Unit 8

Question 1

See

Answer 1

Page 2 optimisation flow chart and ‘overview’

Question 2

What do all solvable optimisation problems give rise to?

Answer 2

Maximum-value or minimum-value function

Question 3

See notes on extreme value functions

Answer 3

Now

Question 4

What is an extreme value function?

Answer 4

It is a function that gives a maximum/minimum point that is a function of the parameters alone! NO CV’s in argument list

Question 5

See

Answer 5

Notes page 4&5

Question 6

How is the Lagrange multiplier interpreted in the producer minimum cost problem? And why?

Answer 6

It can be seen as the marginal cost of a good being produced (ie. dC/dY)

Because if λ>dC/dY the firm could reduce cost further by reducing the number of items produced and selling them at price=λ (and vice versa)

Question 7

Interpretation of lagrange multiplier at the solution in general?

Answer 7

At the solution the LM associated with constraint ‘j’ is interpreted as the marginal effect on the EVF of a rise in resource ‘j’

Question 8

What is a shadow price?

Answer 8

An ‘imputed’ price