EC 2104 Quantitative Methods for Economic Analysis

Problem Set 1 Suggested Solutions

Students will solve the problems from the following questions during tutorial sessions for the week
of January 28, 2019.

1. Assume you have the demand function q d = D(p) = −p/2 + 8 and the supply function
q s = S(p) = p2 + 3.

(a) Find the domains and ranges of both the demand and supply functions. Remember that
p, q d and q s must all be non-negative!
Demand function: p must be non-negative, so p ≥ 0. Also, q d must be non-negative,
so − p2 + 8 ≥ 0. With p ≥ 0, this tells us that p ≤ 16. Therefore the domain of the
demand function is p ∈ [0, 16]. Similarly, q d ≥ 0 because it is non-negative, and reaches
its highest possible value at q d = 8 when p = 0. Therefore the range of the demand
function is q d ∈ [0, 8].
Supply function: p must be non-negative, so p ≥ 0. However, the fact that q s is
non-negative does not add any restrictions (p2 + 3 ≥ 0 is automatically satisfied since
p is already at least 0). The domain of the supply function is p ∈ [0, ∞). The smallest
value of q s is achieved when p = 0 ⇒ q s = 3. The largest value of q s infinite, since p can
be infinite. The range of the supply function is q s is q s ∈ [3, ∞).

(b) Find the inverse demand and supply functions D−1 (q d ) and S −1 (q s ).

Inverse demand function:

q d = −p/2 + 8
q d − 8 = −p/2
p = 16 − 2q d
D−1 (q d ) = 16 − 2q d

Inverse supply function:

q s = p2 + 3
p2 = q s − 3
p
p = ± q s − 3 (price can’t be negative)
S −1 (q s ) =
p
qs − 3

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(c) Graph the inverse demand and supply functions.
p
16

15

14

13
12

11

10 qd = D(p) = -p/2 + 8

9
8

7
6

5
4
qs = S(p) = p2 + 3
3
2

0 q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Note that this is the conventional way of expressing a demand and supply function
(though technically, we are expressing an inverse demand and supply function!)

(d) What are the price and quantity in market equilibrium? Where does this occur on the
graph?
To find the market equilibrium, we must set q d = q s . This gives us the following:

−p/2 + 8 = p2 + 3
−p + 16 = 2p2 + 6
2p2 + p − 10 = 0
(2p + 5)(p − 2) = 0

This implies that p = 2 or p = −5/2. Since p ≥ 0, p = 2. Plugging this back into D(p)
or S(p), we find that q = 7. On the graph, this occurs where the two graphs intersect.

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2. Find f 0 (x) for the following f (x):

(a) |x|

We can take this derivative in 2 pieces, since the ( function is not differentiable at x = 0.
−x, if x < 0
To do this, let’s write the function as f (x) = .
x, if x ≥ 0
(
0 −1, if x < 0
So, if x < 0, the derivative is -1, and if x > 0, the derivative is 1. f (x) =
1, if x > 0
(b) x(1−a) (1 − x)a
where a is a constant

Using the chain rule and power rule:

f 0 (x) = x(1−a) · a(1 − x)a−1 (−1) + (1 − a)x−a (1 − x)a
(1 − x)a−1
= (1 − a − x)
xa
(c) xx (Hint: rewrite this using e and ln)

Using the exponential rule and chain rule:

x
f (x) = xx = eln x = ex ln x
f 0 (x) = ex ln x (x · 1/x + ln x)
= xx (1 + ln x)

3. Find whether or not the following functions are continuous and/or differentiable at x = 0:
(
−x2 + 1, if x < 0
(a) f (x) =
1, if x ≥ 0

First, we check for continuity. f (0) = 1, so f (0) exists. lim f (x) = −(0)2 + 1 = 1, so
x→0−
the left limit exists. lim f (x) = 1, so the right limit exists. The two one-sided limits
x→0+
are both equal to 1, so the limit exists and is equal to 1. These are all equal to f (0), so
the function is continuous at x = 0.

f (0 + h) − f (0)
Next, we check for differentiability. f (x) is differentiable at x = 0 if lim
h→0 h
exists. The left limit is:
f (h) − f (0) −h2 + 1 − 1
lim = lim
h→0− h h→0− h
= lim −h
h→0−
= 0

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 The right limit is:

f (h) − f (0) 1−1

lim = lim
h→0+ h h→0− h
= 0

The left and right limits are equal, so the limit exists. The function is therefore differ-
entiable at x = 0.
(
−(x + 4)2 + 3, if x < 0
(b) f (x) =
−(x − 3)2 − 4, if x ≥ 0

First, we check for continuity. f (0) = −(0 − 3)2 − 4 = −13, so f (0) exists. lim f (x) =
x→0−
−(0 + 4)2 + 3 = −13, so the left limit exists. lim f (x) = −(0 − 3)2 − 4 = −13, so the
x→0+
right limit exists. The two one-sided limits are both equal to -13, so the limit exists and
is equal to -13. These are all equal to f (0), so the function is continuous at x = 0.

f (0 + h) − f (0)
Next, we check for differentiability. f (x) is differentiable at x = 0 if lim
h→0 h
exists. The left limit is:
f (h) − f (0) −(h + 4)2 + 3 + 13
lim = lim
h→0− h h→0− h
−h2 − 8h
= lim
h→0− h
= lim −h − 8
h→0−
= −8

The right limit is:

f (h) − f (0) −(h − 3)2 − 4 + 13

lim = lim
h→0+ h h→0+ h
−h2 + 6h
= lim
h→0+ h
= lim −h + 6
h→0+
= 6

The left and right limits are not equal, so the limit does not exist. The function is
therefore not differentiable at x = 0.

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4. Given that the Total Revenue function =P (Q) · Q, where P (Q) refers to the inverse demand
function, find the relationship between Marginal Revenue and the Price Elasticity of Demand,
εD . Hence, or otherwise, show that the firm will never produce in the inelastic part of its
demand curve.

d[P (Q) · Q]
Since Total Revenue function = P (Q)·Q, Marginal Revenue = = P (Q)+QP 0 (Q)
dQ
Now, recall that:
4Q
D %4 in Q Q dQ P
ε = = 4P
=
%4 in P dP Q
P
dP P
Q = D
dQ ε
P 1
Therefore, Marginal Revenue =P + D
= P (1 + D )
ε ε
As Marginal Revenue cannot be negative and εD < 0, the magnitute of εD cannot be lesser
than 1. This means that the firm will never produce in the inelastic part of its demand curve,