y − 2x + 12,
∂π ∂π
∂x2 = ∂y 2 = −4,
∂π ∂π
∂x∂y = ∂y∂x = −2.
We find the critical points of π(x, y) by solving

∂π ∂π
∂x = ∂y = 0.

Hence,
4x + 2y = 12...............(1)
2x + 4y = 12...............(2)
From eq. (1)
2x + y = 6,
y = 6 − 2x.............(3)

Subst. eq. (2)

2x + 4(6 − 2x) = 12,
2x + 24 − 8x = 12,
−6x = −12 =⇒ x = 2..............(4)

Subt. eq. (4) into eq.(3)

y = 6 − 2(2) = 2.

Thus, the critical point is (x; y) = (2; 2)

Now, we check the conditions for a local maximum of π(x; y) as follows:

∂π ∂π
∂x2 = ∂y 2 = −4 < 0,

and
∂π ∂π ∂π 2
∂x2 ∂y 2 − ( ∂x∂y ) = −4(−4) − (−2)2 = 12 > 0.
Justification:
Therefore, the critical point gives a maximum for π(x; y) as follows:

π(2; 2) = −2(2)2 − 2(2)2 − 2(2)(2) + 12(2) + 12(2),

= R24.

Question 4 (10)

1 1
An efficient small firm has a production function q(k; l) = k 4 l 4 , where k denotes the number of capital units used,
and l the number of labour units used. The unit costs for capital and labour are 32 and 2 respectively. The upper
limit on the firm’s production level is 10.
Use the method of Lagrangean multipliers to determine the firm’s cost function C(q).
Hint: Since the firm is efficient, we want to minimize the cost of labour and capital for a fixed output q.

Solution:
The cost function is 32k + 2L, so we want to minimize 32k + 2L subject to k 1/4 L1/4 − q = 0 for a fixed q. The
Langrangean is L = 32k + 2L − λ(k 1/4 L1/4 − q) for partial derivatives, we get
∂L
∂k = 32 − 1/4kλ−3/4 L1/4 = 0,
∂L
∂L = 2 − λ/4k 1/4 L−3/4 = 0,
∂L
∂λ = q − k 1/4 L1/4 = 0,

Then,
∂L
∂k = 32 − 1/4kλ−3/4 L1/4 = 0,

λ −3/4 1/4
4k L = 32.............(1)

∂L
∂L = 2 − λ/4k 1/4 L−3/4 = 0,

λ/4k 1/4 L−3/4 = 2...............(2)

Eq(1) L
Eq(2) gives k = 16 or L = 16k.

q2
Also, q 4 = kL = 16k 2 which gives k = 4 and L = 4q 2 .

2
Hence, C(q) = 32( q4 ) + 2(4q 2 ) = 8q 2 + 8q 2 = 16q 2 . TOTAL MARKS : 45
Use the method of Lagrangean multipliers to determine the firm’s cost function C(q).
Hint: Since the firm is efficient, we want to minimize the cost of labour and capital for a fixed output q.

Solution:
The cost function is 32k + 2L, so we want to minimize 32k + 2L subject to k 1/4 L1/4 − q = 0 for a fixed q. The
Langrangean is L = 32k + 2L − λ(k 1/4 L1/4 − q) for partial derivatives, we get
∂L
∂k = 32 − 1/4kλ−3/4 L1/4 = 0,
∂L
∂L = 2 − λ/4k 1/4 L−3/4 = 0,
∂L
∂λ = q − k 1/4 L1/4 = 0,

Then,
∂L
∂k = 32 − 1/4kλ−3/4 L1/4 = 0,

λ −3/4 1/4
4k L = 32.............(1)

∂L
∂L = 2 − λ/4k 1/4 L−3/4 = 0,

λ/4k 1/4 L−3/4 = 2...............(2)

Eq(1) L
Eq(2) gives k = 16 or L = 16k.

q2
Also, q 4 = kL = 16k 2 which gives k = 4 and L = 4q 2 .

2
Hence, C(q) = 32( q4 ) + 2(4q 2 ) = 8q 2 + 8q 2 = 16q 2 .

Question 5 (10)
Given that consumer demand q(t) in terms of price p(t) is given by
d2 p
q(t) = dt2 − 3 dp
dt − 5p + 48 or

q = p′′ − 3p′ − 5p + 48,

and that the supply function is q S (p) = 5p − 12, write down the condition for equilibrium. If p(0) = 5 and p′ (0) = 19,
determine the equilibrium price p(t).

Solution: Given P (0) = 5, P ′ (0) = 19, and

q = p′′ − 3p′ − 5p + 48,

q 5 (p) = 5p − 12,

Then
q = q 5 (p),
5p − 12 = p′′ − 3p′ − 5p + 48,
p′′ − 3p′ − 10p = −60.
Assume P ⋆ = p′′ = p′ = p and solve for P ⋆ .
So that,

particular solution:P ⋆ − 3p⋆ − 10p⋆ = 60,

−60
p⋆ = = 5.
−12
Auxiliary system:

z 2 − 3z − 10 = 0,
(z − 5)(z + 2) = 0,

z = 5 or z = −2.
Homogeneous solution:p(t) = Ae−2t + Be5t .
General solution:

p(t) = Ae−2t + Be5t + 5,

p(0) = A + B + 5 = 5 : Given
A = −B.

p′ (t) = −2Ae−2t + 5Be5t ,

p′ (0) = −2A + 5B = 19 : Given
−19 19
A= ,B= .
7 7

Therefore
−19 −2t 19 5t
p(t) = e + e + 5.
7 7