Instructor’s Manual

Mathematics for
Economics and Business
Ninth edition

Ian Jacques

For further instructor material

please visit:
www.pearsoned.co.uk/jacques
ISBN: 978-1-292-19167-6

 Pearson Education Limited 2018

Lecturers adopting the main text are permitted to download and photocopy the manual as
required.

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First published 1992

Fifth edition published 2006
Sixth edition published 2009
Seventh edition published 2013
Eighth edition published 2015
This edition published 2018

© Pearson Education Limited 2018

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ISBN 978-1-292-19167-6

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 Contents

Solutions to Problems 4
Chapter 1 Linear Equations 4
Chapter 2 Non-linear Equations 53
Chapter 3 Mathematics of Finance 93
Chapter 4 Differentiation 115
Chapter 5 Partial Differentiation 166
Chapter 6 Integration 201
Chapter 7 Matrices 219
Chapter 8 Linear Programming 241
Chapter 9 Dynamics 261

Excel 278

Advanced Topics
Advanced Topic 1 Differentiation from First Principles 313
Advanced Topic 2 Implicit Differentiation 317
Advanced Topic 3 Hessians 320
Advanced Topic 4 Input–Output Analysis 325

Solutions to Advanced Topics 338

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 SOLUTIONS TO PROBLEMS
CHAPTER 1

Linear Equations

Section 1.1 Introduction to algebra

Practice Problems

1. (a) −30 (b) 2 (c) −5

(d) 5 (e) 36 (f) −1

2. (a) −1 (b) −7 (c) 5

(d) 0 (e) −91 (f) −5

3. (a) 19 (b) 1500 (c) 32

(d) 35

4. (a) x + 9 y (b) 2 y + 4 z

(c) not possible

(d) 8r 2 + s + rs − 3s 2 (e) −4 f

(f) not possible (g) 0

5. (a) 5z − 2z2

(b) 6x − 6y + 3y − 6x = −3y

(c) x − y + z − x2 − x + y = z − x2

6. (a) 7( d + 3) (b) 4(4w − 5q)

(c) 3(2 x − y + 3 z ) (d) 5Q(1 − 2Q)

7. (a) x2 − 2x + 3x − 6 = x2 + x – 6

(b) x2 − xy + yx − y2 = x2 − y2

(c) x2 + xy + yx + y2 = x2 + 2xy + y2

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(d) 5x2 − 5xy + 5x + 2yx − 2y2 + 2y

= 5x2 − 3xy + 5x − 2y2 + 2y

8. (a) (x + 8) (x – 8)

(b) (2x + 9) (2x − 9)

Exercise 1.1 (p. 18)

1. (a) −20 (b) 3 (c) −4 (d) 1

(e) −12 (f) 50 (g) −5 (h) 3

(i) 30 (j) 4.

2. (a) −1 (b) −3 (c) −11 (d) 16

(e) −1 (f) −13 (g) 11 (h) 0

(i) −31 (j) −2

3. (a) −3 (b) 2 (c) 18 (d) −15

(e) −41 (f) −3 (g) 18 (h) −6

(i) −25 (j) −6

4. (a) 2PQ (b) 8I (c) 3xy (d) 4qwz

(e) b 2 (f) 3k 2

5. (a) 19w (b) 4 x − 7 y (c) 9a + 2b − 2c

(d) x 2 + 2 x (e) 4c − 3cd (f) 2 st + s 2 + t 2 + 9 .

6. (a) 10 (b) 18 (c) 2000

(d) 96 (e) 70

7. (a) 1 (b) 5 (c) −6 (d) −6

(e) −30 (f) 44

8. (a) 16

(b) Presented with the calculation, −42, your calculator uses BIDMAS, so squares first to
get 16 and then subtracts from zero to give a final answer, −16. To obtain the correct
answer you need to use brackets:

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( - 4 ) x2 =

9. (a) 9 (b) 21 no.

10. (a) 43.96 (b) 1.13 (c) 10.34 (d) 0.17

(e) 27.38 (f) 3.72 (g) 62.70 (h) 2.39

11. (a) 7 x − 7 y (b) 15 x − 6 y (c) 4x + 12 (d) 21x − 7

(e) 3 x + 3 y + 3 z (f) 3x 2 − 4 x (g) y + 2 z − 2 x − 6 y + 2 z = −2 x − 5 y + 4 z

12. (a) 5(5c + 6) (b) 9( x − 2) (c) x ( x + 2) (d) 4(4 x − 3 y )

(e) 2 x(2 x − 3 y ) (f) 5(2d − 3e + 10)

13. (a) x 2 + 7 x + 10 (b) a 2 + 3a − 4 (c) d 2 − 5d − 24

(d) 6 s 2 + 23s + 21 (e) 2 y 2 + 5 y + 3 (f) 10t 2 − 31t − 14

(g) 9 n 2 − 4 (h) a 2 − 2ab + b 2

14. (a) 6 x + 2 y (b) 11x 2 − 3x − 3 (c) 14 xy + 2 x

(d) 6 xyz + 2 xy (e) 10a − 2b (f) 17 x + 22 y

(g) 11 − 3 p (h) x 2 + 10 x

15. (a) ( x + 2)( x − 2) (b) (Q + 7)(Q − 7) (c) ( x + y )( x − y )

(d) (3 x + 10 y )(3 x − 10 y )

16. (a) 4 x 2 + 8 x − 2 (b) 3 x 2 + 2 x − 3 x 2 − 15 x = −13 x

17. S = 1.2N + 3000E + 1000( A − 21); $204000

18. (a) C = 80 + 60L + K (b) C = 10 + 1.25x (c) H = 5a + 10b (d) X = Cd + cm

Section 1.2 Further algebra

Practice Problems

3 4 1 1 1
1. (a) (b) (c) (d) (e)
5 5 2y 2 + 3x x−4

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1 3 1× 3 3
2. (a) × = =
2 4 2× 4 8

7 1 7
(b) × =
1 4 4
2 8 1 2 93 3
(c) ÷ = × =
3 9 1 3 84 4

1
8 8/ 1 1
(d) ÷ 16 = × =
9 9 16 2 18

3 1 2
3. (a) − =
7 7 7

1 2 5 6 11
(b) + = + =
3 5 15 15 15

7 1 14 9 5
(c) − = − =
18 4 36 36 36

5 x −1 5
4. (a) × =
x −1 x + 2 x + 2

x2 x x2 x + 1 x( x + 1)
(b) ÷ = × =
x + 10 x + 1 x + 10 x x + 10

4 1 4 +1 5
(c) + = =
x +1 x +1 x +1 x +1

2 1
(d) −
x +1 x + 2
2( x + 2) (1)( x + 1)
= −
( x + 1)( x + 2) ( x + 1)( x + 2)
(2 x + 4) − ( x + 1) ( x + 3)
= =
( x + 1)( x + 2) ( x + 1)( x + 2)

5. (a) 4x + 1 = 25
4x = 24 (subtract 1 from both sides)
x=6 (divide both sides by 4)

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(b) 4 x + 5 = 5 x − 7

5= x−7 (subtract 4 x from both sides)

12 = x (add 7 to both sides)

(c) 3(3 − 2 x) + 2( x − 1) = 10
9 − 6x + 2x − 2 = 10 (multiply out brackets)
7 − 4x = 10 (collect like terms)
−4x = 3 (subtract 7 from both sides)
3
x=− (divide both sides by −4)
4

4
(d) =5
x −1
4 = 5( x − 1) (multiply both sides by x − 1)
4 = 5x − 5 (multiply out brackets)
9 = 5x (add 5 to both sides)
9
=x (divide both sides by 5)
5

3 5
(e) =
x x −1
3( x − 1) = 5 x (cross-multiplication)
3x − 3 = 5x (multiply out brackets)
−3 = 2 x (subtract 3 x from both sides)
3
− = x (divide both side by 2)
2

6. (a) 12 > 9 (true) (b) 12 > 6 (true)

(c) 3 > 0 (true) (d) same as (c)

(e) 2 > 1 (true) (f) −24 > −12 (false)

(g) −6 > −3 (false) (h) −2 > −1 (false)

(i) −4 > −7 (true).

