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    Home Assignment 4 v1

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    Home Assignment 4 v1

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    Home Assignment 4 v1

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    mr.furqatjon
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    Mathematics for Economics and Finance, 2023/2024 Home Assignment #4 (due October 15th, 2023)

    Problem 1. Find the functions (c∗ , x∗ , λ∗ ) that satisfy the first-order and transversality conditions of the
    following problem,
    Z 2
    4 − 2x(t) − 6x′ (t) − x′ (t)2 dt
     
    max
    c,x 0

    s.t. ẋ(t) = c(t),


    x(0) = 0,

    for each of the following different terminal conditions [8 point each],

    (a) x(2) is free

    (b) x(2) ≥ 4

    (c) x(2) = 2000

    Verify that the value for the objective function obtained in case (a) is no lower than the one obtain in case
    (c) [3 points]; would the opposite make any sense? [3 point]

    Problem 2. Find the functions (c∗ , y ∗ , λ∗ ) that satisfy the first-order and transversality conditions of the
    following problem,
    Z 2
    1
    max (4(−c(t)) 2 + y(t))dt
    c,y 0

    s.t. ẏ(t) = c(t),


    y(0) = 1,

    for each of the following different terminal conditions [6 points each],

    (a) y(2) ≥ 0

    (b) y(2) ≥ −1

    (c) y(2) ≥ −α, for a constant α ∈ (0, ∞)

    Given the above [6 points each],

    (d) Is the expression for λ∗ (2) found on (c) decreasing or increasing on α?

    (e) Explain briefly if you find any economic interpretation to your answer in (d)

    Problem 3. Suppose that a smooth function f (t, c) is such that the following optimal control problem has
    some solution (notice that f (t, c) does not depend on x),
    Z 1
    max u(t, c(t), x(t))dt,
    c(t),x(t) 0

    where u(t, c(t), x(t)) = f (t, c(t)) + x(t),


    s.t. ẋ(t) = −(c(t))2 ,
    x(0) = 1

    Explain briefly whether and why you agree or disagree with the following statements,
    Z 1 Z 1
    1 1
    (a) + max f (t, c) ≥ max u(t, c(t), x(t))dt ≥ + f (t, 0) dt [8 points]
    2 t,c c(t),x(t) 0 2 0
    Mathematics for Economics and Finance, 2023/2024 Home Assignment #4 (due October 15th, 2023)

    (b) (c∗ , x∗ , λ∗ ) where x∗ (t) = 2(1 + t) − et may be a solution [6 points]

    (c) (c∗ , x∗ , λ∗ ) where x∗ (t) = 1 − t2 /2, λ∗ (t) = 2 − t may be a solution [6 points]

    (d) (c∗ , x∗ , λ∗ ) where λ∗ (t) = 1 − t may be a solutions [6 points]

    (e) (c∗ , x∗ , λ∗ ) where c∗ (t) = t may satisfy the necessary conditions for solutions [6 points]

    (f ) Adding terminal condition x(1) ≥ 0 may decrease the optimal overall value [8 points]

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