Home Mathematics for economics and finance Methods and modelling Mari Autooy and Noman Biggs ‘Dart of Mah AaHome cambridge, New York, balboa Ma Cape Tos, Sagar, to Fae, Del Masi chy Cambridge Universi Pes ‘The Hembrah ung, Cambrise C2 UU aisha i the United Sates of Amenex hy Carrie Univrsty Pres, New Yar © Cambrge Unies Pes 198 “This pblicton in copyright. Sbjct satry excepton ake provisions af ‘eleva alec ering agreements no fpraacion ny par maak pace ‘Mou he ees amis o Camzs UNITY PSS Fin pala 1986, ong 2072 Fined Boa inthe Unie Kiya byte MPG Bonk Groap A catloerecod for is pucaton save the rh Libary 1 7405-85959 peck for extra x h-pry zee nests eee 6 nhs Puc, dos wot isang nat ny conan sachsen seus or rpgHome Contents Mathenatea models in ecunoates Lt nnducion 2A model of the maker 13 Market egibean LA Excise 1 5 Comment Worked examples Mai topic wKey erms notations and formulae Exercises 22 Mathematical terms and notations 2asats 22 Functions 23 Compost fantions 2.4Graps and equations Worked examples ‘Main wpis Key trms, notations and formulae Exercises 4. Sequence, reurrences lin BA Sequences 32 The fisbonde recurrence 33 Limit 34 Special eases Worked examples Main topes Key terms notations and formulae @ Exersiees 4The elements af fiance 4.1 ees and capital gow 42 Income generation 43 The interval of compounding Worked xamples Maia wpiewKes terns, notations an fonnalae Exersiees “The cobweb mdst 5.1 How sabes maket eulitiam? 52 Anceample 53 The general ina ease 54 eam srpreation Worked examples Main opiesKey terms, notations a formalae Exercises (Introduction t callus {61 Theratcof change of fncton (62 Rules fr Sning the derivative 163 Margi cost a derivative (64 The derivative of composite funtion {65 The dorvative of ah cre fnton Worked examples Main topieKey tors, tations al fre Exercises 17-Some special funetions 1 Powers 72 The exponential funtion and its properties 73 Comiouns compounding of mstest 7A The logan funtion 7S Trigonoretcal factionsHome Workod examples Main fopce/Key lerms, nation nd ormale Exercises 4 Introduction to optimisation 21 Profit maxiisation 2 Creal points 53 Optinitton in an itera Init intervale Worked examples “Main topis"Keytrms, notations and formulae Eesti 9. The derivative in economics 9.1 East of demand 9.2 Profit maximisation agin 93 Compesiion versus monopoly Worked examples Main topceKey terms notations and formulae Haein 10. The derivative i econoaiee—IL 10.1 The ecient smal ir 102 Startup and breakeven points Worked examples ain topics Key tems, mations and formulae xerises 1. Partial devivatives 1.1 Futon fever variables 112 Pata densatives 113 The caine Works cxompes Main opievKes trms, notations and formulae @ 12, Applications of parca derivatives = 0 121 Famction define impli 122 The derivative of sm mpi fmction 123 Chelous and sous 124 Seale fet ond homogencous factions Worked examples Main ops Key tems, notations a formu Bieri iaton in to vasiables 12.0 131 Profitmasimisation again 152 How prices are elated to quate 133 Cra! poms 134 Manima nia, and sade points 138 Clasfcaon of rial pois inodaction 13.6 The clnaiication of ries points in general ‘Worked examplas Main opcsKey terms, molalions nfm xara 1H, Veetors preferences and eonveity 14.1 Vector and bundles 1.2 Pres and budgets 143 Preferences, tity, and ndillerece ares 16.4 Linearand convex sombintions 145 Chasing opal bundles Worked samples Main ops Key terms, nolalions xl formule Excrcinss 15. Mates algebra 15.1 What na ati? 152 Matix mulipiceton 153 Horio make money wih maces ‘Worked examplasHome Main opis es terms, notations and forme 16. Linear equations 16.1 tvindstry “conor” 162 Linear equations ia mati on 153 Solution of nar equations by row operations 16 The echelon for in gene Worksd exams Mais topievKey ter, ottons and frre Exersiees 17 Linear equations I 171 Consistent and inconsistent systems 172 The rank ofa consistent syste 173 The general solution in vector notation 174 Adbitag ports and ste prices Worked examples Main opieeKey tors, tations and forme Elec 18 Taverve matrices 191 The square linear stom 182 The inverse of squae mati 11 Calton ofthe nvase 184 The inverse of 22 main 185 151M analysis Worked examples Main topieeKey tors, tations an forme Exercises 19. The nput-outpat model 19.1 An economy with many industries 192 The ecology nix 19.3 Why is there solution? ‘Worked examples Main opcsKey terms, molalions afm Exarcisss 20, Determinants 20.1 Detemiats 2.2 The determinant os a tot for ince 2033 Cramer's rule Worked examples Main ops terms, olin al frm Exarisss a Constrained optimisation 21,1 The elementary theory ofthe fm, 212 The method of Lagrange rutin 213 The cout incon 214 The efficent smal fem again 215 The Colt Douglas fon Worked examples Main opcsKey terms, molalions afm xara 2. Lagrangcansand the consumer 22.1 Lagrange a mone geet formulation 222 The clementar theory ofthe consumer 2233 The pice rao andthe gency condition 2244 The cons’ demand fanctions 2255 The inet wlity function Worked examples Main ops Kes tems, notations al fommulae Exarisss 2%, Second-order recurrence equations 231A simplified national econo 252 Dynamics ofthe economyHome 233 Linarhomagoncousrcureness 234 Nowlnaegeecent rents Worked examples Mais topievKe tro, otations ad frre Exersites 24. Macroeconomic applications 24.1 Recutence equation in pastice 242 Ossilltorysoations 24 Basia yokes 244 Improved mods: of he economy Worked examples Main opie toms notations and formulae 25, Avent and laterals 251 The eons surplus 252 The concept of aea 25. Antecratves and integrals 2544 Definite integae 25.4 Stndad intel Worked examples Main opis toms notations and formulae 26. Techniques of integration 261 Iteration by substitution 262 Definite integrals by subtion 262 Iteration by prs 264 Paral tions Worked examples Main opie term, tations and fle Exersiees 27 First-order itferetil equations @ 27.1 Continuous time models = 0 272 Some types of diferent equntions 27.3 Sepaable denial oquations 2714 A coolimouetine model of price adjustment ‘Worked examplas Main opcsKey terms, molalions afm Exarcisss 28, Second-order ditferetial equations 28.1 Make remand consume demand 282 Linvar equations with constant evffcons 283 Solution of homogeneous epations 284 Nom homogeneous emstions 285 Rehoviow of sone ‘Worked examples Main opcsKey terms, molalions nfm xara Solutions selected enerives IndexHome Preface ‘This took is an inueduetion to calouus and Tinea algebra for students of dscplines sucha esomomics, nance, bse, management a accounting 1 inode for ears who may hve leady encountered wre lees alk, and will also be appropriate fr hove wi lw experience, poss ted in Sonjston wih ne ofthe any more slementary exe on bac maleate Pars ofthis book abe om a ete couse given by the urs to students of ‘sconomis, mangement, accouming and aune, abd anageieot signees at the ‘Landon Schoo! of cotomic. ‘Wo thunk Duncan Anthony, Reza Arabseibai, Julie Biggs and, paculsry, (Graham Brighwell fr thei invaluable comments on various drt of the book ‘he final dat was mad by Dr Stephon Skis of Camidge University. and hc perinet comments resulted in nunber of iprovernens. We ae aso stateful 0 Roger Atay of Cambvidge Univesity Poss (or his efficit handling of the moje ado Alison Adcock Zr har help in preparing the manuscript Ldn, October 195,Home 1. Mathematical models in economicsHome @ 11 Introduction Inthis book we use the Language of arborist describe stations whic occur in economics. The motivation for doing this Hat watberatial aguas at Toga apd exact, and they enable us o work oui pecbe dell tbe comeequenes ‘of economic hypotheses, Fr this reson, mutenatial modelling fe become an indispensable toot in economies, Finance, busines and management Tis ma allways simple fo use malemain but language amd techies enable ws fo frame and solr: pms tha cxmot be sftacke ellecively tm other ways Fathermon, theatrical [or quantitate) ells bt xe all ce, to guitate real welHome 1.2 Amodel of the market ‘One of he simplsst and most wefl mode it the dasepion of supply and demand in the warkst for a single good. This model is conecmod sith the ‘eltionsip:barween to things th price ps unit