7. (a) 2x < 3x + 7
−x < 7 (subtract 3x from both sides)
x > −7 (divide both sides by −1 changing sense because −1 < 0)

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(b) 21x − 19 ≥ 4x + 15
17 x −19 ≥ 15 (subtract 4x from both sides)
17x ≥ 34 (add 19 to both sides)
x≥2 (divide both sides by 17, leaving inequality unchanged because 17 > 0)

Exercise 1.2 (p. 36)

1 3 3 1 4 1
1. (a) (b) (c) (d) (e) = 1
2 4 5 3 3 3

35 7 56 14 56 3
2. (a) = ; = (b) =1
100 20 100 25 35 5

2x 1 1 2 3a .
3. (a) (b) (c) (d) (e)
3 2x ac 3xy 4b

2p p x 1 3ab b
4. (a) = (b) = (c) =
2(2q + 3r ) 2q + 3r x( x − 4) x − 4 3a (2a + 1) 2a + 1

14d 2 x+2 1
(d) = (e) = (using the difference of two
7 d (3 − e) 3 − e ( x + 2)( x − 2) x − 2 squares for the denominator)

x −1 x −1 1
5. = = ; other two have no common factors on top and bottom.
2 x − 2 2( x − 1) 2

3 1 3 2 5
6. (a) (b) − (c) + =
7 3 6 6 6

15 8 7 3 4 7 1 4 5
(d) − = (e) + = (f) + =
20 20 20 18 18 18 6 6 6

5 3/ 1 5 2
4/ 3/1 2 7 2/ 1 7
(g) × = (h) × = (i) × =
/ 4 8
26 / / 2/ 1 5
515 / 3 12
48

1
2/ 5/ 1 1 2 1 2 3 7 21 1
(j) × = (k) × = (l) × = = 10
/ / 4/ 2 30
15 75 9 3 27 1 2 2 2

1 1 95 5 95/ / 19 4/ 2
7. 47 ÷ 1 = ÷ = × = 38
2 4 2 4 2/ 1 5/ 1

2 1 3 1 2 x/ 1 2 3 2 3 x 2 3x − 2
8. (a) + = = (b) × = (c) − = − = 2
3 x 3x 3x x 1x
/ 5 5 x x 2 x2 x2 x

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7 2 7 y 2x 7 y + 2x a a 1 a/ 6/ 3
(d) + = + = (e) ÷ = × =3
x y xy xy xy 2 6 1 2/ a/1

5c 5d 15c 10d 15c + 10d x+2 y − 51 x + 2

(f) + = + = (g) × =
12 18 36 36 36 1y −5 x+3 x+3

4 gh 2 g 2 4/ gh
/ × 9h = 18h
2
t t 1 t 1
P/ Q/ 1
(h) ÷ = (i) ÷5 = × = (j) × =1
7 9h 7 2/ 1 g/ 7 4 4 5 20 1Q/ P/1

9. (a) x + 2 = 7
x=5 (subtract 2 from both sides)
(b) 3x = 18
x=6 (divide both sides by 3)
x
(c) =2
9
x = 18 (multiply both sides by 9)
(d) x − 4 = −2
x=2 (add 4 to both sides)

(e) 2x − 3 = 17
2x = 20 (add 3 to both sides)
x = 10 (divide both sides by 2)

(f) 3x + 4 = 1
3x = −3 (subtract 4 from both sides)
x = −1 (divide both sides by 3)

x
(g) −7 =3
6
x (add 7 to both sides)
= 10
6
x = 60 (multiply both sides by 6)

(h) 3( x − 1) = 2
3x − 3 = 2 (multiply out brackets)
3x = 5 (add 3 to both sides)
5 2
x = =1 (divide both sides by 3)
3 3

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(i) 4 − x = 9
−x = 5 (subtract 4 from both sides)
x = −5 (divide both sides by −1)

(j) 6x + 2 = 5x − 1
x + 2 = −1 (subtract 5x from both sides)
x = −3 (subtract 2 from both sides)

(k) 5(3 x + 8) = 10
15x + 40 = 10 (multiply out brackets)
15x = −30 (subtract 40 from both sides)
x = −2 (divide both sides by 15)

(l) 2( x − 3) = 5( x + 1)
2 x − 6 = 5x + 5 (multiply out brackets)
−3x − 6 = 5 (subtract 5x from both sides)
−3x = 11 (add 6 to both sides)
−11 2
x= = −3 (divide both sides by −3 )
3 3
4x − 7
(m) =2
3
4x − 7 = 6 (multiply both sides by 3)
4x = 13 (add 7 to both sides)
13 1
x= =3 (divide both sides by 4)
4 4
4
(n) =1
x +1
4 = x +1 (multiply both sides by x + 1)
3=x (subtract 1 from both sides)
1
(o) 5 − =1
x
1 1
5 =1+ (add to both sides)
x x
1
4= (subtract 1 from both sides)
x
4x = 1 (multiply both sides by x)
1
x= (divide both sides by 4)
4

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10. (a), (d), (e), (f)

11. (a) 2x > x +1

x>1 (subtract x from both sides)

(b) 7 x + 3 ≤ 9 + 5x
2x + 3 ≤ 9 (subtract 5x from both sides)
2x ≤ 6 (subtract 3 from both sides)
x≤3 (divide both sides by 2)

(c) x − 5 > 4x + 4
−3x − 5 > 4 (subtract 4x from both sides)
−3x > 9 (add 5 to both sides)
x < −3 (divide both sides by −3 )

(d) x −1 < 2x − 3
−x −1 < −3 (subtract 2x form both sides)
−x < −2 (add 1 to both sides)
x>2 (divide both sides by −1)

12. 2
4 2x 4/ y 2
÷ = 2 × / = 3
x2 y y x y/ 2/ 1 x x

13. (a) 6(2 + x) = 5(1 − 4 x)

12 + 6 x = 5 − 20 x (multiply out brackets)
12 + 26x = 5 (add 20x to both sides)
26x = −7 (subtract 12 from both sides)
7
x=− (divide both sides by 26)
26

(b) 3x + 6 ≥ 5x − 14
−2x + 6 ≥ −14 (subtract 5x from both sides)
−2x ≥ −20 (subtract 6 from both sides)
x ≤ 10 (divide both sides by −2 )

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Section 1.3 Graphs of linear equations

Practice Problems

1. From Figure S1.1, note that all five points lie on a straight line.

Figure S1.1

2.
Point Check
(−1,2) 2(−1) + 3(2) = −2 + 6 = 4 ✓

(−4,4) 2(−4) + 3(4) = −8 + 12 = 4 ✓

(5, −2) 2(5) + 3(−2) = 10 − 6 = 4 ✓

(2,0) 2(2) + 3(0) = 4 + 0 = 4 ✓

The graph is sketched in Figure S1.2.

The graph shows that (3, −1) does not lie on the line. This can be verified algebraically:
2(3) + 3(−1) = 6 − 3 = 3 ≠ 4

Figure S1.2

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3. 3x − 2 y = 4
3(2) − 2 y = 4 (substitute x = 2)
6 − 2y = 4
−2 y = −2 (subtract 6 from both sides)
y =1 (divide both sides by − 2)

Hence (2, 1) lies on the line.

3x − 2 y = 4
3(−2) − 2 y = 4
−6 − 2 y = 4 (substitute x = −2)
−2 y = 10 (add 6 to both sides)
y = −5 (divide both sides by − 2)

Hence (−2, −5) lies on the line.

The line is sketched in Figure S1.3.

Figure S1.3

4. x − 2y = 2
0 − 2y = 2 (substitute x = 0)
−2 y = 2
y = −1 (divide both sides by − 2)

Hence (0, –1) lies on the line.

x − 2y = 2
x − 2(0) = 2 (substitute y = 0)
x − 0 = 2
x = 2
Hence (2, 0) lies on the line.

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The graph is sketched in Figure S1.4.

Figure S1.4

5. From Figure S1.5, the point of intersection is (1, −½).

Figure S1.5

6. (a) a = 1, b = 2. The graph is sketched in Figure S1.6.

Figure S1.6

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(b) 4 x + 2 y = 1
2 y = 1 − 4x (subtract 4 x from both sides)
y= 1
2 − 2x (divide both sides by 2)
so a = −2, b = 1
2. The graph is sketched in Figure S1.7.

Figure S1.7

Exercise 1.3 (p. 52)

1. From Figure S1.8, the point of intersection is (2, 3).

Figure S1.8

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2 (a) The graph is sketched in Figure S1.9.

Figure S1.9

(b) (i) $540 (ii) 2500 km

3. A, C, D, E

4. (a) 3x − 10 = 8
3x = 18 (add 10 to both sides)
x=6 (divide both sides by 3)

(b) 3 − 5 y = 8
−5 y = 5 (subtract 3 from both sides)

y = −1 (divide both sides by −5 )

(6,2), (1, −1).

