DPPE 0320

DEAM 0320
DMHE 0320
SECOND PUBLIC EXAMINATION
Honour School of Philosophy, Politics and Economics
Honour School of Economics and Management
Honour School of History and Economics
MATHEMATICAL METHODS
TRINITY TERM 2013
Thursday 6th June 2013, 14:30 - 17:30
Please start the answer to each question on a separate page.
There are 8 questions in this paper.
Answer ve questions.
Candidates may use their own calculators.
Do not turn over until told that you may do so.
1
1. (a) Supply in a competitive market is given by S(p, ) and demand by D(p), where
p denotes price and a cost parameter. D and S are continuously dierentiable
with derivatives D
p
< 0, S
p
> 0 and S

< 0. The equilibrium price as a function

of is denoted by p

(). Show that

dp

()
d
=
S

(p

(), )
D
p
(p

()) S
p
(p

(), )
(b) Suppose now that S(p, ) = p and D(p) = /p, where > 0 is a constant.
Find the equilibrium price p

; hence nd dp

/d, and verify the formula in the

previous part.
(c) Consider two competitive industries whose products are substitutes. Demand
in industry 1 is D
1
(p
1
, p
2
) and in industry 2 is D
2
(p
1
, p
2
), where p
1
and p
2
are
the prices of the respective products. Supply functions in the two industries are
S
1
(p
1
, ) and S
2
(p
2
, ), where is the cost parameter common to both industries.
Demand and supply functions are continuously dierentiable. The equilibrium
prices in the two industries are p

1
() and p

2
(). Outline how to nd expressions
for dp

1
/d and dp

2
/d.
2. Consider the function U(x, y) = xy/(x + y) on R
2
++
, i.e. where x > 0 and y > 0.
(a) By examining its Hessian, or otherwise, show that U is concave.
(b) A consumer wishes to maximise U subject to the budget constraint px+qy m.
Write down the Kuhn-Tucker rst-order conditions for this problem, assuming
that the optimal values of x and y are strictly positive. Comment on whether
these conditions are (i) necessary, (ii) sucient.
(c) Find the consumers optimal choices of x and y as a function of p, q and m.
Hence nd the maximum utility, V (p, q, m), that the consumer can obtain given
her income and prices.
(d) Show that the optimal value of x satises
x =
V/p
V/m
.
Explain whether or not this result holds for general utility functions.
(e) Show also that V is homogeneous of degree zero in (p, q, m). Give this result an
economic interpretation.
DPPE 0320
DEAM 0320
DMHE 0320
2
3. (a) Explain what it means for two events A and B to be independent. Explain also
what it means for them to be mutually exclusive. Show that A and B cannot be
mutually exclusive if they are independent and both have non-zero probability.
(b) An unemployed worker is searching for a job. Each day there is probability p that
he nds a job independently of other days. Let X be the numbers of days it takes
him to nd a job.
(i) Write down the probability that X = r, where r = 1, 2, . . ..
(ii) Find the mean of X.
(iii) Find the probability generating function of X and use it to nd the variance
of X.
(c) Suppose that the worker in the previous part will cease searching and drop out
of the labour force if he has not found a job after T days of searching. Let Y be
the number of days he spends searching.
(i) What is the probability that that he drops out of the labour force?
(ii) Explain why
Pr(Y = r) =

p(1 p)
r1
if r = 1, . . . , T 1
(1 p)
T1
if r = T
(iii) Find the mean of Y .
4. (a) A consumers income, X, is randomly distributed between 0 and 1 according to
the density function
f(x) = cx
k
, k > 0 .
(i) Explain what properties f must have for it to be a density function.
(ii) Find what value c must take in terms of k.
(iii) Find Pr(X x | X s), where 0 < s < 1 and x s. Hence or otherwise
nd E(X | X s).
(b) Suppose instead that the consumers income, X, and consumption, Y , have the
joint density function
g(x, y) =

3x if 0 < y < x < 1

0 otherwise
(i) Find the marginal distributions of X and Y . Explain whether or not X and
Y are independent.
(ii) Find the conditional density of Y given X = x. Hence nd E(Y | X = x) and
E(Y ).
DPPE 0320
DEAM 0320
DMHE 0320
3 turn over
5. (a) (i) Explain what it means for a set of vectors to span R
n
.
(ii) Which of the following three sets of vectors span R
3
?
A :