ofthe good (asalydanotod by ‘andthe quay of it on ths markt (usually dcnotd by 2). The ‘matheraricl ‘model ofthe station is based on he simpls idea of reposting apr ofnumbst= {4 point ima diagram, by mans of eaoedinstes with spect a pai of axe. [a ‘Sconomics ite cusomay to take the honor ane a the g-xis, and the verte fis as the praxis. Thus, for example, the pat vith cootdinaes (2000, 7) ‘epresets hesitation when 2000 wits ae availble ta price of 57 per unit. How do we deserbe demand in such a diagram? The dea ist ook at those pies (ac) which are eltd inthe following way fp wate th sling pis would be ‘the demand, tu she quamity whic would be cold o consumers at tht pi. IF ‘we fillin ona dag all tho pus (gp) elated in ths way. we gt something ks Figur 1 ‘igure 11: Th demand sot We sal fort this asthe demand ser D forthe paniculr good. In seonomiss you ‘wl eam reasons wiy it ug 1 ook ae Hk it does in eur gram, a smoot ‘ovmvard sloping curve. @ e Suppose the domand set D contin the point (30, 5). This means that when the price p = 5 is give, then the conssponding mand wil befor q = 30 nits In {20s provided D has tho ight haps a5 in Figur 1, than for ech alu of p there will bea uniqusly dstrmined value of g, Im this easton we say that ermine: «denna actin, g?. The value writen Pp) is the quantity whieh woul be ld if the rice were ps0 that 445) =, for exarple, Example Suppose the demand set D consists of the points, on the sagt line (y= 8p~ 125. Then for a given vale ofp we can deem the carespoodins we simply rerange the ution ofthe Ine nthe Fem ~ (125 Hp. So hae {he demo inci i eipp ew SBP ayy= BEE For any given value of p we find the comesponcing ¢ by sbstinting in thie formula. For sample, if p= we get a= (dy = 388 x4/6-95/6, . ‘his ane vay of ooking the elonp two gad pf esppoe hatte gat yes th he a pr sic gp) in he end Dis the pet conmimere woul! be preped 1 poy i gi th aay ‘va, From is violate ae expan p it ems offen of the ther ny rm We wrk PG rth valu of p comeing ta gen a ‘etal? te mers demand ton Example (confined) Taking the same set D a before, we can now rearange the ‘spain of tein inthe frm p = (125 ~6)R Sothe inverse dean unin x yy = P= 6 P= EH ‘Nest we tum oth upply side. We assure tht there is supp st S consisHome ‘hose pairs (gp) for whieh g would be tbe amount supplid wo the markt if he rice were, Tote ae good seoomic razon fer supposing ha baste gsr form stowa in Figs 12. Figure 1.2: The sapy set If know the supply st Scan const he snaition gan the oer ply ivsion po the sane way as we did forthe demand fapeton aod its inverse For example, iis the sto pains on the lie 24 ~ 5p = 12, hen solving The equation for g and arp we get eu 252, pg 4t2.Home 1.3 Market equilibrium ‘The wsafulness of e mathematical model list in the fat that we cam use thematic shniqus to obtin information about la the eae of supply ad ‘demand. te most important problem isthe following. Suppase we knew all about ‘he factors ffcting supply and damandin the markt for particular good: nother ‘von. the si Sand Dar given. Wht alse of gandp wil actully be achieved in the makst? The diagram (Figure 1.3) makcs it lca hatte solution is find the interaction of D and S, because that i wre the quantity supplied is exactly Talaced bythe quant neue. Figure 13: The equiibeium st B= 81.D ‘The mabematical symbol for the intersection of theses $ and Dis $1 D. and economist efario B= 57 Das the elvan st fre wien marke, Fortunately, thre i a simple mathomaialtchrigue fr finding the equ st it the mtd fr solving 'simaltncous stations Example Suppose the Ets D and Sar, rspetvaly the sts of pis p) sue thst 4 Sp=A0.and 24 ~ ip ‘Then plat” p*) wih iin tbe agua st = SD oust, by dein, 20. be inboth Sand D. Thus 4% p" ssies the two uations a 5p" 90.20 The wanda technique for sling thee ests to stiply the Rit ane by 2 ond subtt trom the second one. Working tro the sles, we get? ~ 20 and p= 4. In other words the oguovium st F isthe single pi 20.4, {eis worth remarking that in this example we get single point of equilibrium, because We tok hosts D an So be straight lines a possible wo imagine more compl stations suchas tht we ehall describe in Example 25, whare the cquibrium st contains several pains, oro pois at al.Home 1A Excise tax Using only the simple ecniguesdeloped sofa ws ean obtsn some intersting insights int probleme in seonomic. In tis acon we sty the problem of exis ‘ax. Suppose that «goverment wits fo discourages etizas frm drinking too such his. One was 1 do this it impos a fixed wx on each bate of whicky Sold. For sample he govseumcet may decide that for eae bot of whisky the Supplies sal they must pay the goveramen”S1. Not that he tax on each unit of ‘he tad good a ied mount, na a porentage ofthe sling pice, Sone very simple mathematics ts us how he sling prise changes when an ‘nce a imposed Esampe inthe previous cxample the dmond and supply fnstions ar even by 51g PW=M—5y, =F ‘au the oulteium pice p* =. Suppose hate goverment inpoes an exese taxol 7 pr uni How doe ths affect th sulla pice? ‘The answer is found by noting ha if te ne sling pie sp, den, oo the supplies viewpoint ar Ifthe price were p-T. because the supplies evens pet unis ot p, but pT. In ober word the miplyfancon has changed: wen The tat T per uni the mew supply function gS i aiveaby ep-do-7-So-n- 0 ‘Ot couse th and function min th san. The new seuib,iam vals ¢? and si heute Sasi ater ru Ur af -40- spate = 9 = Sy? —7)—10 himinaing ge get @ Reaanging hs equation, we obtain = 0 15) raspy Sr (+3)r Pg aa oe aes aati pt x eras dr ‘The comsspondng new equilibria quanti is 7 =a 5p =20-39. Forceample, if 7 | the squirm price rises fom 41046 and the equim quant falls from 20 to 17, Unsurprisingly, the sling price has sen and the quantisy sold has lle. But mot hat, though the tay is T pr unit he solling cs as rsx not by the fll amount. bu by the ation 35 oF 7 ts other words. otal ofthe tx is passed on othe sonsumr.Home 418 Comments 1. Economics fells a why the supply and demand see ough to have ceran proper Mathematics ee us wha we can dee Fm the proerice and haw Fo dothe calculations 2 Matomates abo enables uso develop alioal fates of the mode. the ‘ise of suply ad demand, we might ask questions such ste flowing + What happens if couions chang, so tht te supply and demand sets ae alowed sighs? + 1th quilium is dsurbed for some reason what isthe esul? + Hove do he sapped consumers ave the equilib? A typical instanceof the fat queton isthe excite tx daa ove kn this ook we shall develop the mntematical lechnigues needed te deal with many lhe inslancs ofthese questionsHome Worked examples [example Lt ifr 2p~Sarnd 3 59~20, shat are ond? Solution: We eliminate y fom the similares equations. (An aerating, ad ‘ually valid it ep woul bef eliminate) To do ti, we oli the fit ‘Stuntion by Saad the second by 2, btaining the to eatin Se= 1) =, e+ 10) =20, Adding thee, weave (5x 109) + (654 10y) S440, I= 55, so that ~ 5. Given this, me can we he fist equation. x -2)~ 3. to determines A (eY2=(8-3)2= 1 Therefore, ~ Sand y= a Example 12 Suppose thal the apply amd demand sie Sad fora partielar market ave deserted as flows S coe ofthe pie. p) suc hat 2p 39 = TD amd B eons af th oir (gp) suck that 2p + ¢ ~ 20. Determine the supp Iincton (phe imcerse supply nction pq), the demand fetion gp) and ‘he averse demand fenton py). Ses Sand D an desernine the egulrian = S 1D. Common rely he erpretaton othe veal Solution: The supply function is obina by expressing quant in rms of price for poins inthe supply st. We hve 2p — 3g = 12. and reaanging this gives a= yp—4 Toe 2 #0r- ps Silay Pepi= 20-2. "i abs i iggy Inve eae acs we pe cfg onthe supply and demand st. Thus. the inverse supply function i gn ond the inverse dso fantom is PCa) = 10-44. 2 ‘The wee Sand Dae sketched in Figure 14 > Figure 14: The domand set andthe supply for Example 1.2 ‘Api pein = Sia only te pinsini bhtheenion ofthe supply stand the equation of the demand st Thus," p") mus be sich that a= 12 aa wg Subsrocting th it sqation fam the aceon gives "= 8, org" = 2. SubstringHome "his valus ia the fiat equation ves 2p” 6= 12,50 that p*= 8. Thus F comnts of The single point (2.9, and when the marke iin egiium, ch sling pice wll 1 Dand the quit so willbe 2. 