5. x y

0 8

6 0

3 4

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The graph is sketched in Figure S1.10.

Figure S1.10

6. (a) The line −2 x + y = 2 passes through (0, 2) and (−1, 0)

The line 2 x + y = −6 passes through (0, −6) and (−3, 0)
The point of intersection has coordinates (–2, –2)

(b) The line 3 x + 4 y = 12 passes through (0, 3) and (4, 0)

The line x + 4 y = 8 passes through (0, 2) and (8, 0)
The point of intersection has coordinates (2, 1 1 2 )

(c) The line 2 x + y = 4 passes through (0, 4) and (2, 0)

The line 4 x − 3 y = 3 passes through (0, −1) and (3/4, 0)
The point of intersection has coordinates (1 1 2 , 1)

(d) The line x + y = 1 passes through (0, 1) and (1, 0)

The line 6 x + 5 y = 15 passes through (0, 3) and (5/2, 0)
The point of intersection has coordinates (10, –9)

7. (a) 5, 9 (b) 3, −1 (c) −1, 13

(d) − x + y = 4
y = x + 4 (add x to both sides)
so the slope is 1 and the y-intercept is 4

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(e) 4 x + 2 y = 5
2 y = −4 x + 5 (subtract 4x from both sides)

5
y = −2 x + (divide both sides by 2)
2
5
so the slope is −2 and the y-intercept is
2

(f) 5 x − y = 6
− y = −5 x + 6 (subtract 5x from both sides)

y = 5x − 6 (divide both sides by −1)

so the slope is 5 and the y-intercept is −6

8. (a) The line has a slope of −1 and a y-intercept of 0.

The line passes through the origin and for every one unit along the graph goes down 1.
The graph is sketched in Figure S1.11.

(b) x − 2 y = 6
−2 y = − x + 6 (subtract x from both sides)

1
y = x −3 (divide both sides by –2)
2
so the line has a slope of 1/2 and a y-intercept of −3 .
The line passes through the point (0, −3) and for every unit along the graph goes up by
1/2 unit, or equivalently, for every 2 units along it goes up by 1 unit.
The graph is sketched in Figure S1.12.

Figure S1.11

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Figure S1.12
9. (a) C = 4 + 2.5x

(b) The graph is sketched in Figure S1.13.

Figure S1.13

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(c) The diagram shows that the distance is 8 miles. Alternatively, using algebra:
4 + 2.5 x = 24
2.5 x = 20
x =8
10. (a) The graph is sketched in Figure S1.14.

Figure S1.14

(b) (i) From the graph, N = 260. Alternatively, from the formula, N = 10 ×14 + 120 = 260 .

(ii) From the graph, n = 7. Alternatively, using algebra,

10 n + 120 = 190
10 n = 70
n=7

(c) Slope = 10; this is the number of staff employed in each café.
Intercept = 120; number of staff employed managing the company.

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11. (a) When A = 0, S = $9000

(b) S = 9000 + 12 × 800 = $18,600

(c)
9000 + 12 A = 15,000
12 A = 6000
A = $500

(d) The slope of the graph is $12.

Section 1.4 Algebraic solution of simultaneous linear equations

Practice Problems

1. (a) Step 1
It is probably easiest to eliminate y. This can be done by subtracting the second equation
from the first:
3x − 2 y = 4
x − 2y = 2 −
2x =2

Step 2
The equation 2x = 2 has solution x = 2/2 = 1.

Step 3
If this is substituted into the first equation, then
3(1) − 2 y = 4
3− 2y = 4
−2 y = 1 (subtract 3 from both sides)
1
y=− (divide both sides by − 2)
2

Step 4
As a check the second equation gives
x − 2 y = 1 − 2(−1 / 2)
= 1 − (−1) = 2 ✓
Hence the solution is x = 1, y = −1/2.
If you decide to eliminate x, then the corresponding steps are as follows:

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Step 1
Triple the second equation and subtract from the first:
3x − 2 y = 4
3x − 6 y = 6 −
4 y = −2

Step 2
The equation 4y = −2 has solution y = −2/4 = −1/2.

Step 3
If this is substituted into the first equation, then
3 x − 2( − 1 2 ) = 4
3x + 1 = 4
3x = 3 (subtract 1 from both sides)
x=1 (divide both sides by 3)

(b) Step 1
It is immaterial which variable is eliminated. To eliminate x multiply the first equation
by 5, multiply the second by 3 and add:
15 x + 25 y = 95
−15 x + 6 y = −33 +
31 y = 62

Step 2
The equation 31y = 62 has solution y = 62/31 = 2.

Step 3
If this is substituted into the first equation, then
3 x + 5(2) = 19
3 x + 10 = 19 (subtract 10 from both sides)
3x = 9
x=3 (divide both sides by 3)

Step 4
As a check the second equation gives
−5 x + 2 y = −5(3) + 2(2)
= −15 + 4 = −11 ✓

Hence the solution is x = 3, y = 2.

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2. (a) Step 1
To eliminate x multiply the first equation by 4, multiply the second equation by 3 and
add:
12 x − 24 y = −8
−12 x + 24 y = −3 +
0 y = −11

Step 2
This is impossible, so there are no solutions.

(b) Step 1
To eliminate x multiply the first equation by 2 and add to the second:
−10 x + 2 y = 8
10 x − 2 y = −8 +
0y = 0

Step 2
This is true for any value of y, so there are infinitely many solutions.

3. Step 1

To eliminate x from the second equation multiply equation (2) by 2 and subtract from
equation (1):
2 x + 2 y − 5 z = −5
2x − 2 y + 2z = 6 −

4 y − 7 z = −11 (4)

To eliminate x from the third equation multiply equation (1) by 3, multiply equation (3) by 2
and add:
6 x + 6 y − 15 z = −15
−6 x + 2 y + 4 z = −4 +

8 y − 11z = −19 (5)

The new system is

2 x + 2 y − 5 z = −5
4 y − 7 z = −11
8 y − 11z = −19

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Step 2

To eliminate y from the third equation multiply equation (4) by 2 and subtract equation (5):
8 y − 14 z = −22
8 y − 11z = −19
− 3 z = −3 (6)

The new system is

2 x + 2 y − 5 z = −5 (1)
4 y − 7 z = −11 (4)
− 3 z = −3 (6)

Step 3

Equation (6) gives z = –3/–3 = 1. If this is substituted into equation (4), then
4 y − 7(1) = −11
4 y − 7 = −11
4 y = −4 (add 7 to both sides)
y = −1 (divide both sides by 4)

Finally, substituting y = −1 and z = 1 into equation (1) produces

2 x + 2(−1) − 5(1) = −5
2 x − 7 = −5
2x = 2 (add 7 to both sides)
x=1 (divide both sides by 2)

Step 4

As a check, the original equations (1), (2) and (3) give

2(1) + 2(−1) − 5(1) = −5 ✓

1 − ( −1) + 1 = 3 ✓

− 3(1) + ( −1) + 2(1) = −2 ✓

Hence the solution is x = 1, y = −1, z = 1.

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Exercise 1.4 (p. 65)

1. (a) Step 1

Add the two equations to eliminate x:

−2 x + y = 2
2 x + y = −6 +
2 y = −4

Step 2

The equation 2y = −4 has solution y = −4/2 = −2 .

Step 3

If this is substituted into the first equation, then

−2 x + ( −2) = 2
−2 x − 2 = 2
−2 x = 4

4
so x = = −2
−2

Step 4

As a check the second equation gives

2 x + y = 2(−2) + (−2)

= −4 − 2 = −6 ✓

Hence the solution is x = −2, y = −2

(b) Step 1

It is probably easiest to eliminate y. This can be done by subtracting the second equation
from the first:

3 x + 4 y = 12
x + 4y = 8 −
2x =4

Step 2

The equation 2x = 4 has solution x = 4/2 = 2.

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Step 3

If this is substituted into the first equation, then

3(2) + 4 y = 12
6 + 4 y = 12
4y = 6 (subtract 6 from both sides)
6
y = =3/ 2 (divide both sides by 4)
4

Step 4

As a check the second equation gives

x + 4y = 2 +4(3 / 2)
= 2 + 6 = 8 ✓

Hence the solution is x = 2, y = 3/2

(c) Step 1

To eliminate x multiply the first equation by 2 and subtract the second:

4x + 2 y = 8
4x − 3y = 3 −
5y = 5

Step 2
The equation 5y = 5 has solution y = 5/5 = 1.