1
0
2

0
1
1

; B :

1
0
3

3
2
3

1
1
0

; C :

1
0
1

0
1
1

3
2
0

5
1
1

.
(b) In a certain economy there are two assets and two possible states. Asset A sells
for 10 per unit, and one unit pays out 4 in state 1 and 2 in state 2. Asset B
sells for 16 per unit, and one unit pays out 1 in state 1 and 5 in state 2.
(i) A consumer wishes to guarantee himself a payout of 10 in each state. Find
the required portfolio and its cost.
(ii) Find the state prices in this economy.
(c) (i) Outline briey the principal assumptions in input-output models.
(ii) Let A =

a
11
a
12
a
21
a
22

be a 2 2 matrix with all entries strictly positive. Show

that if a
11
+a
21
< 1 and a
12
+a
22
< 1 then (I A)
1
exists and has all entries
strictly positive. Why might this result be useful in input-output analysis?
6. (a) Show that
r + x
x(1 x)
can be written as
A
x
+
B
1 x
for some values of A and B.
Hence or otherwise, calculate the indenite integral

r + x
x(1 x)
dx .
In what follows, consider the rst-order ordinary dierential equation (ODE)
x(1 x)v

(x) + (r + x)v(x) = (r + 1)x

for x [x

, 1] where x

is strictly between 0 and 1, and r > 0.

(b) What is the homogeneous version of the above ODE? Show that it can be written
as a separable ODE, and solve it. (You should nd the result of part (a) useful.)
(c) Show that + x is a particular solution of the above (non-homogeneous) ODE
for some values of and that you should determine.
Hence write down the general solution of the ODE.
(d) Find the specic solution of the ODE subject to the boundary condition v(x

) = s,
where 0 < s < 1.
(e) Let x

=
rs
r + 1 s
. Verify that 0 < x

< 1.
Given that v(x

) = s, use the ODE to nd the value of v

(x

).
DPPE 0320
DEAM 0320
DMHE 0320
4
7. (a) Consider the second-order dierence equation
6x
t+2
x
t+1
x
t
= 12 .
(i) Find the steady state, x

, then nd the general solution, and show that x

t
converges to x

irrespective of the initial conditions.

(ii) Find the specic solution that satises the initial conditions x
0
= 5, x
1
= 1.
(b) Next consider the system of rst-order dierence equations
x
t+1
= x
t
2y
t
+ 2 ,
6y
t+1
= 2x
t
5y
t
+ 5 .
Show that the steady state, (x

, y

), is (3, 1).
Find the solution, (x
t
, y
t
), that starts from (5, 4) at t = 0.
(c) What is the connection between the second-order dierence equation in part (a)
and the system of rst-order dierence equations in part (b)?
(Hint: Rewrite the rst equation of the system as y
t
= . . . ; use this expression for
y
t
and an equivalent one for y
t+1
to eliminate the terms involving y in the second
equation of the system.)
8. (a) Let {x
k
}

k=1
and {y
k
}

k=1
be sequences in R.
Explain what is meant by the statements:
(i) the sequence {x
k
}

k=1
converges; (ii) the series

k=1
y
k
converges.
(b) Consider the alternating harmonic series:

k=1
(1)
k+1
/k = 1
1
2
+
1
3

1
4
+ . . .
Let S
n
denote the partial sum

n
k=1
(1)
k+1
/k.
(i) Show that the sequence of odd partial sums, {S
2n1
}

n=1
, is strictly decreasing,
and that the sequence of even partial sums, {S
2n
}

n=1
, is strictly increasing.
(ii) Show that these sequences are bounded below by
1
2
(= S
2
), and bounded
above by 1 (= S
1
).
(iii) Explain briey why this implies that the sequence of odd partial sums con-
verges to a limit L, and that the sequence of even partial sums converges to
a limit U.
Show that L = U, and hence conclude that the alternating harmonic series
converges.
(c) Derive the Taylor expansion of ln(1 + x) about x = 0.
By an appropriate choice of x, nd the sum of the alternating harmonic series
above.
(d) Would the approach of part (b) also work to establish the convergence of the
series:

k=1
(1)
k+1
(
1
2
)
k
/k =
1
2

1
8
+
1
24

1
64
+ . . . ? If so, what is the sum of this
series?
DPPE 0320
DEAM 0320
DMHE 0320
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