0 Example 13 Suppose that oth market desorbed tn Example 1.2. on excite ts of 2 por isinpored.Deteraine the ne egalbriun mare pris aad quant: Solution: tn the presence of an excise 10% of 2 the effetve prise fromthe supplies point of vw i mot the marks rise but he marke price es 2. Thus. 3 is dhe now egulibrium market price whea the ax is ioposed, the guaniy ‘pli sii both aT = gp" —2) andg" =P) shat is P= 2)—4 and g! = 20-29". Eliminating yw wet ey jor 2-4 ving = 192 and = 20. 2192) 1 Example 14 Suppose the spp and demand sous for Glontaniey sa Ye are aslo: S cosas ofthe pats (gp) far wih 9 3p = onsste of the pars such that @™~ 2p = 14S. Hire, p i the price per bole ‘measured i dlls. a Is the muber of thousand of bres sold. Determine ‘he equiva price ad quai Suppose now tha the goverment inpores a exe fos of ST per bate, Whet vl ete nee sling price and quanti sold? Solution: The supply and demand fens te FD)= 35.0) 145-29. By the standard method we odin the equllbviam valus g* = 85 and p" = 30 ‘When the excise tex ie imposed dhe esi vales 7 ap? ae given by gf 3h) = 8 —2p 1 follows ta 5p? = 18037, and p= 30+ (35)7. The exresponding quatcy selding? ~ 145 ~ 2p! 15 ~(65)7 thomand ote, o Example 15 Suppoe th! dhe spy an dear facing are FvI=bp-aPp)=e—e, sche a, de pave comin, Show that he ql price Up” = + Mb ah Fan exe a oT per tps (0 fn teresa market rie adhe hap arly ee han pT Seleion: The mula pice p(n the sence of any as) sour by solving the uations g*= bp" =a edp" which give p= [e+ ab +a, Whe an ecie tn of per anit imped the ffetve pie from the suppli's point of view isp! —T.The quam sold. ¢,saisies amp Daa. gl mea wopea (sea) -# (cea)? ‘Ths the selling pice rns by (sh) Pails new quiiliu vale Since amd 11 hath pontive, the Facon Ab + ad) x aly Tew tha Ty and hence the increas is sly leas than 7 otha Note thal we hve verified mathematically quale obervation:in cane here the supply and demand see ore described by stoigh lines with up nd towmnrl slaps repectivey, na alla an excite a cps onl the ensue ‘ha acon of wha olen Koawn he Zr Theorem oHome Main topics + ntpsston of demand and apply sts + demand, soppy. inverse demand and inverse soppy inetions + iia pen lity, + libcium pie nd quality in the presence fence tx Key terms, notations and formulae + demand ot D ssumy st 5 + demand anton mse demand anton?) + supply fncton gives sap Faction pg) +euiram at = 57D cquiieum quay g" and pce p™ + xs as 7 comesponding equlibrium suanty and pie, 9p?Home Exercises ercne Ll ffs y= Sands 29-3, shat ae ad 9? aercse 12 Soe the following salen eutons ayo, Hel vere 12 Sipprse the marke! for a exmroity is governed by sippy am demand ei defined fll The mp et te the set of pis) for hick {-Sp~—12 and the demand vet D i the eof prs gp) for hick 4 © 2p ~ 0. Shots 8 amd D amd sdeermive the esate set B= 81D. the supply and demand inca

fs) ~ thei dry vain’ 2s. Mis won ing that when we ele fin hie wy the Sanction coll sully well be defined by wring f)—2s, © f= 24 even bob) ~2 lob Th pista isthe incon which doubles any vale I ie often epi fo think of fantion ax “lack bow’ which coments an inp Ino av onpat (Figure 21) the name athe fare i / hen fs) theo ‘orepording to given inp. The ban may epescl any re, uch x "lp by 2 or-add2¥, or aga’, proud oly tht for cach inp there unig, vellatined on sof lose Figure 2.1 Diagrammatie epresntton ofa funtion “Te dngram x wf Bem it sree hat a insti one-way relationship, ignited bythe direction ofthe arows. In geeral my not be passe to reverse ‘he arows: that is, the cntpot may not determine the input. For example. i the function isthe “squa’ factions that i) =, and tho “ouput” ofthe box is 4 ‘vedo nat know wiser he input was 2 or 2, cia of which Wool give te same ‘alu. 176 a funtion for which i possible wo revere th amows. the resulting revere Cetion ie called tbe lnvere funtion fa fan is denoted by So ity = io thease Pip) Figure 22) xalsloy vel joy Pigere 22: faction ait inser a = 6 Example Suppose fis ivan by the formule faj264, se that whom the inp ix the ouput is y = 2+ 7. To tan a fomula forthe invere futon eve wo id out what vale of wil give a paculr and we do is simply by reoanising the equation» ~ 20+ 7 io the foam x~ 7)2 This wiquely determines. in wins of, so here We bave te iavase fsetion give by the formas F'0)-0- 70 0 Note thal fan ae fnctinn sch hat is he vere of ten is the inverse ofg Fox,» ~ Ay) if an only it~ 2). by the definition of ¢ =f" Here x and y re ony vlc, ond their nae are mcovant. So we mnyinetchangs the nares ving ~ (x fand ony fx 0, and this jus he eoniton that = ‘We can now se that he inverse supply and demand functions discussed in Chapter 1 ae particular caso this gneral notion : pie the inverse funtion for g8 and is the inverse Sanction for ¢?.Home 23 Composite functions Te has an inverse faretion one com tink of Fas the “undoing” of fin the sense that if ws take x and for = find then apply 10» we ota again, Foc example consider gain he previous example. Here, x)= 24 +7 and 710)= (792. Forany 2x47) 2 res) eet) Ts, fr any x FH) ‘The observation just mas cancers fllowing the action off by hat of The ‘soton of applng one function dictly 1 ths ouput of anther i an important ons and ean be made preci, as follows. If we are given fictions ans thon we ‘am apply them consecutively to obtin what snows as tho compas function ‘avon by the malo Ke) ~ a), (See Figure 23) The composts funtion & is ‘knot t= and ison described in words a followed by or as afer Note the orders epic fs, thems, bu inthe usual ntationiteoms ota 7. ee eee ee) lgure23: composite fanetion sample Suppose that 7) = ~2 and te) 14 Then he compost funtion f= ce He) =r) = 02 o ‘A composite fanstion is somatines called a fantom of a function’ For exanp ‘he futon & doseribed above ean bo thought of asthe Sametion "ube" of the function ‘aguare and ad. Oftan is helpful to split up a given funtion inthis @ seu: Ths, given fo) = Vt +8 +5, ecm ape fhe composite sof ipl fanctions,s)= J ands) st sees [tis possible to form the composite of more than two farctions, by sepeting the Asintion given above. Given thos functions. ths eompsite fnction fh {sfinad o be fgh. Inther words. we it om alowed bys and thn form the compost ofthis fuction oh fllowed by (he reader might sk why we dont define fas fn ft tis wil aways {sme exelly the sme Fmction, becnine hore only the onter of the operations Imporant. Tecnicaly. we 3 thet composition of functions is an ascacirve peation) Example Suppose tat lo) =e) 8 and ry 2 2 3 Thon (cle) ahe2 243) Ge2 De HVE Gishys) =f ((2 +2439") rae o Finally, we soe hat the fnetion i euch tha for all x, a) x own othe entity fonction. ‘This teal ba iyportant faetion ray be compared wih the umber O in aridmetic it does nofhing, bu ou calelations would be nore Aico without i, This, the obsession thatthe nvare fiction isthe ‘undoing off may formally by exposed by the equation "f= 1 Similan, the carport fation FV clas egHome 24 Graphs and equations Mon ft mathematical echiques which ae taught alan mentary level can be evr ithe se aad fanctione ermiology Fr example. we might be ake to draw the graph of x2 5 #6, This lly means hate should ilotate ‘he sot of points =e pip Se represented in the wl way a ssc of JR? (ace Figure 2) AEs ie pbles is Solve a iain age af ep Pepe te simple cave the single near euton At 8-0, which we lea to solve in cemetary algebra +~ (8/4), provided A 0. Inotoe ‘rons the st [| 18" 8) contains enaety one member 4/4). Exe: what happens if is 270) Another, ighly hander, problem of clementry lgcbrs ix to find the act of salon of gardai egtation atthe te=0, where we may swell ssune that #0, because if =0 the equation reduces 03 Tear one. fo some eases the qualraic exprsion ean be fetid for example, 2-Se 6 (e~2)le~ 3), and we cancae halthe set fx =2—Se + 6= 0) han fe members, 2 and. Alnogh fctration nay be Hil, there ix + genera \cchique for determining the wl toa undeletion, We ft oo ha ‘snee4 0, ema divide th uation ar? + br FeO righ Bat obtain 2,6 c wttxt ino, ‘which will have the same solutions (if any) a the orginal equation. Using 2 ‘schniqu known