Step 3
If this is substituted into the first equation, then

2x + 1 = 4
2x = 3

3
so x =
2
Step 4
As a check the second equation gives
3
4 x − 3 y = 4   − 3(1)
2

= 6−3=3 ✓

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Hence the solution is x = 3/2, y = 1

(d) Step 1

To eliminate x multiply the first equation by 6, and subtract the second equation:
6x + 6 y = 6
6 x + 5 y = 15 −
y = −9

Step 2
y = −9

Step 3

If this is substituted into the first equation, then

x − 9 =1
x = 10

Step 4

As a check the second equation gives

6 x + 5 y = 6(10) + 5(−9)

= 60 − 45 = 15 ✓

Hence the solution is x = 10, y = −9

2. (a)
x + y = 3500
30 x + 25 y = 97500

(b) Multiply the first equation by 30 and subtract the second:

5 y = 7500
y = 1500

3. The lines are sketched in Figure S1.15.

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Figure S1.15

(a) The two lines are on top of each other so intersect throughout their length. There are
infinitely many solutions.

(b) The lines are parallel, so do not intersect anywhere. There is no solution.

4. (a) Step 1

To eliminate x multiply the first equation by 3, and add:

−9 x + 15 y = 12
9 x − 15 y = −12 −

0y = 0

Step 2

The equation 0y = 0 is true for all values of y so there are infinitely many solutions

(b) Step 1

To eliminate x multiply the first equation by 5, multiply the second by 2 and subtract :

30 x − 10 y = 15
30 x − 10 y = 8 −
0y = 7

Step 2

The equation 0y = 7 is not true for any value of y, so there are no solutions.

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5. Step 1

To eliminate x multiply the second equation by 2, and add to the first:

6x − 4 y = 2
−6 x + 4 y = 2 k +
0 y = 2k + 2

Step 2

The equation 0y = 2k + 2 only has solutions (when there will be infinitely many) if the
right-hand side is zero so that

2k + 2 = 0

2k = −2 (subtract 2 from both sides)

k = −1

Section 1.5 Supply and demand analyses

Practice Problems

1. (a) 0 (b) 48 (c) 16 (d) 25 (e) 1 (f) 17

The function g reverses the effect of f and takes you back to where you started. For
example, if 25 is put into the function f, the outgoing number is 0; and when 0 is put into g,
the original number, 25, is produced. We describe this by saying that g is the inverse of f
(and vice versa).

2. The demand curve that passes through (0,75) and (25,0) is sketched in Figure S1.16. From
this diagram we see that

Figure S1.16

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(a) P = 6 when Q = 23

(b) Q = 19 when P = 18

Alternatively, using algebra:

(a) Substituting Q = 23 gives

P = –3(23) + 75 = 6

(b) Substituting P = 18 gives 18 = –3Q + 75 with solution Q = 19

3. (a) In equilibrium, QS = QD = Q, so
P = −4Q + 120
P = 1/3Q + 29

Hence
1
–4Q + 120 = Q + 29 (since both sides equal P)
3
1 1
−4 Q + 120 = 29 (subtract Q from both sides)
3 3
1
−4 Q = −91 (subtract 120 from both sides)
3
1
Q = 21 (divide both sides by −4 )
3
Substituting this value into either the demand or supply equations gives P = 36.

(b) After the imposition of a $13 tax the supply equation becomes
1
P − 13 = QS + 29
3
1
P = QS + 42
3

The demand equation remains unchanged, so, in equilibrium,

P = −4Q + 120
1
P= Q + 42
3

Hence
1
−4Q + 120 = Q + 42
3

This equation can now be solved as before to get Q = 18 and the corresponding price is
P = 48. The equilibrium price rises from $36 to $48, so the consumer pays an additional
$12. The remaining $1 of the tax is paid by the firm.

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4. For good 1, QD1 = QS1 = Q1 in equilibrium, so the demand and supply equations become

Q1 = 40 − 5 P1 − P2
Q1 = −3 + 4 P1

Hence
40 – 5P1 – P2 = –3 + 4P1 (since both sides equal Q1)
40 – 9P1 – P2 = –3 (subtract 4P1 from both sides)
–9P1 – P2 = –43 (subtract 40 from both sides)

For good 2, QD2 = QS2 = Q2 in equilibrium, so the demand and supply equations become

Q2 = 50 − 2 P1 − 4 P2
Q2 = −7 + 3 P2

Hence
50 – 2P1 – 4P2 = –7 + 3P2 (since both sides equal Q2)
50 – 2P1 – 7P2 = –7 (subtract 3P2 from both sides)
–2P1 – 7P2 = –57 (subtract 50 from both sides)

The equilibrium prices therefore satisfy the simultaneous equations

−9P1 − P2 = −43 (1)

−2P1 − 7P2 = −57 (2)

Step 1

Multiply equation (1) by 2 and (2) by 9 and subtract to get

61P2 = 427 (3)

Step 2

Divide both sides of equation (3) by 61 to get P2 = 7.

Step 3

Substitute P2 into equation (1) to get P1 = 4.

If these equilibrium prices are substituted into either the demand or the supply equations
then Q1 = 13 and Q2 = 14.

The goods are complementary because the coefficient of P2 in the demand equation for
good 1 is negative, and likewise for the coefficient of P1 in the demand equation for good 2.

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Exercise 1.5 (p. 80)

1. (a) 21 (b) 45 (c) 15 ( d) 2 (e) 10 (f ) 0

The answers to parts (a) and (b) show that putting 2 into f gives 21 and putting 21 into g
takes us back to 2.

A similar property holds for parts (b) and (e) as well as (c) and (f).

If one function undoes the result of another and takes you back to number you first thought
of then we say that they are inverses of each other.

2. The supply curve is sketched in Figure S1.17.

Figure S1.17

1
(a) 11; this value can either be found by substituting Q = 12 into P = Q + 7 or by reading
3
values off the graph.

1
(b) 9; this value can either be found by solving the equation, Q + 7 = 10 or by reading
3
values off the graph.

(c) 0; once the price falls below 7 the graph shows that the firm does not plan to produce
any goods.

1
3. (a) Q = 100 − 10 + 2 × 40 + × 6 = 173 .
2
To work out the new advertising expenditure you could solve the equation
1
100 − 10 + 2 × 40 + A = 179
2
which gives:
1
170 + A = 179
2

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1
A=9 (subtract 170 from both sides)
2
A = 18 (multiply both sides by 2)
Hence additional advertising expenditure is 18 − 6 = 12 .
Alternatively notice that the demand increases by 179 −173 = 6 . In the demand
1
function, the term involving advertising expenditure is A so that for every one unit
2
1
increase in A, demand increases by . Hence expenditure will need to rise by 12 to
2
achieve a change of 6 in the value of Q.

(b) Normal; the coefficient of Y is positive so an increase in Y leads to an increase in Q.

4. (a) Q = 30 − 3 × 4 + 5 = 23

(b) Substitutable; the coefficient of PA is positive so a rise in PA leads to an increase in Q

(c) The demand equation is:

30 − 3P + 11 = 23
41 − 3P = 23
−3P = −18 (subtract 41 from both sides)

P=6 (divide both sides by −3 )

50a + b = 420
5.
80a + b = 240

Subtract to get

−30a = 180
a = −6

Substituting this into either of the original equations gives, b = 720.

6. (a) Substituting Q = 0 and Q = 50 into the supply function give P = 20 and 45, respectively.

To find the value of Q when P = 25, solve the equation:

1
Q + 20 = 25
2
1
Q = 5 (subtract 20 from both sides)
2
Q = 10 (multiply both sides by 2)

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Line passes through (0, 20), (10, 25) and (50, 45)

(b) Line passing through (50, 0) and (0, 50)

The lines intersect at the point (20, 30) so the equilibrium values are Q = 20 and P = 30

(c) As income rises demand increases so the demand curve moves to the right. As it does so
the point of intersection moves both to the right and upwards on the page.
Hence price and quantity both increase.

7. The new supply equation is

1
P − 4 = QS + 23
2

1
which rearranges as P = QS + 27 .
2

In equilibrium, QS = QD = Q so we need to solve the equations:

P = −3Q + 48
1
P= Q + 27
2

Hence
1
−3Q + 48 = Q + 27
2
1 1
−3 Q + 48 = 27 (subtract Q from both sides)
2 2
1
−3 Q = −21 (subtract 48 from both sides)
2
Q=6 (divide both sides by −3.5 )

8. In equilibrium, QD1 = QS1 = Q1 and QD2 = QS2 = Q2

For good 1 we have

100 − 2P1 + P2 = −10 + P1
100 − 3P1 + P2 = −10 (subtract P1 from both sides)

−3P1 + P2 = −110 (subtract 100 from both sides) (1)

For good 2 we have

5 + 2P1 − 3P2 = −5 + 6P2
5 + 2P1 − 9P2 = −5 (subtract 6P2 from both sides)

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2P1 − 9P2 = −10 (subtract 5 from both sides) (2)

It is probably simplest to eliminate P2 . This can be done by multiplying equation (1) by 9

and adding equation (2).

