Singapore Institute of Management: University of London Preliminary Exam 2015

SINGAPORE INSTITUTE OF MANAGEMENT
UNIVERSITY OF LONDON
PRELIMINARY EXAM 2015
PROGRAMME
University of London Degree and Diploma Programmes
MODULE CODE
EC3120
MODULE TITLE :
MATHEMATICAL ECONOMICS
DATE OF EXAM :
24/02/2015
DURATION
3 hours
TOTAL NUMBER :
5
OF PAGES
(INCLUDING
THIS PAGE)
------------------------------------------------------------------------------------------------------INSTRUCTIONS TO CANDIDATES :Section A (40 marks in total)
There are a total of FIVE (5) questions.
Answer all FIVE (5) questions from this section.
Each question carries 8 marks.
Section B (60 marks in total)
There are a total of FIVE (5) questions.
Answer only THREE (3) questions from this section.
Each question carries 20 marks.
DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU ARE TOLD TO
DO SO.
Candidates are strongly advised to divide their time accordingly.
EC3120 MATHEMATICAL ECONOMICS
Page 1
Section A. Please answer all FIVE questions from this section (8

marks each)
QUESTION 1. Answer all parts of this question:
(a) Dene the indirect utility function.
(b) State Roys identity.
(c) Conrm that Roys identity holds for the Cobb-Douglas utility function
1=3 2=3
u (x1 ; x2 ) = x1 x2 .
QUESTION 2. Prove that a function f : C Rn ! R, where C is convex, is quasi-convex
if and only if, 8x1 , x2 2 C and 8t 2 [0; 1], the following is true:
f [tx1 + (1
t) x2 ]
max ff (x1 ) ; f (x2 )g :
QUESTION 3. Answer all parts of this question:

(a) Dene of an homogeneous function of degree k.
(b) Consider a function g (x; y; z) : R3 ! R, where g is homogeneous of degree
4 in (x; y; z). Show that the following is true:
x
@g (x; y; z)
@g (x; y; z)
@g (x; y; z)
+y
+z
= 4g (x; y; z) :
@x
@y
@z
QUESTION 4. Consider a Ramsey-Cass-Koopmans model where the representative agent

is innitely lived. The labour force, population and technology are all
constant over time. The representative agent maximises the present value
of future utility:
Z
1
u(ct )e
U=
dt;
where is the discount factor, u(ct ) is the instantaneous utility function,

and ct is consumption per capita at time t. The agent maximises this
subject to the constraint
ct + k t + kt = f (kt );
where kt is the per capita capital stock at time t, is the depreciation
of the capital stock and f (kt ) is the output function per capita, which is
increasing and concave and satises the Inada conditions. Write down the
current-value Hamiltonian for the agents maximisation problem and the
rst order and transversality conditions. Provide an intuitive economic
interpretation of each of these expressions.
Page: 2
QUESTION 5. Let f (x; a) be a continuous function of x 2 Rn and the scalar a. For any
a, consider the problem of nding the maximum of f (x; a) with respect
to x. Let x (a) be the maximiser which we assume to be dierentiable
with respect to a.
(a) Prove that
d
da f
(x (a) ; a) =
@
@a f
(x (a) ; a);
(b) Provide an economic application of this result.

Section B. Please answer THREE of the following ve questions
(20 marks each)
QUESTION 6. Consider the following maximisation problem:
max f (x; y) =
x;y
s:t: 1
2y
x2
3x
y2
0
(a) Give the graphical illustration of the feasible set. What can you say about
the existence of the solution?
(b) Is f (x; y) concave?
(c) Write down the Lagrangian and the Kuhn-Tucker conditions.
(d) Find the maximum checking for necessary and sucient conditions.
(e) Is the solution a global or local maximum? Explain.
Page: 3
QUESTION 7. Consider the following linear utility function: u (x1 ; x2 ) = 3x1 + 2x2 . The
prices for the two consumption goods are p1 and p2 respectively.
(a) Dene and write down the expenditure function, for a given level of utility
u.
(b) Show that the expenditure function is increasing in the utility level.
(c) Show that the expenditure function is non-decreasing in prices.
(d) Show that the expenditure function is homogeneous of degree one in prices.
QUESTION 8. Consider the following macroeconomic control problem:
Z 1
(k + i) dt
0
s.t. k
k (0)
2
1
=
2
i2
(a) Identify the state and the control variables, and set up the Hamiltonian.
(b) Write the necessary conditions for a maximum.
(c) Obtain the dierential equations, in the state and co-state variables, which
are implied by these conditions.
(d) Solve the optimal policy.
Page: 4
QUESTION 9. John has to study N pages in T days, where 2 < T < 1. If on day t he
studies st pages, he has disutility s2t . John therefore solves the following
dynamic optimisation problem with discount factor 2 (0; 1).
min
fst gT
1
T
X
t 2
st
t=1
s.t.
T
X
st
= N
t=1
st
0, t = 0; 1; :::
(a) Formulate this problem as a dynamic programming problem, and write

down the Bellman equation.
(b) Solve the problem by backward induction to nd st , t = 1; :::; T in terms
of N , , t and T .
(c) If = 21 is st increasing, decreasing or constant? Provide an intuition for
the result.
QUESTION 10. Consumer As Arrow-Pratt coecient of absolute risk aversion is constant
rA =
a
u00A (w)
= ;
u0A (w)
w
where a > 1 is a constant and uA (w) is the utility function of wealth

for consumer A. Consumer Bs Arrow-Pratt coecient of absolute risk
aversion is instead constant
u00B (w)
rB =
= b > 0;
u0B (w)
where uB (w) is the utility function of wealth for consumer B.
(a) By letting vA (w) = u0A (w), the equation rA = wa can be rewritten as a
rst-order dierential equation for the function vA (w).
(i) Write such rst-order ODE.
(ii) Find the family of functions vA (w) that solve it.
(iii) Hence, nd the family of functions uA (w) that satisfy rA =
a
w.
(b) By letting vB (w) = u0B (w), the equation rB = b can be rewritten as a

rst-order dierential equation for the function vB (w).
(i) Write such rst-order ODE.
(ii) Find the family of functions vB (w) that solve it.
(iii) Hence, nd the family of functions uB (w) that satisfy rB = b.
Page: 5

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SINGAPORE INSTITUTE OF MANAGEMENT

University of London Degree and Diploma Programmes

EC3120 MATHEMATICAL ECONOMICS

Section A. Please answer all FIVE questions from this section (8

max ff (x1 ) ; f (x2 )g :

QUESTION 3. Answer all parts of this question:

QUESTION 4. Consider a Ramsey-Cass-Koopmans model where the representative agent

where is the discount factor, u(ct ) is the instantaneous utility function,

(b) Provide an economic application of this result.

EC3120 MATHEMATICAL ECONOMICS

EC3120 MATHEMATICAL ECONOMICS

(a) Formulate this problem as a dynamic programming problem, and write

where a > 1 is a constant and uA (w) is the utility function of wealth

(b) By letting vB (w) = u0B (w), the equation rB = b can be rewritten as a

EC3120 MATHEMATICAL ECONOMICS

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