as ‘comp sting the square’ this equation may bs reitsn as This allows fo the deity (08) -20e(t)+(f) rede & ‘The equation we now have 1 salve it (+8) -% an fom ths we can obtain the complete picture. Fit if 62 Ae < Othe ar no Solutions. or (a we might say) th sltion st is emp (Readers fair with complex numbers wil alse tha by “solution we mean areal solution: that is, « solution which belongs io JR 1F5*~dee=0, dan te eatin is (3) wid has exaely one solution, ame, x =~). AP — dee > 0, then the nto it (ot) so tha there are two ponies b __\eF=aae or x4 2 e-Home “rs, inthis, there are slo. abt ame bP hee yo DE ‘We often say thatthe solaons ae + Vee 2a whee the symbol * meming ‘pe or minus’, indicates thal there ane tra hoes one ee we choo he sign an another where we howe the sim ‘To suomurine,sppone we have the quadeatic equation a? the c= 0, where # Then +12 — Ae <0, the equation as to satin +i? — ae ~0, the equation bas exally one slations~-B(Qa) + 2 — a0, the equation stv soatons _ cbt vee aye SSE (ten, the wor Yo! x neo deere 3mm oa uel cain ad we may speak for example of aquatic equation having to ros. The quantity #7 do, shih re mae ae is male Kno athe “escinna othe ada ution. Aolbe kindof yublem aries when we hive sever equations which we have by solve ‘simultaneously’ This means that we most find the intersection of the “olition sets of the indivi equations We hve lsat this anton in he ‘keminntion of marc oqiiriom, hers the tlutom of» par of simulaneoas Inca equstions sorespon to finding the pont of interscton ofthe sp =< andthe demand set Here san example in which the equations te rica a = 6 Example Suppose we wish dota the set @ ML, hors G= Wey lymw Se 46), L= Ie why 2644 In other word, we ree the pints of internets of the graph G (Figure 24a) with he ine y= 2 4Figine 2b), what the me hig, thea oF the ‘inlanons eqesion. ees Figure 24: The sets 0, Land GL ‘The scooriaus of the pons in GT eam be fund by ainiauting . This gives the equation :2~ Sx + 6=2r~ 6, hat ie Te + (2 =0, Here Ihe quate spin lees oom (-a4e-3), and the souions are xy = 4 and 23 = 3. The comsponding coordinates are bid by substiting in ether ofthe orignal equations giving yx ~2 and SoG PE comsint af the io points (4,2) and (3,0), shou i Figure? deHome Worked examples Example 2.1 Sarpose that the spp and demand sets a gna gy S= ty Phy~P=—7),D= 10g 993010}, evermine the supply fon, the darand futon, ¢P, the nerse supply Fiction, and the averse ded function, p. Very tha, Sor amy nd 6 (ENO) = p and (pi) Solution: From he definition ofthe st Sand D we get PW) P-Tadphig)—9 97 Pip)=10-3p and Pray = 10-9), 3 In general isthe inverse function for fthen for al x. ('#Kx} ~ x. We shall ‘vei this xpiidy for tho cassin which fis and ¢?. We have COMPA)“ FO-D-W-DT-P ond (APA) = PP (10—39)= $00~ (10-399) = $09) ss roquid ample 22 Suppose tat the three fctions fare given by fa) Psghs)— 2a 43, e)— He +, Fad farm fo the ompaste json ff (eK) = Reta) = fx 3)= =3)* ond @ = @ & Aa ape = (0) = te) = 28 3. Fuhr, a= O09 and 1 (if) = HIUFas)) = h((2e43)) = —— oi Wat MO) = Ceara : Bea . Example 23 1fand re the fnctions defined Example 23 explain why and sve ise facions, an fd formal fr ther. Show ato thf hes am free fonction and that fF" Selaion: According tothe definition, y~ is) mean hat» ~0. For enh y tht has extty one sation for, namely x=. the cube rot of Henee fas an ‘inverse funtion. and "(y)=)"5 For g, we have y= a9) ifand only if y= 2e~ 3 wih ie the unique solton = (y~ 3), a0 an ine funetion given tye ly-o- 390 Finally = 29) means tha y= (2-398. So(2e+ 3) 7! and x= 392, ‘These the somposite fe bas an inves Function, GY") = (9! ~ 3)2. Alo, the composite unetin gis given by he fon ro cyto =e (0) <0" -ay2 So we have oly, 4810) = (Yh and therefore (r= (Exercise explain why his a general rule) ° Example 24 Let Q= Uc, ))| =a? + 3c+ A} and L= (9) |= 1}. Show thar Q'9.4= (and expat your answer graphicalHome Salation: The inereston Q OU ithe set of sy) = JR? which belong bath ta and to L Saif) sin BL. then post Behan yet Elmina ye get 4 A=, which reduces to + 26+ 3 = 0, Thi ‘qc exuation im which “A? — 4a" i il 19-8, which ie nog, a 0 ‘ere ina soon Since there are mo posse values ofr there canbe mo points {6 3)inQ AVL Grphialy hs mean ht the ine does not mt he carve D Example 25 Assume thatthe catfod marks & desenbed hy the supp and demand es S= tig p)|Sp~ 4-24-29), D= Hg, pip +4? 2y~ 15} rie dump ar pan sei Sand B. Determine the eli st B= § Diam coment on ey eres fates Solution: Weng pin terns oF inde sul way we find para tat Pe m+ “The sts Sand D oe the graphs ofp and p? respectively temember. a ays in sconomis, tht the gee the horizontal ne), Tae ean ofp dst cos he 4s since the equation g? +24 >27= 0 as 20 salons (1 ~ da’ ig 2? =A 1 77 hich is agate), By planing afew pois we quickly ave ar the raph showin Figure 25a This own as parabola ‘The graph of pPlg) is abo a parabola, but in this cas i apd? (a ie always the eave when the cofBcet of x aeative) To ind what trou the (pee we mle the equation P24 150. ‘Ths Econ as -(e~ 394+ 5)= 0,50 dat th olons ae y=~5, 3. The sD ie skethod in Fae 2.58, igure 2.5: The sts nd 0 forthe eatfood markt ‘The sraps sugges thatthe set E = $ 7) D consists of to points. Tobe sure, we rus verify the result algebraically. We have gp) E= 9 Dif nd only it FP 424427) = 15 G4 Rearanging, F244 11-15 Se I= 0. that Gg? 12g 480, Diving by 6 we gat #25 ~ 8~0, whic fstorzs a8 (g +42) 0. The seluins arog ~~ andg~2 and the conesponsing Yaucs of given by p= 15 ~ 2g. ate bath equ W 7. So we have £= 44,7) (2.70 ‘The fit pin has no ceonomic significance Boeause ig rapresons a quantity af ¢ real commodiy thon g~ ~# © meaingless The ‘cconamie sqiibrum®’ is therfore given by ¢ = 2and p =7.Home Main topics * sts and the diferent ways of describing thom “subsets, unions, intersections + tel numbers and inkegers an impale ofthese + imctons, vere fnstions and compete fietons ups andthe solutions of equstons Key terms, notations and formulae “vo ways of deserbing sts: = {.). 08 f} ‘subst union, Ur imersction, ‘rol aumbos, integers, Z,: tural numbers, NY: poanegtive rks. Ry. ode pits fel uber 2: fst quad. 2 *invae function 7 composite function k=) = 8) ‘fart theo Oand #—4ae0. y= (b+ das) 2aHome Exercises [Bxerese 2.4 For each ofthe fllong funtion fetch the graph y= An 2 Decl whather the lversefetion (ex, amt If does exis write down the firma for 1 fel=Se sada 2 art =6. Everese 22 Each ofthe folowing definins spots a suber K of 2. nhs isi =the nme of he cori mare wt he hive asd’ 8 The mame ofthe evo mere on dhe vertical i) Hix) Be 4y= 12, ec 9a S BE fle Lay NAGLE, aT] A) ens ‘reac ease htc est Kad nto on ou sai te et RR. verese 2.3 Suppose tate sappy and clan sets or a parteaar market are S= (GP) 39-9=51.D= Na.m)L39>F #29=9} ‘Shot $ and D and dermine the egultbrum set E~ SD. Conant bet on {he interpretation ofthe rest, xerese 24 The fnctions js hare given bf) Find formulae forthe composts ff hi 0) = Wha) J veri 24 Suppose thr h supply ard demand sets fora good re given hy SHUG pl a-¥e=1,D= te Dla p=. Determine te sap ton, the demand ction, P, the iver ey anc, verse dear fac, p. Yr a for ay pan 4) = nand PP) =P verse 26 For il ais ofa hase ean oar ino @ e no solutions. exactly one sluton, or fo solitons? Determine the solutions in the second and thi eatce.Home 3. Sequences, recurrences, limitsHome 3.1 Sequences Inthis copter we sal hink ofa sequence of numbers yp 71.¥2- 38» desertion of bow a variable quaiy » evlvas with respect to tims. The gonaal tm», ‘represents the value of y at tho ead ofthe mh ae pviod: for example, iht represent the vel af unemployment or the exchange rae for dll ar ering, sth endof year (Oem i i pase to specy wenn pen by vig am ption which epee y Bier tthe eerie vali’ gj me so om. ir coal iL posses mo tes when Lam bor. and my only supplir of fics s my greta ho _gives me to for every thy, them my stck of tes assiming no wastage! 