This gives −25P1 = −1000 and so P1 = 40 .

Substituting this into equation (1):

−120 + P2 = −110
P2 = 10 (add 120 to both sides)

The easiest way of finding the equilibrium quantities is to use the supply equations which
give:
Q1 = −10 + 40 = 30
Q2 = −5 + 60 = 55

9. (a) Q = −20 × 8 + 0.04 × 1000 + 4 × 15 + 3 × 30 = 30

(b) Substitutable; e.g. since coefficient of Pr is positive

(c) −20P + 0.04 × 8000 + 4 × 30 + 3 × 25 = 235

−20P + 515 = 235
−20P = −280 (subtract 515 from both sides)
P = 14 (divide both sides by −20 )

(d) (i) Q = −20 P + 0.04 × 2000 + 4 × 10 + 3 × 5

Q = −20 P + 135

slope = −20 , intercept = 135

(ii) Q + 20 P = 135 (add 20P to both sides)
20 P = −Q + 135 (subtract Q from both sides)
P = −0.05Q + 6.75 (divide both sides by 20)

slope = −0.05 , intercept = 6.75

Section 1.6 Transposition of formulae

Practice Problems

1
1. (a) Q = 4 (subtract 13 from both sides)
2

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Q=8 (multiply both sides by 2)

1
(b) Q = P − 13 (subtract 13 from both sides)
2
Q = 2(P – 13) (multiply both sides by 2)
Q = 2P – 26 (multiply out brackets)

(c) Q = 2 × 17 − 26 = 8

2. (a)

6x 2 = y
y
x2 = (divide both sides by 6)
6
y
x= (square root both sides)
6

(b)

1
=y
7x −1
1
7x −1 = (reciprocate both sides)
y
1
7x = +1 (add 1 to both sides)
y
1 1 
x =  + 1 (divide both sides by 7)
7 y 

3. (a) x − ay = cx + y
x = cx + y + ay (add ay to both sides)
x − cx = y + ay (subtract cx from both sides)

(1 − c ) x = (1 + a ) y (factorise both sides)

1+ a 
x=  y (divide both sides by 1 − c)
 1− c 
x−2
(b) y =
x+4
( x + 4) y = x − 2 (multiply both sides by x + 4)

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xy + 4 y = x − 2 (multiply out the brackets)

xy = x − 2 − 4 y (subtract 4y from both sides)
xy − x = −2 − 4 y (subtract x from both sides)
( y − 1) x = −2 − 4 y (factorise left-hand side)
−2 − 4 y
x= (divide both sides by y − 1)
y −1

Exercise 1.6 (p. 91)

1. 2Q + 8 = P

2Q = P − 8 (subtract 8 from both sides)

1 1
Q = ( P − 8) = P − 4 (divide both sides by 2)
2 2

1
Substituting P = 52 into this formula gives Q = × 52 − 4 = 26 − 4 = 22
2
5
2. (a) y = 2 x + 5; (b) y = 2 ( x + 5) ; (c) y = ;
x2
(d) y = 2 ( x + 4) − 3.
2

3. (a) multiply by 5 add 3

(b) add 3 multiply by 5

(c) multiply by 6 subtract 9

(d) square multiply by 4 subtract 6

(e) divide by 2 add 7

(f) reciprocate multiply by 2

(g) add 3 reciprocate

4. (a) 9 x − 6 = y
9x = y + 6 (add 6 to both sides)

1
x = ( y + 6) (divide both sides by 9)
9

x+4
(b) =y
3

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x + 4 = 3y (multiply both sides by 3)

x = 3y − 4 (subtract 4 from both sides)

x
(c) =y
2
x = 2y (multiply both sides by 2)

x
(d) +8 = y
5
x
= y − 8 (subtract 8 from both sides)
5
x = 5( y − 8) (multiply both sides by 5)

1
(e) y =
x+2
y ( x + 2) = 1 (multiply both sides by x + 2)
1
x+2= (divide both sides by y)
y

1
x= − 2; (subtract 2 from both sides)
y

4
(f) y =
3x − 7
y (3x − 7) = 4 (multiply both sides by 3x − 7 )
4
3x − 7 = (divide both sides by y)
y

4
3x = + 7 (add 7 to both sides)
y

1 4 
x =  + 7  (divide both sides by 3)
3 y 

5. (a) aP + b = Q
aP = Q − b (subtract b from both sides)

1 Q b
P= (Q − b) = − (divide both sides by a)
a a a

(b) Y = aY + b + I
Y − aY = b + I (subtract aY from both sides)

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(1 − a)Y = b + I (factorise by taking out a common factor of Y)

b+I
Y= (divide both sides by 1 − a )
1− a

1
(c) Q =
aP + b
Q ( aP + b) = 1 (multiply both sides by aP + b )
1
aP + b = (divide both sides by Q)
Q

1
aP = −b (subtract b from both sides)
Q

1 1  1 b
P =  − b = − (divide both sides by a)
aQ  aQ a

3
6. y = −2
x
3
y+2= (add 2 to both sides)
x

( y + 2) x = 3 (multiply both sides by x)

3
x= (divide both sides by y + 2 )
y+2

2DR
7. =Q
H
Square both sides:
2DR
= Q2
H
Multiply both sides by H:
2DR = HQ 2

(a) Divide both sides by 2R:

HQ2
D=
2R

(b) Divide both sides by Q2:

2DR
H=
Q2

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Section 1.7 National income determination

Practice Problems

1. S = Y – C
= Y – (0.8Y + 25) (substitute expression for C)
= Y – 0.8Y − 25 (multiply out brackets)
= 0.2Y − 25 (collect terms)

2. Y = C + I (from theory)

C = 0.8Y + 25 (given in question)

I = 17 (given in question)

Substituting the given value of I into the first equation gives

Y = C + 17

and if the expression for C is substituted into this then

Y = 0.8Y + 42

0.2Y = 42 (subtract 0.8Y from both sides)

Y = 210 (divide both sides by 0.2)

Repeating the calculations with I = 18 gives Y = 215, so a 1 unit increase in investment

leads to a 5 unit increase in income. The scale factor, 5, is called the investment multiplier.
In general, the investment multiplier is given by 1/(1 – a), where a is the marginal
propensity to consume. The foregoing is a special case of this with a = 0.8.

3. Y = C + I + G (1)

G = 40 (2)

I = 55 (3)

C = 0.8Yd + 25 (4)

T = 0.1Y + 10 (5)

Yd = Y – T (6)

Substituting equations (2) and (3) into equation (1) gives

Y = C + 95 (7)

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Substituting equation (5) into (6) gives

Yd = Y – (0.1Y + 10)
= 0.9Y – 10

so from equation (4),

C = 0.8(0.9Y – 10) + 25
= 0.72Y + 17 (8)

Finally, substituting equation (8) into (7) gives

Y = 0.72Y + 112

which has solution Y = 400.

4. The commodity market is in equilibrium when

Y=C+I

so we can substitute the given expressions for consumption (C = 0.7Y + 85) and investment

(I = 50r + 1200) to deduce that

Y = 0.7Y – 50r + 1285

which rearranges to give the IS schedule,

0.3Y + 50r = 1285 (1)

The money market is in equilibrium when

MS = MD

Now we are given that MS = 500 and that total demand,

MD = L1 + L2 = 0.2Y – 40r + 230

so that

500 = 0.2Y – 40r + 230

which rearranges to give the LM schedule,
0.2Y – 40r = 270 (2)

We now solve equations (1) and (2) as a pair of simultaneous equations.

Step 1
Multiply equation (1) by 0.2 and (2) by 0.3 and subtract to get
22r = 176

Step 2
Divide through by 22 to get r = 8.

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Step 3
Substitute r = 8 into equation (1) to give Y = 2950.

The IS and LM curves shown in Figure S1.18 confirm this, since the point of intersection
has coordinates (8, 2950). A change in I does not affect the LM schedule. However, if the
autonomous level of investment increases from its current level of 1200 the IS curve moves
upwards, causing both r and Y to increase.

Figure S1.18

Exercise 1.7 (p. 105)

1. MPC = 0.75; MPS = 1 − 0.75 = 0.25

2. (a) MPC = 70/100 = 0.7; MPS 1 − 0.7 = 0.3

(b) From part (a), MPC = 0.7 so C = 0.7Y + b

Substituting, Y = 1000 and C = 800 gives 800 = 0.7 ×1000 + b so b = 100.
Hence C = 0.7Y + 100 .

3. (a) 40; (b) 0.7

0.7Y + 40 = C
0.7Y = C − 40 (subtract 40 from both sides)
7
Y = C − 40
10
7Y = 10(C − 40) (multiply both sides by 10)

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10
Y= (C − 40) (divide both sides by 7)
7
10
Y= (110 − 40) = 100
7

4. (a) S = Y − C = Y − (0.9Y + 72) = Y − 0.9Y − 72 = 0.1Y − 72

(b) S = Y − C = Y − (0.8Y + 100) = Y − 0.8Y − 100 = 0.2Y − 100

5. (a) Y = C + I
Y = 0.6Y + 30 + 100
Y = 0.6Y + 130
0.4Y = 130 (subtract 0.6Y from both sides)
Y = 325 (divide both sides 0.4)

(b) C = 0.6Y + 30 = 0.6 × 325 + 30 = 225

(c) S = Y − C = 325 − 225 = 100

10a + b = 28
6.
30a + b = 44

Subtracting these equations gives:

20a = 16 so a = 0.8

From the first equation,

10 × 0.8 + b = 28
8 + b = 28
b = 20

Finding the equilibrium level of national income:

Y = C + I = 0.8Y + 20 + 13 = 0.8Y + 33
0.2Y = 33
Y = 165

7. Y = C + I + G

Y = 0.75Yd + 45 + 40 + 50

Y = 0.75Yd + 135

Now Yd = Y − T = Y − (0.2Y + 80) = Y − 0.2Y − 80 = 0.8Y − 80

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Substituting gives
Y = 0.75(0.8Y − 80) + 135 = 0.6Y − 60 + 135 = 0.6Y + 75

Hence
0.4Y = 75 (subtract 0.6Y from both sides)
Y = 187.5 (divide both sides by 0.4)

Examination Questions

1 (a) The graphs are sketched in Figure S1.19.

Figure S1.19

(b) 12 miles

(c) EatMeNow: y = 0.5 x + 9 Deliver4U: y = 1.25 x

1.25x = 0.5x + 9
0.75x = 9
Hence x = 12.

2 (a) The graphs are sketched in Figure S1.20 based on the following table of values.

P 5 10 15 20 25
QD 325 250 175 100 25
QS 0 50 100 150 200

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Figure S1.20

(b) 400 − 15P = −50 + 10P

25P = 450
P = 18
Substitute into either equation to get Q = 130 .

(c) Demand curve above that of supply for P < 18 .

(d) Demand curve unchanged and supply curve shifts upwards by 5 units, as shown by the
dashed line in Figure S1.20.
400 − 15 P = −50 + 10( P − 5)
400 − 15P = −100 + 10P
25P = 500
Hence P = 20 and Q = 100.

3 (a) For (1) an increase in P causes a decrease in Q so this must be the demand curve and so
(2) is the supply curve.

(b) Q + 3P = 48
3P = 48 − Q
1
P = 16 − Q
3
Hence the slope is −1 / 3 and the intercept is 16.

(c) Subtract (2) from (1) to get 5P = 18 so P = 3.6.

Substituting this into (2) gives Q = 30 + 2 × 3.6 = 37.2 .

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4 (a)

C = 0.75(Y − 50) + 150

= 0.75Y + 112.5

Substitute this into Y = C + I + G to get

Y = 0.75Y + 112.5 + 100 + 250

= 0.75Y + 462.5
Hence
0.25Y = 462.5
Y = 1850

(b) Substitute Y = 1870 into Y = 0.75Y + 112.5 + I + G to get I + G = 355

Hence the increase is

355 − 350 = 5.

5 (a) 12

10 L
(b) 4 =
10 + 2 L
4(10 + 2 L) = 10 L
40 + 8L = 10L
40 = 2L
L = 20

(c) Q ( K + 2 L ) = KL
QK + 2QL = KL
KL − QK = 2QL
K ( L − Q ) = 2QL

2QL
K=
L−Q

Y 0 100 200
C+I 40 115 190

The graph is sketched in Figure S1.21.

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Figure S1.21

The intersection of the 45 ° line and the aggregate expenditure line occurs at Y = 160.

Check: Y = 0.75Y + 18 + 22
0.25Y = 40
Y = 160

If MPC decreases the slope of the aggregate expenditure line decreases as shown by the dashed
line in Figure S1.21. The point of intersection shifts down the 45 ° line indicating that the
equilibrium value of Y decreases.

7 (a) The coefficient of P2 in the demand equation for good 1 is positive indicating that
demand for good 1 rises as the price of good 2 goes up. Similarly for good 2; as the
price of good 1 goes up, the demand for good 2 rises. Hence the goods are substitutable.

(b)

120 − 2 P1 + P2 = −7 + 7 P1  9 P1 − P2 = 127 (1)

168 + 3P1 − 7 P2 = −3 + 20 P2  3P1 − 27 P2 = −171 (2)

Subtract 3 × (2) from (1) to get 80P2 = 640 so P2 = 8 .

Substituting this into (1) gives 9P1 − 8 = 127  9P1 = 135  P1 = 15

The prices can now be substituted into the supply equations to get

Q1 = 98, Q2 = 157

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(c) The supply equation for good 1 is now

QS1 = −7 + 7( P1 + 4) = 21 + 7 P1

The new equation (1) is

120 − 2P1 + P2 = 21 + 7 P1  9P1 − P2 = 99 (1)’

Equations (1)’ and (2) can be solved as before to get

80P2 = 612  P2 = 7.65 and P1 = 11.85

The price of good 1 goes down by $3.15 and the price of good 2 goes down by $0.35.
8
(a) 3 f + 4 s ≤ 3000

3 f + 1080 ≤ 3000

3 f ≤ 1920

f ≤ 640
(b) (i) P = 3
36
(ii) 2.4 =
2Q + 5

2.4(2Q + 5) = 36

2Q + 5 = 15

2Q = 10

Q=5

(iii) P (2Q + 5) = 36

36
2Q + 5 =
P
36
2Q = −5
P
18 5 36 − 5P
Q= − =
P 2 2P
36 − 5 × 2.4
Check (ii): Q= =5
2 × 2.4

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(c)
S =Y −C
Y 2 + 100
=Y −
Y +2
Y (Y + 2) − (Y 2 + 100)
=
Y +2
Y 2 + 2Y − Y 2 − 100
=
Y +2
2Y − 100
=
Y +2

(a)

2x + 6 y = 1 (1)

3 x + my = n (2)

(1) × 3: 6 x + 18 y = 3

(2) × 2: 6 x + 2my = 2n

Subtract to get

(18 − 2m ) y = 3 − 2n (**)

Hence
3 − 2n 3 − 2n
y= =
18 − 2m 2(9 − m)
2x = 1 − 6 y
6(3 − 2n)
=1−
2(9 − m)

3(3 − 2n)
=1−
9−m
(9 − m) − 3(3 − 2n)
=
9−m
6n − m
=
9−m

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Hence

6n − m
x=
2(9 − m)

Denominator is zero when m = 9.

If m = 9 equation (**) becomes 0 y = 3 − 2n

(i) n = 1.5  0y = 0 so infinitely many solutions

(ii) n ≠ 1.5  0 y ≠ 0 so no solutions

(b)

5P1 − 3P2 = 39 (1)

2 P1 + 4 P2 − 3P3 = 28 (2)
3P2 + P3 = 29 (3)

Use equation (1) to eliminate P1 from equation (2):

2 × (1): 10P1 − 6P2 = 78

5 × (2): 10P1 + 20P2 − 15P3 = 140

Subtract to get: −26P2 + 15P3 = −62 (4)

Now eliminate P2 from (3) using (4):

3 × (4): −78P2 + 45P3 = −186

26 × (3): 78P2 + 26P3 = 754

Add to get: 71P3 = 568  P3 = 8

Substitute into (3) to get: 3P2 + 8 = 29  P2 = 7

Substitute into (1) to get: 5P1 − 21 = 39  P1 = 12

10

If the commodity market is in equilibrium,

Y =C +I
Y = 0.6Y + 60 + ( −40 r + 1300)
Y = 0.6Y − 40 r + 1360

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Hence 0.4Y + 40r = 1360 (1)

For the money market, M D = L1 + L2 = 0.2Y − 30r + 40

If the money market is in equilibrium,

MS = MD
600 = 0.2Y − 30r + 40

Hence 0.2Y − 30r = 560 (2)

Subtract 2 × (2) from (1): 100r = 240  r = 2.4

Substituting r = 2.4 into either (1) or (2) gives Y = 3160.