8 esrb bythe equations Yo=O y= t2U=123, Tn is example it is ary easy 1 find a solu — dati am exit Forma fo ‘Alls years sal ve 2 tes am 20,2 ‘Gancaly, a equation which defines yn trms of 4-2 an on sno a6 arecurence equation. You ay also sc the mam ‘flsrence equation’, epzially imceonomis books,Home 32° The first-order reeurrence A fre eres cm etic depo btw the prover sales When the lationship hs the form ware hee amd bare given coma, we say thatthe recurence is ln, and tha it Tecoma coffe, Example Suppose we are given tht the values of for | satis the equation y, = 2-15 Thies linear Finrderrecumence, with conta! coefient, IF we xe also given the value of yp. say 9 ~ 4 he emt soquence of values eam be mined by ropoatadsbstinin, sfllows: pi=dyy-5=24-5. yyn2y-5=2 41-5 sand soon. o ‘Asytmatc approach t the solution offender ina ecurrenses isto begin by finding a rahe iva Kind of solution, onc in which the value of 9, dogs act, pend 001 That i, wey 10 Gnd a const y® sue tat i yp, = 9" Hen he recarene uation ease al hs the are wal, This simply mane ha ay +h, ‘which we can reanange a allows: (lay hat nya "Toei every term has his patio constant value the egitin eid eens this slstion does mot ary with its called timesndendent ston Note thatthe algebra gocs wrong ifa™~ I becese then (1) sot defined. We ball deal sth hi css Section 3 Example (costinuad) What isthe imo-ndapendent soliton of the rseurence squationy,=25,-4-57 Here wo have a= 2and 6-5, 50 the ne ndspendent soon is Ivete wont if vey ea a Sthe equation i sii 1m practice we are usally faced withthe problem of solving a incarrcurence swith given ital condition, sich specifies the valve of 3p This makes sense, bocaus if we know yy then we can NOK out wing the egton ~ ayy ~ aml ance we kuow we ean Work ut 15 using the equation = ay +B, and so on However his process wl nly proce the ine-indeperaet solution = y* = 141 a) ifthe given nial contion isi y* IF we ae given any other vale of vo, wo shall gc fret solution. 1m onder find the mat soncral frm of soluon, we use the ik of wring 26 he mm of the conta y* apd amateequamity Then sabeating y— yn the equation =a 1s4 we get stat tat Since *~ap* +b this educon to the simpler uation ‘Our ik has rdueod the uation o ons whos solution Wo ean spo saight vay. ‘Atcach sp = smulpid by the constant value 2.50 2) Wat ea = a Hore the ina valu 2p uven by y= 17 +5. 8029 = Yo) and =v =i + oIHome ‘Observe that thie forme gives oltion fr any spied val of, Well = V8 HO) 7th the general slain f oor ginal equation ample (continued) Whats the general ston ofthe ecuence eto y— mas? We ave ara calculated that ~ im this cases he gencal soliton x nS Mo9- 5) In parioulat. whoa yy 4 the soliton i y, ~$ ~ 2% which egoce with the ‘aleustions made euler a Example Whon the new Republic of Pushovia was formed. shore ware niall 32000 tonnes of grin in he state granary. Each year half of the existing tok of ‘ysin was contd and another S000 tonnes of grain wre produced How many ‘ones of gun did the state granary comin after wel years? We could solve this problem by coeuating 1.73.95 and soon. up 1091. but 3 ‘ter mathod iso fd w genral formula fry the amount of gran in he scary Alef years: This approach is the svaniage that we then ke for the corte ofthe ganar aller ny, 20 yee, we need nat wok ou yy, 4 and x0 om We econ subsitate ¢~ 20 in the genera oral for. The ital condition isp 32000, and he reurence equation fry, when = Lis 7054 + 000, In this case a = (5 and A ~ S000, s0 7" ~ SOD ~ 0.5) ~ L6ODI. The genre ‘olution 6000+ (2000 ~ 6000} 057 ~ 140041 +059) ‘The behaviour of the sequence 7 dzpanés on what huppons 10 the term (0. hich anther ay oF writing (1.2, The it eves of thi em ne 1 > eis clorhat hs ass appoue oa ress. In parteur thew of (05) is vary eh w sr, othe granary coms abot 1600 tons of gain fle 12 yeas (Actually (05)? 0 DAALA2S, nthe pany cata eatly 16003 90625 tonnes of grain afer 1 years) oHome 33° Limits Inthe preceding example the valu of y approaches a inercases, becouse (0.5) approaches zero Inthe gencralcase We have poy Hoirye, andthe bataviou increases doponds on what happens to. For exampls if = 3, hen the sequence of ales af a! x 3.9.21, $1,243, 729,2187, which larly doesnot approach eo! Similarly. ifa=—2. we get 2A -8, 16,22, 64, -128,256, ‘whi also dss not approach zr, In mothomntis the theory of fits dca with the kindof questions we encour here. For our purposes t wil sfc to rely on spe inttive notions, ut for ‘more advanced wark a proper understanding ofthe theory is needed. When a 8 yea than I, as rincreases, owl evenly bacoma eater tan any given aera we ny that of tend infty as ted infinity We write dis symboleas mast or lima’ =o ‘nthe other hand, sn a= and a> 1, weave @0astso0 or ima =O. ‘Wennaice that wile gts closr and loser 0 fe all yaluss of ain the range —1 aI its bahaviowrdepan o came extent on whster «is post a ngave ‘Whond is negate, the terms ar alomataly positive and neaatie and we ay that the approach 10s acy. For example, when a= 02, the sequence ois 112,004, “D008, 10016, -.09052, 0.0004, 0.090012, 0.000255, ‘Whoa is es than I the sequence is again osilltory, but it dss not aperoa ‘ny limit the toms being altematlylge-posive and large-vpative, as inthe ase a=2 disused dove. Iathis ease, we say dat @ vce inesiag Figure he bchavour of Figure 3.1 lusts the behaviour ofthe general soation fry which, oecoding ‘othe formula, depends simply o the behaviour of For ample, fe 0 han ‘he ml ls tal y+). We eat abut th ests as flows Fite of Behaviow of, #0 (decreasing) not f= 0 onlating) yor coils nereasngly alain meeHome 3A Special eases You tie tht the cxsex = Yanda ~~1 doo appa in the able. The ese = Uven specifiy cme al the ala, and a method of dealing ith Gt (cur secrenee cations breaks down comply, beruse the exprestion fi") Far he tinesdependent sollion is meaningless when a ~ t Farimaely this cave ‘an be dealt i edietly Note that when = I the Fistoner inne rcenence sony nant ‘This says spy that each anni bined by adding ode previous om: y= ty thy soto yt. So ste > © ory >, depending on whether b> 0 or <0.(1CH=0,y,= forall) by tb= yp 2h, 9999 #9 + Mand wo an Clay the general Inthe remaining case, =I, tho sequence of als syn) =to 8.92 = + and the bebaviou is sila: Ba since the oilliions have consti mage the sequence doer otter a it b= dg, - Hoe the valu ae yp and ~ypt alternateHome Worked examples Example Find the solution of the meumnoce equation v= 6 sen that yp = 52. Solution: I'we kee = 5 and = 6 nthe stand form y= ayy ~b ofthe ist order rectrenc, we hove exact the equation given Te it thing to do sto fd ‘he mcindependet soho, ly the formal, this ey" ll a) 645) = 5¥2. We can now write do the genoa soltion and inser the given vale of nav sovayw epee It at aboltely necesary tn mmonse the fame, bscaus the mio basically common-sense. Yu nced ony remember what "time-independent means 1 eho solution obsined by puting y,~ = "thats y* = 5)" +6 This gas y°=-B2. Then we nse the ek oF ping yey" giving (e)-sCen)es “This reces to =}~ 5 which has the obvious solution =; 5. Since Jy 57 ay" =-372 i follows that p=, and weg the eu as above 0 [Example 32 Desrhe ond the Boho ofthe flog sequences ar >, and expla brief sou reasons: ol ¥ (a0) Solution: (0) This sesenee is deereasng and ends to rem afr 0 ining @ because (a = (Uy and 0 1 1 (b) hic soqueneisinerasng and tends to infinity as 1 tends to infty, Besse Lo01> 1 o Example 33 Fle soaton ofthe recwrence euaton Wn 0, shen yy = 25, an desert ts hohaviour ast». Cale the est fr wish vu dle from the e-independen solos by festa 0. Solution: The fist thing to chek is wheter the metbod develope in his chaptr an bo applied desl Observe tht the given equation is nora th standard Toa ays + bsbecause hese ator 3 malin te tam, However, dividing bt ides ofthe equation by 3 ill ot change the lation, We gl 2 vo at which din the standard farm, with « = 23 and b= 108, We now pruceed as bere, clotting the timeinlopendent soln ae Te pals Hoy =41s(2) ney tony ais) Since 25 is positive and Iss than 1, (213 doceass and tnd tO as 1+ Hence y,—+y" = 108 ‘Tomake ye by lens than 05 omy, we need ~ 10-05, hatinHome nGam « Gh ‘A fo ra on ealeultr will eal ta he Las sth 1 9, se also Section 73). o ample 3 The row Eur-conmissone for agricul ha oberied «span “gram mounin'f Kone. eld a arehouse near Sra. Each sear Steof the gro the wich ofthe rt of the year eaten by En-mce he commassoner ie obi