Figure S1.22 (not drawn to scale) shows the IS and LM curves. The equilibrium is
determined by the point of intersection (2.4, 3160).

If MPC decreases from its current level of 0.6, the effect on equation (1) is to increase the
coefficient of Y from its current level of 0.4. The r-intercept is unchanged and the Y-
intercept decreases. This is illustrated by the dashed line which shows that the equilibrium
values of Y and r both decrease.

Figure S1.22

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Non-linear equations

Section 2.1 Quadratic functions

Practice Problems

1. (a) x 2 − 100 = 0
x 2 = 100
x = ± √100
x = ± 10

(b) 2x 2 − 8 = 0
2x 2 = 8
x2 = 4
x = ± √4
x=±2

(c) x 2 − 3 = 0
x2 = 3
x = ± √3
x = ± 1.73(to 2 decimal places)

(d) x 2 = 5.72 = 0
x 2 = 5.72
x = ± √5.72
x = ± 2.39 (to 2 decimal places)

(e) x 2 + 1 = 0
x 2 = −1
This equation does not have a solution, because the square of a number is always
positive. Try using your calculator to find √( − 1). An error message should be
displayed.

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(f) 3x 2 + 6.21 = 0
3x 2 = −6.21
x 2 = −2.07
This equation does not have a solution, because it is impossible to find the square root
of a negative number.
(g) x 2 = 0
This equation has exactly one solution, x = 0.
2. (a) a = 2, b = −19, c = −10

x=
− ( −19 ) ± (( −19) 2
− 4 ( 2 )( −10 ) )
2 ( 2)
19 ± ( 361 + 80 )
=
4
19 ± 441 19 ± 21
= =
4 4
This equation has two solutions:
19 + 21
x= = 10
4
19 − 21 1
x= =−
4 2

(b) a = 4, b = 12, c = 9.

x=
−12 ± ((12) 2
− 4 ( 4 )( 9 ) )
2( 4)
−12 ± (144 − 144 )
=
8
−12 ± 0
=
8
This equation has one solution, x = − 3 2 .

(c) a = 1, b = 1, c = 1.

x=
−1 ± ((1) 2
− 4 (1)(1) )
2 (1)
−1 ± (1 − 4 )
=
2
−1 ± ( −3 )
=
2

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This equation has no solutions, because ( −3) does not exist.

(d) We first need to collect like terms to convert

x 2 − 3x + 10 = 2 x + 4
into the standard form

ax 2 + bx + c = 0
Subtracting 2x + 4 from both sides gives
x2 − 5x + 6 = 0
a = 1, b = −5, c = 6.

x=
− ( −5 ) ± ( (5) 2
− 4 (1)( 6 ) )
2 (1)
5± ( 25 − 24 )
=
2
5± 1
=
2
5 ±1
=
2
This equation has two solutions:
5 +1
x= =3
2
5 −1
x= =2
2

x −1 0 1 2 3 4
3. (a)
f ( x) 21 5 −3 −3 5 21

The graph is sketched in Figure S2.1.

Figure S2.1

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x 0 1 2 3 4 5 6
(b)
f ( x) −9 −4 −1 0 −1 −4 −9
The graph is sketched in Figure S2.2.

Figure S2.2

x −2 −1 0 1 2 3 4
(c)
f ( x) −22 −12 −6 −4 −6 −12 −22

The graph is sketched in Figure S2.3.

Figure S2.3

4. (a) Step 1
The coefficient of x 2 is 2, which is positive, so the graph is U-shaped.

Step 2
The constant term is −6, so the graph crosses the vertical axis at y = −6.

Step 3
The quadratic equation

2 x 2 − 11x − 6 = 0
has solution

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x=
− ( −11) ± (( −11) 2
− 4 ( 2 )( 6 ) )
2 ( 2)
11 ± (121 + 48 )
=
4
11 ± 169
=
4
11 ± 13
=
4
so the graph crosses the horizontal axis at x = −1/2 and x = 6.
In fact, we can use symmetry to locate the coordinates of the turning point on the curve.
The x coordinate of the minimum occurs halfway between x = −1/2 and x = 6 at
1 1  11
x =  − + 6 =
2 2  4
The corresponding y coordinate is
2
 11   11  169
2   − 11  − 6 = −
4 4 8
The graph is sketched in Figure S2.4.

Figure S2.4

(b) Step 1
The coefficient of x is 1, which is positive, so the graph is U-shaped.

Step 2
The constant term is 9, so the graph crosses the vertical axis at y = 9.

Step 3
The quadratic equation

x2 − 6 x + 9 = 0
has solution

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x=
− ( −6 ) ± (( −6) 2
− 4 (1)( 9 ) )
2 (1)
6± ( 36 − 36 )
=
2
6± 0
= =3
2
so the graph crosses the x axis at x = 3.

The graph is sketched in Figure S2.5.

Figure S2.5

1
5. (a) Figure S2.4 shows that the graph is on or below the x-axis for values of x between −
2
1
and 6 with the function taking the value 0 at the end-points so the solution is − ≤ x ≤ 6 .
2

(b) Figure S2.5 shows that the graph is always on or above the x-axis taking the value 0 at
the one point, x = 3. However, because the inequality is strict we need to exclude this
point so he solution consists of all values of x except for x = 3.

6. (a)

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(b)

7. In equilibrium, QS = QD = Q, so the supply and demand equations become

P = 2Q 2 + 10Q + 10
P = Q 2 − 5Q + 52
Hence

2Q 2 + 10Q + 10 = −Q 2 − 5Q + 52
3Q 2 + 15Q − 42 = 0

Q 2 + 5Q − 14 = 0 (dividing both sides by 3)

Q=
−5 ± (( 5) 2
− 4 (1)( −14 ) )
2 (1)
−5 ± 81
=
2
−5 ± 9
=
2
so Q = −7 and Q = 2. Ignoring the negative solution gives Q = 2. From the supply equation,
the corresponding equilibrium price is

P = 2 ( 2) + 10 ( 2) + 10 = 38
2

As a check, the demand equation gives

P = − ( 2) − 5( 2) + 52 = 38
2

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Exercise 2.1 (p. 137)

1. (a) ±9; (b) ±6;

(c) 2 x 2 = 8

x2 = 4
x = ±2

(d) ( x − 1) 2 = 9
x −1 = ±3
x =1± 3
x = −2, 4

(e) ( x + 5) 2 = 16
x + 5 = ±4
x = −5 ± 4
x = −9, −1.

2. (a) 1, −3 (b) 1/2, −10 (c) 0, −5

(d) −5/3, 9/4 (e) 5/4, 5

−(−5) ± (−5)2 − 4(1)(2)

3. (a) x =
2(1)
5 ± 25 − 8
x=
2
5 ± 17
x=
2
x = 0.44, 4.56

−5 ± 52 − 4(2)(1)
(b) x =
2(2)

−5 ± 25 − 8
x=
4
−5 ± 17
x=
4
x = –2.28, −0.22

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−7 ± 7 2 − 4(−3)(2)
(c) x =
2(−3)

−7 ± 49 + 24
x=
−6
−7 ± 73
x=
−6
x = –0.26, 2.59

−(−3) ± (−3)2 − 4(1)(−1)

(d) x =
2(1)

3± 9+ 4
x=
2
3 ± 13
x=
2
x = −0.30, 3.30

−8 ± 82 − 4(2)(8)
(e) x =
2(2)

−8 ± 64 − 64
x=
4
−8 ± 0
x=
4
x = −2

−(−6) ± (−6)2 − 4(1)(10)

(f) x =
2(1)

6 ± 36 − 40
x=
2
6 ± −4
x=
2
It is impossible to find the square root of a negative number so there are no solutions.

4. (a) x 2 − 16 = 0

x 2 = 16
x = −4, 4

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(b) 0, 100

−22 ± 222 − 4(−1)(−85)

(c) x =
2(−1)

−22 ± 484 − 340

x=
−2
−22 ± 144
x=
−2
x = 5, 17

−18 ± 182 − 4(1)(81)

(d) x =
2(1)
18 ± 324 − 324
x=
2
18 ± 0
x=
2
x=9

−4 ± 42 − 4(2)(3)
(e) x =
2(2)

−4 ± 16 − 24
x=
4
−4 ± −8
x=
4
It is impossible to find the square root of a negative number so there is no solution.