oad tunes to the runt each ea: whore i to be fed im advance by egontion boween goveroments The commissioner 1 Int on sting a ah of onthe! the mon wl decree se 0 thot she con ela a goat victory Advise her IFN ~ 150, hw og wl take te ran ‘neuntin theo 2750 tomes” Solution: Wo fist find areurencs equation fry, the amour of gai in toms) inthe warehouse ath end of your We are told that 5% of th gains eten by The Eugoaioe each yet so Mt 95% of the gran athe bean of any given {yea remains at thy end. Since dere ae tonnes of grain nih wateous at he ‘nd of year Ff (and hence atthe beginning of yar) the amount of rain whieh ‘ros i soe a he sat of yar and whic srsives tithe end of tht Yas 95% of ye 4 OF (095)y-¢. During Year. N tomes of ew gram are added. nd 50 ‘he szs of th ruin mountain atthe end ofr ease givenby 98-0 +3 Weare give that there ar niall 30000 tomes, 0 — 30000, “Thos we hve recutence ofthe sandal fan, in which = 0.98 and = A {assume ta bes fined conta). Pceding im he wl way the meinen! soliton gp" AL a)= AL -195) ~ 208, nthe soton sity Hoy yt 208+ (30000 20NV(095), ‘The term 2N is consiant and docs not vary with time Thus, wl decrease i and ‘only if 20000 ~ 209/085) decreases with Since (0.85 decreases, appeomhing 210, ths wl Be ue rece when dhe constant ate (30000 ~ 204) is poste ‘Tras we require 30000 20N'>0, oN < 1500, Sins ean ings tht condition bocomss = 1499, Tharfors ifthe Euno-comimisionsr mages to negotiate & ‘ale of Wn larger han 1495 she wil nse vitor “The ial par ofthe problems concems what happens ifthe eommisionsr manage to mcgiite vale of Na loo L700, We Fit subsite the va = 1500 no ‘he general expression or yt obtain the solution m this ease. Ths ves 24> 20.30) + 50000 - 20 31094(0.95}'~ 2600 + 4000.95. [efllowsthat he condom y< 27500 is 26000 + 0001095) 7500, swish reduces to (0.98 < 0.37. Til with a calelator (or the mothad 1a be Assert in Seton 73) yes = 20. Ths th tags of 27500 will be achioved in the vamtth year Example 35 A closed econany produces an income Yn yea FoF whieh apt Cy ‘consumed andthe reminder J is avesed; has N-Gth eis blicned hat comatrption Cyn year ome bal ofthe cuz! yea’ income; thats, = J¥, Its lived that next yes income is proportional othe curt investment thats, Y= where is a conan Show that investment J sates fe-onder recumence equstion, and find the oalton tat inves (an income se from ea 9 yen Sobaion: This roti is one where armingly comple set of relationships becomes very imple when expremed mathemstcally We are gives thee et relating Cle 1, 5 Ct Gm bap N iM cay, listing C, om the fist eowstions, we gstHome z Replacing by #1 in the thi equation gives %,~ Hf Thos tye) s adn fifi “The equation f,~ 2 is plainly «first-order rectence equation. The soliton (hich easy enough ose del hoe, o which follows by taking b= O an a= 122i the stand fou it i= lh. he ince i hn we mt ve £2 > 1 The cnn fr insieatoloore tt A> 2 Bxampl 4 marke s made by the lowing demon nd saps ctw: PO--ndo-r Datin the etic ad uy Suppose hat for some etal reason the mares disturbed aud hat the acta price i reduced top = 34, 0 hot demand exceeds supply. Aesume that over ven ine peri (0 mut) the ering hae in prce proportional fs the ‘roe thei Pe Per=UPOa)~C48). vrhere € As a postive constant. Solve this equation and show that the price approaches the ell val Wan only fe = esrb earful what happens when) |e «and © = b Solution: The oqulibium prize p” and eouilibiam quantity g* are sbained by solving the equations tpg ap a = 6 Wetiave dp" =p'ss0p"=dandp"=2, giving (Consider he equation 9, — 72-1 =@PtPe-s)— 4p). Using the expressions for @P and i this becomes P.-Pes =eld—D) Pee 20d soa Pen. 2ep1 +46 “hie ie linoar ft ordr scene in standard fom, »;~ ayy 4 A wth pin laze of yy and a= 1 2c, B= de. The time-independent salons A412} = 40 = 2c) =2, an the general sltion when pp = 34s P= 240 2K1~ Def = 2 S207 ‘Toe behaviour ofp is dstrmined bythe behaviour of 2) everything ele in this expression being independent oft. Ceaty wl tend tovards the equi pics of2 if and only sf 2» O a >, whi isthe case precisely whsa TL 2e<1, Remerbssing tht is givn obs postive the condition 1-22 1 ‘sautomtialy satisfied and 1-1 2eimpliesthat2e 2,0 ¢< 1 ‘When ¢> 1/2 the tem I~ 2e is negative and the pice will silat: it il be sratlygretr thin 2 and les than 2,1 aio © I then f 20> 1 ond the ‘osillations wll decrease in magne andthe pie il end to 2. When ¢~ V2 weave |= 2e~tlandthe equntin form Becomes = 2, ta the pie remains te qulbium sale fr all> 1 oHome Main topics * dorvng and soving itor ecurene equations “ne timeindependnt solo + the lmitng behaviour of of “tn imitingBehaioar ofthe soon resumen Key terms, notations and formulae + sand iat-oede ner recutene, = a1 + imeindepensent oton, "= Bf! a), (a) + nial conditions + pened oition 919" ye + notation for limits. g (059+ Das +22, or im) = 0Home Exercises [ereae 3. Find he solution tothe fling rewrence equation pts (2120 ercie 3.2 Desriein wade the behavsar the follwing uence ax s+ aay, (yoy, Exercise 3.8 Find the solution of the recurrence mendes PSNI venta yy ~7- Deri its havior a erete 3 Find the time-independent solation of the recrrene equation DUH L235) anes ‘Fash solution when yp = 6, aad deserbe is baka ow ast Exercise 3.8.4 compuny currents employs 4000 staf, working tal of 8000000, vrking hors por year plans orale etal employe hx worlng hours) by E onsaed ech yar, where Els sume eonsan The compan estimates dh, eal Year dhe to worker? reaving, Teasing, or reducing thet” WorMoads, the Yoel br af working hours employed the curent workforce dees by W Let Yybe te al manber of thousands of hows worked by the employees the vear ending scfm nw: Esplin hy v(t for 12 1 The company plone to einai at eae caren emploimen i the {ate ind a xpreion for yaa dedicat E should a E> 0 Raercie L6 A market fro comm i mle by the demand nd suppl functions Py)-3-p.Fo)-P Wat teem price? The marke is initialy mo in eure ad any ime te exient price prelate to he price in the pris peri By the equation PHO ee HM BOD shore rare posite conan with E> rr maybe thanght af a a mess of the te of faion) Atrime = Othe price ip ~ 1 Solve tis equation and show that over ume the rie tends to. ming value fan nlf kel tea ‘Sho ha sas Aang vei grater han 32 and es than 3, ana wo gua ‘ode gully priceHome 4. The elements of financeHome 41 Interest and capital growth Inthis choptee we sal ook at one of he base mods we in aoa sono, and work out ts ropes using the general theory of the fistordr inca Sppose there is fined annul interct rateavilabe to investors. We sal exes srasa abr, ther than a pcrentge, tht whats commen given asa ae oF ‘per anmineorespnds tor 0.08 In this we invest SIN ths oer ons scar we all ave SiO0 SK SDK, More general Hf we invest then afer one {ear we hve P-=PP =r). (From now on we omit the cumeney uns, Beemse ‘hey at ielevant othe elcuations | \We ca me this simple model to describe ental gnwt Suppone we invest Pf Y year as comstant arma nee rate 7 Une Ky be de capa al the endo ‘ne th year we have yy ~ Pan the reurence AO Pre 23) “This isin he standard form disused inthe lst chop, wth @~ (I +P) and b=. ‘The caution is sly obvious (even without any shooryk i is, ~ (1+ WP In paniculata capital Calter N yeas willbe iy that is coat. Tes insrutive to think of the raionhip between P and C inthe language of ‘mathematical fueton,o in Figure 41. Tho input ite priniplP, the Funston is"invavmont for yer tne ate and the ou ite apt Ca inte formula above In her words, Cis dterminod a a funetion af P by the frm cma tye p —|omial| P| Prem |e enh | ae igare 41: Relationships between prin and capital [Now suppose me reve the quetion 1 re want to ensue tht the final apa x {Gal sould be the principal PY Cle ti xed by spy enranging the ‘spain that we get Pin ems Cal © MO Tea tn mthematicalIngungs, we have found the inverse of the Capital Growth function (sce Figure 41 xi) In coonomies and fice this known 08 calling the prsent vue ofa capital sim C. dict N years given fined Intra is very important Bees it rales st compar the guanteed ret fom a iso ate ivexment with the tet fr her ways of wg The rie. Example IF a flere 2 gill citer $5010 no $1000 in seven yea ie, ‘which sould accept, given te Gnd neest rt of 4? Hore we have to calelate PC) when C= N= Te formula gives 0000, with the parameters = 0.08 and 10000 = Com snl ing the aprimation 105)? 17182827 we bi the pact vaae of SEK 90. So Ishuldacep the S6ODD now Fh oh eka tink of in the Following way The ft th the resea valve of $1000, de 7 years ra noe unde the previing ite rte, ee an 6000, x exuvaen o the saenent that $600 svete now wuld generate mre than SIODDD afer 7 year nother ‘ers ifwe are prepared ow seven year thes we are ely peared a ake the am cm flr maw ad place in a bane acount We given tne! te, leaving it unouced for sven year The amount thm generated is 60.08)" 1022.5, which s more tan 10000 (OF couse, you my decide otto low this course of actin if you have debts orf you really amt that new house, ea oF watever ace In ther words, his analysis makes sens: if yu ae planing to fryer the money instead you planted to spend i, you should ke ins account the wetness of owning te items you purchase)Home 42 Income generation ‘Asian stereo capital got, peple oem vet be mony b'prvide repr ncome olen known ean anny Suppose we ives ad wien 25 ‘mount fa heen leach year Fn year a hich ime te cpt med ‘What income can be genersed fon he principal Pa (maertialy speaking), vata ie ae anion of PP Here the sesimence eas n= (1 Pig where ne P “his is another case ofthe fst order Hinarecuenes in tandard frm with @= (1 + jan b = The time-independent solution is therefore y* = Fe The gent selon yy =)" * (ye snd since yp ~ Pw aba Le (eDaa In ower ta deem /2¢ fusion of P we mst we the contin dha oti i let ale N years hai yy =O. This covitiom La(r-Dunar a and eaanging we wet oon sage r, Faery = Pate, sothat se) = (fee). ‘Hae too it is natural to conde the invere funtion The question bate is: what a = 6 principal is required wo provide an anal income fo the nest VY yars, or What Inthe Inve funton PU? Rearanging the equation gives te result (ae) ‘This lis ws the preset vale of an anuitygeneting each year gunned for the newt W years ‘Example Whats the presen vale of an ann next seven years, given the fed interest at of sneitng SIAN 9 ye forthe ‘The Fm gies 1080 /, ro oe (oar) the pprosinaton(L.08)7= 1 T142427 we oan the sone Eauisalenly $52063 70 invested a 8% will provide $1000 pe yet forte ext 7 yes .Home 43° Theinterval of compounding In the foregoing discussion we have ten +t be the annual ate of intrest, and _scumed ht the ileret nade a ingle mp sama he end f exch ear Ih ince to ak whal happens if interenli de tare Feuer. Suppose, fo ‘ample, hal 4% inves aed wiceyealy, once atthe mide ofthe ear a (cea the end (We ay thal the the “ogi arma ales 8% along a8 we stall se, sch an arngemen doe aa have he tame effec xt single payed of fe) one principal «$109, te sap fer one year al bs oot + 0.08)? ~ 108.16 which lightly move han the $1O8 which ens from the sngle annual son ‘intrest i added quarterly th apt afte oe yar le approximately. In general, when the year is divide into|m equal pees the ‘syuivalent ate sn aver each ped, ad the capital after one years 100 (142)". Our numerical experiments indies tht the quantity inereasee steadily athe ‘unber oof conspounding intervals increases. (rerele: work out the atewer if the iret added ily, tats m = 365) An abviows question, which we shall tower in Chapter 7, wht happens asm — 2Home Worked examples Example 4 Shite don ext formula for (2) he fin vee C(P) of en aroun Pies 6 onaeal nee fr 0 ears, here tn anna wea: (©) he constant anil Income IP) generated by on amount P nesta at 3% ‘anual inverest aver 10 years, there bof copa. ce the apposition (1.05)! ~1629,) ie down the inverse fcsions PCC) aad PCD) and give thelr imerpretion a eons ofpreses val Solon: Fora we use the fe fa pinsipal inves at constant ann ts - fe yeas wil ow 19 A Hat, he nts SH, 907 = 005. The snow in thertore€(P)~ PL +008) or CP) ~ 19? approximately Forpast (we ue the formula sven in Seton 2, with r= 005 and = 10 y= (4) ee ( a) . (94a) (C22) » ora. “To determin he inverse faction AC). note tat C~ 1.6297 sequvalent to P= (1.629 6159, 20 tat PC) = 0.0139C. This the amount of money wih ‘vil provid the capital som aftr 0 years constant ners ate of 5: mht ‘rons the present waco Il yin rom now, even fixed 5% nferet ate “To determine the inverse Feetion PY), we ole 1 O.1295P x equivalent to = 101995 ~ 17201. Ts, Pr) ~ 77221 This the principal which wil generate x ‘carly income othe next 1 yas that i the prssent ai fam ani af or ‘he nat 1 years, gven a ied 5% a 1 42 Sipps tht yor hve eo competition ina ntinal espe @ e ‘and you can clnase ether o receive a amp sum of SIOBEO0 ows ar «payment of 20000 a he end ofeach year for she met seven years. Which prize sho you ‘ehoase asswning tet the highest ores rate you can obtain a constant ‘ver he seven-ear period? Solution: We calculate the poset value of the srsam of income (that is the monty) and compar thie wi $10 OK Using the forma woth r= O07, N= 7. =a, we se that the press alive of 2000 a he end ofeach yar fe he nox seven years is vt ady a Sine this is eteter thon 101000, i yoo act rationally yom should aeept the tmnaty rather tha the cash su. (OF course. as mentioned in the Section 4 this analysis only makes sense if you woud eines were you 6 oecept it) = 10757, Example 43. amonnt of $1000 is invested and lati interes at rate sqrt to WM per aru Find the fol after one pear of tne interest wnpourded (a) eras.) qurtr (cant) da. Assume the year rot ateap year) Solaion: We mie the fact th ifthe inks x pil in equaly spaced instal, then the tl ter ne yeas 1000 (1 ++ £)™ where = 0.1 and = 1.4.12, 365 inthe fourcas. Thtfore the answers ae a allows: tm 01-10 (1 28)'— sa 000 (14 2)" = cn (14 92)" @ ae sa (1+ 2)" = steHome Example 44 Show that the presen vale of an amity of 1 for N years, ven the fied meres rate 8 1 me Use the rma (vex +38 +t) er aha tha hi eis the sam expression or Pas that piven i Section 4.2 Solution: To lp explain she genoa approach, imagine that you wore offre 1000 one year fom now factor wth $1000 two yeas fom now: ad that he ines ae was constant at ¥%, How would you dtemnino the presnt Yas of ‘his anni? One way ist observe that he proset value ofthe fet S000 ie 10C01 08 (ince it duc one sour from aos, he preset value ofthe socond $1c00 (due wo yews fiom now) i 10001087, and so the poset valu of the ‘anuity must be the sum of these eo present valus; hat 1000.08 + 1001 0872 ‘Consider now de general case, wen the anal ipeome ig Jad theatres ates The peseat also the ist payment i 1-1), the present vale ofthe sacoad _siyment is (LAP and, generally he resent vale ofthe th payment + Fr folows thatthe presen ric ofthe army. which i the sy nf the presen sale fry I, 2X 0 sted above Using the forma wth = (2H, we ve Mulpying bye obtain the veuied expression for PrHome Main topics “intrest capital growth andthe meaning of present value *rocaene® equations in annuity problems + the interval of compounding Key terms, notations and formulae * principal, Peal, © + with anal composing, C= (9% ¢ + rss lo wih am compounding, PC) = 7S seni ote) (gf22,) ; pvt r=! (1)Home Exercises ercne 4.1 Suppose tht sainer acount pays rest mala a ate of Aninvetor depen ans SP which large evgh tense tht. ch Sear far the mex 13 yrs, she con withdraw SI. rom the acuta he end of The {ar maiming a non-negative balance. Let, he he amount of mone in the ‘account fe ears, 8 that y= P Epa wy = 1054 1000, {re 1.2.3, Find an expression fry, and honce show that 1 ream (\- a5) ercite 42 Jngine yo hore S200 fo iment emastan rate of 8, a ‘het yon an 0 witha fed aca The ed of each sear forthe net nem yearn Wl he mariposa of Lor wc thi psi? Aner the same question wir of Ire ta be made othe begining. of echo the nest ent eas ocr the preent ear) ere 43 How ack shoul om inset now ha acount wher the ines) drei cotant 794 in ler te let ihr $1000 a the of each of he nest ty oars? nerese 4 Suppose yow have wor competion ana sh you are given the ‘hole Bewean $180000 aoe $10000 a the a of ach yu for the ms of your Nfs sine tha the bank has constant intrest rate of 8% and that yon ‘urenty have no debs (0 that your decston Sea purely atom on, based on ‘presen vale), Wich option should you ehoare ify thnk yon wl ve) unt 5) wal 10, fe) forever? qnre (a) ion ave one 65.) Exercise 45 an amcunt of $2000 is inverted amd atracts inerest at arate eubalen (0 8% per umm, Find the tou afr one year i the Ieres ampaured (a) analy (b) quarters fe) dal (Ascune the Yur na ep year)Home 5. The cobweb modelHome S.A How stable is market equilibria? In thie chaper we shall discs the stability of the markt fora single goad. The questions we adress concern the way in which the markt operates when there isa ‘me-lag nthe actions of the supers, andthe way in Wich he market reacts ‘en extral coe at he sy We consider am agricultural prot for which thee is 9 yearly “cop and for sve the spy am dean st ake the fil form shen Im Figure 51.1 ‘ere aren disturbances the gulibiam pice p" and quantity” will bas chown inthe digram. Suppose that one You, fr sons extemal reason such as drought. ‘here isa shomag, so thatthe quant falls and th pie rises py. During ths inte the Famer plan ter poduetion fr dhe next year om te bass otis isha peice, and so am ipeteased quantity appcuss om tbe masket in the next Sou specie falls, tothe value p, = p?(q,). Overall, the effect ofthe disturbance om the price is that it ges fom pg. which x greater than pop, which ees than po 111 ~ Pl) Besaane the quantity ix peaer the price commer pay @ e Figure 5: The fet ofa disturbane, overs one soar ese But we ae ot Finished The process i pete agai inthe Following ye thie time the wer price leas ra decrease proton 4 ar hal fr mes 2 higher price 72, The next year similar press aks place. a 50 on When the Sequenes 7p. Pi. Paws 8nd dye gion ae posted on the supply and demand gram, we get pice lke Figure $2. This isthe vat forthe mame ‘cobweb model. Figare 52: A cobwebHome 52° An cxample Is appa rm the diagram tha he sequence jp =O, 1,2, ile, the erm ‘wing alters roar and es than tho eoulbium pice and that he valss proach p” ab the yeas go by. In yzetal, th sequence of pies determined by the ital pie py the spy function 4, andthe inverse demand fneton ‘Gencralising the argument abows, we se that 7 tenis hich fy eremng py acording tothe rules =e. shee). Inany given care we can use these equstions fo bina reeurence squstion Fr, ample Suppose thi the demand and supply setae flows. = Ha plat P~24.5~ (fp) | 2918p) “Then the cquilibeium quantity and price ore q° 2. p" $0) 0579, Pe) hg 22. and “The eations inking, gay ae = 25p,1-9.0,= My Eliminating we obttin a irs-onder ina recurs fap: P.=33-05p. “hiss in the standard form y,~ avy. + 4 with py opacng and y =-0.5, 6= 438. Te timindependet solution is) ~ a) = 33(37) = 22, andthe explicit ‘lion in wr of Pe=22* (py 2H-05), Not surprisingly the time-independent soliton ithe sauibriom pice” ~ 22, and inthis eas the sequence approaches pin an osciltory Way. as suggstd by ‘he discussion in Sect 5.1. For snap, if we sta ith price higher tan he cquibium pris suchas py 23, hoa we have P1~215,p~ 22.25, p)~ 21875 advo 08Home $3 ‘The general linear ease We now ook af more genera eaures ofthe made. We know tt yi determined ‘by gu whi x dcterined by py. aconding tothe spy and demand sqvations sven above. Infact we ean bypass g by puting the two equations together; his sous pasa “ution fa Funes’ of, 2 =P Homer al his is it abraham xo we shall concer onthe case when S and Dare sraight lms, In genera, we may tke S= Hla p)\g~hp-al, D= (ig plla=e- dos “The reason for wrtng the exaton im this form is that whon 8 A © and are ose the sets Sand take the “economy respetale’ frm shown im Figure Sh We shall noo the expt formlae fr the fimcons and? which ane Si Pig) £4. Ce Following the method used inthe Exarpl we bain cma _e-tina-o) a which simplifies to B)oue (4) Figure 535 The linear ease ‘This is just another nea Sat-orderrecutence. To solve it, we fst fad thetime- ‘dependent solution ‘We obsove that his isthe equibium vale of the peice, in other words the value ofp whste dhe lies g = Apa and g = © ~ dp intersect! This is nt relly Sapislig ee per gine RS ee pt ee apoctll ubsoquo! vals oft ean "ali ‘Wha happens ify #p°? Ua this case we med look atthe general salon tthe recurence which according othe general theory ren-n(2) Athi point may lp o lok at anther example "Example Suppose the sippy end demand sts ars given the equations =p 2 and ¢' 7 Zp resoetvely. Then we have |. 42m the above aotation, and the reewrenceHome Fi O5p 745 ‘The elvan rice p"is (7 2)(1+2)=3, andthe gnarl solution i Pi=3+ (9-30-05 Suppose thar we sta with a igh rlce such as py ~ 3.5. Thon we find that, = 2.95,92= 3.125, py =29375 and soon The prices ocillae around ihe euitium value p*~ 3, and beense (1.5) approaches zero as the magnitude ofthe sllation dereases and pp" asc. We say tht she markt egulibeiun is ‘able hs eave Thx nea tha f the process hepa one ran pice, then twill evertielew approach the qui pein the cure of tine a Inde example the ea thal py pas. ha 0.5 tly ebween = and and 50 (05)! —» 0 asf», the gnstl cas, 05 in rplaad by the appropriate value of bd and ao it is this which detines wht or nt the ‘xu is abe Recall hat b and dare both postive s the eriterin is simply whether a not bs Tes than itis, hen es Between —1 and 0, amd +0 a tbe ote hand, i is greter than dW <= 1 and hi! xcilloes ith increasing up, In hi cane the exis aes the ail rice i lene from phen however rl he ference, the price sil at approHome SA Economie interpretation \We can ge sill more insight ino the ee omomic nerpeetation ofthe beh model by oan that hand d meas the slopes of the Sad D ses espotinely, So the ality condiion bsp means th the Sine i ‘expt the Diet Pls Langage, i change athe quantity allt the supplier price moc han th {Sommers price, hem the equim wil be stable, (Haring. ks which ake the pais to be the borizonial one the Smal concn ie the same, ba the argument about ihe tepnes of he ines is evesed) Ofcourse, we might wish look athe question of tabi hen the San sce sae nol sight lew Clely tha will repute 9 mathematic technique hich Stables ut to define the slope of morlmcar finetons This telmgue, the ‘Bernt all, willbe ioodace in the mest chapterHome Worked examples Example S1 Consider a market which the spy and demand sets re S (0.0) a= 3p 71D = (1,9) 4=38- 2p te down the recurrence equations which deiemine the sequence p, of prices stuming thatthe suppers operate according 0 the cobrob model. Fld dhe ‘pice solaton given tha py = 4, amd describe in words hot the sequence p, haves rite don a forma for ay the uate market year t Solution: Hare. gp) = 3p Svein ae 7 and. pq) = 404 —4) The cqutions Baa adh ya BS ‘which, on eliminating go oud to the single ocurenes » bn ie =395 0257-1 2 ‘The ime-independet solution te his equation is as is ad tho explicit soutin is Pop" +o C025)~ (ors ‘The behaviour ofp, is dtemincd by the behaviour ofthe term (0.28). This silas with dacteatng magnitude and approaches Oa tends wo iain: hs, ‘silts and ends op” = 3 as tnd infin “Tosi gg we ae te fact that ee TSG +0281 7-24 ssh o Example 52 Sappne tt he spey an demand inci for crm are fp) = 3p 2150, 4p) =8800-p. Assuming tha ihe supple operate according 1 the cobweb mod, find « reeurance equation forthe sequence p, of pics. Find the explicit solution givan that y= 7499, and destin words bow the sequence , boas. Sotaion: Here. g%p) ~ 3p ~ 1 and pig) = 2~ q The sequence py of prices is dlsormined by th reourencesquations 4 Bey} ~ 2, = 8800-9, where i the sequence of quantiles, Elinining gy we obtain the singe (P= 8500 (3p, 21500) = 30000 3p. ‘The timesndeperdentslution lo ths equation isp" = 200004 ~ 7500 andthe cpl ston i Peep Pap VAY = 15003) ‘The Behavior of yx donned hy the haviour of the tem (3! Thi sails inerasnly as «eds ins ths, oscites increasingly andthe cauihcum s wtb is questonae wheter sud behaviour i comically Salt del ste age ean, he model een pec that he pie py wil be agate. One can imagine ti, in realy de hevowr excel by an Uae bch proces sony tanary ard hath sappy and sons ‘ln wht sopping ad ceo canes by the ode o Example £3 Wihow soling any equations, determine whether the cobweb model predicts sible eur forthe mark th Pos P62 Solution: Note tht sre the supply an dma funetons reo he Fem 8p) =