5. The graphs are sketched in Figure S2.6.

Figure S2.6

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6. (a) x ≤ −4, x ≥ 4 (b) 0 < x < 100; (c) 5 ≤ x ≤ 17;

(d) x = 9 (e) all values of x

7. (a)

T 23 24 25 26 27 28 29 30
Q 56.166 56.304 56.35 56.304 56.166 55.936 55.614 55.2

The graph is sketched in Figure S2.7.

Figure S2.7
(b) The production level is a maximum at 25°C so as temperature increases output will fall.

8. (a)

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(b)

(c)

9. In equilibrium, QS = QD = Q so the supply and demand equations become:

P = Q 2 + 2Q + 12 and P = − Q 2 − 4Q + 68

Hence
Q 2 +2Q + 12 = −Q 2 − 4Q + 68

2 Q 2 + 6 Q − 56 = 0

Q 2 + 3Q − 28 = 0 (divide by 2 to make the use of the quadratic formula slightly easier)

−3 ± 32 − 4(1)(−28)
Q=
2(1)

−3 ± 9 + 112
Q=
2

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−3 ± 121
Q=
2
Q = 4 or −7
Ignoring the negative solution gives Q = 4 and substituting this value into the supply
equation gives

P = 42 + 2 × 4 + 12 = 36

10. In equilibrium, QS = QD = Q so the supply and demand equations become:

P = Q 2 + 2Q + 7 and P = −Q + 25

Hence
Q 2 + 2Q + 7 = − Q + 25

Q 2 + 3Q − 18 = 0

−3 ± 32 − 4(1)(−18)
Q=
2(1)

−3 ± 9 + 72
Q=
2
−3 ± 81
Q=
2
Q = 3 or −6
Ignoring the negative solution gives Q = 3 and substituting this value into the demand
equation gives
P = −3 + 25 = 22

11. (a) 30 × 7 + 10(7 − 0.03 ×10) = $277

(b) The first 30 shirts cost $210 so the remainder costs 504.25 − 210 = $294.25

x(7 − 0.03x) = 294.25

7 x − 0.03 x 2 = 294.25
0.03x 2 − 7 x + 294.25 = 0
−(−7) ± (−7) 2 − 4 × 0.03 × 294.25 7 ± 13.69 1
x= = = 55, 178
2 × 0.03 0.06 3
But x ≤ 100 so 85 shirts.

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Section 2.2 Revenue, cost and profit

Practice Problems

1. TR = PQ = (1000 – Q)Q = 1000Q – Q2

Step 1

The coefficient of Q2 is negative, so the graph has an inverted U shape.

Step 2

The constant term is zero, so the graph crosses the vertical axis at the origin.

Step 3

From the factorisation

TR = (1000 – Q)Q

the graph crosses the horizontal axis at Q = 0 and Q = 1000.

Figure S2.8

The graph is sketched in Figure S2.8. By symmetry, the parabola reaches its maximum
halfway between 0 and 1000 at Q = 500. The corresponding value of TR is
TR = 1000(500) − (500)2 = 250 000

From the demand equation, when Q = 500,

P = 1000 − 500 = 500

2. TC = 100 + 2Q

100 + 2Q 100
AC = = +2
Q Q

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The graph of the total cost function is sketched in Figure S2.9.

Figure S2.9
One possible table of function values for the average cost function is

Q 10 25 50 100 200
AC 12 6 4 3 2.5

The graph of the average cost function is sketched in Figure S2.10.

Figure S2.10

In fact, it is not necessary to plot the tabulated values if all that is required is a rough sketch.
It is obvious that if a very small number is put into the AC function then a very large
number is produced because of the term 100/Q. For example, when Q = 0.1
100
AC = + 2 = 1002
0.1

It should also be apparent that if a very large number is put into the average cost function
then the term 100/Q is insignificant, so AC is approximately 2. For example, when
Q = 10 000
100
AC = + 2 = 2.01
10000

The graph of AC therefore ‘blows up’ near Q = 0 but settles down to a value just greater
than 2 for large Q. Consequently, the general shape of the graph shown in Figure S2.10 is to
be expected.

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3. TC = 25 + 2Q

TR = PQ = (20 – Q)Q = 20Q – Q 2

Hence
π = TR − TC
= (20Q − Q 2 ) − (25 + 2Q)
= 20Q − Q 2 − 25 − 2Q
= −Q 2 + 18Q − 25

Step 1

The coefficient of Q2 is negative, so the graph has an inverted U shape.

Step 2

The constant term is −25, so the graph crosses the vertical axis at −25.

Step 3

The quadratic equation

− Q 2 + 18Q − 25 = 0

has solutions

−18 ± ( 324 − 100 )

Q=
−2
−18 ± 14.97
=
−2

so the graph crosses the horizontal axis at Q = 1.52 and Q = 16.48.

The graph of the profit function is sketched in Figure S2.11.

Figure S2.11

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(a) If π = 31, then we need to solve

− Q 2 + 18Q − 25 = 31

that is,
−Q 2 + 18Q − 56 = 0
−18 ± ( 324 − 224 ) 18 ± 10
Q= =
−2 −2
so Q = 4 and Q = 14.
These values can also be found by drawing a horizontal line π = 31 and then reading off the
corresponding values of Q from the horizontal axis as shown on Figure S2.11.
(b) By symmetry, the parabola reaches its maximum halfway between 1.52 and 16.48: that
is, at
Q = 1 2 (1.52 + 16.48) = 9
The corresponding profit is given by

π = − ( 9) + 18( 9) − 25 = 56
2

Exercise 2.2 (p. 148)

1. (a) P = 80 − 3×10 = 50; TR = 50 ×10 = 500

(b) TC = 100 + 5 ×10 = 150

(c) π = 500 − 150 = 350

2. (a) TR = PQ = 4Q

7
(b) TR = PQ = ×Q = 7
Q

(c) TR = PQ = (10 − 4Q )Q = 10Q − 4Q 2 .

The graphs are sketched in Figures S2.12, S2.13 and S2.14.

Figure S2.12

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Figure S2.13

Figure S2.14

TR 50Q − 4Q 2
3. (a) P = = = 50 − 4Q
Q Q

TR 10
(b) P = =
Q Q

TC 500 + 10Q 500

4. TC = 500 + 10Q; AC = = = + 10
Q Q Q

The graphs are sketched in Figures S2.15 and S2.16.

Figure S2.15

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Figure S2.16

TC Q 2 + Q + 1 1
5. TC = 1 + (Q + 1)Q = Q2 + Q + 1; AC = = = Q +1+
Q Q Q

The graphs are sketched in Figures S2.17 and S2.18.

Figure S2.17

Figure S2.18
6. If the formula for total cost is given by TC = aQ + b then

100a + b = 600
150a + b = 850

Subtracting gives 50a = 250 so a = 5. Hence b = 600 − 5 ×100 = 100 .

40000 − 2000
7. (a) VC = = $76 (b) 2000 + 600 × 76 = $47,600
500

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10 + 3 × 4
8. (a) = $5.50
4
(b)
10 + 3x
< 3.25
x
10 + 3x < 3.25 x
10 < 0.25 x
x > 40

9. The demand equation, 2Q + P = 25 rearranges as P = 25 − 2Q giving

TR = PQ = (25 − 2Q )Q = 25Q − 2Q 2

 32 
TC = AC × Q =  + 5  Q = 32 + 5Q
Q 

Hence

π = TR − TC = 25Q − 2Q 2 − (32 + 5Q)

= 25Q − 2Q 2 − 32 − 5Q
= −2Q 2 + 20Q − 32

(a) At the break-even point, π = 0 so − 2Q 2 + 20Q − 32 = 0

Q 2 − 10Q + 16 = 0 (divide both sides by −2 )

−(−10) ± (−10)2 − 4(1)(16)

Q=
2(1)

10 ± 100 − 64
Q=
2
10 ± 36
Q=
2
10 ± 6
Q=
2
Q = 2 and 8

(b) −2Q 2 + 20Q − 32 = −432 (a loss is a negative profit)

− 2Q 2 + 20Q + 400 = 0 (add 432 to both sides)
Q 2 − 10Q − 200 = 0 (divide both sides by −2 )

−(−10) ± (−10)2 − 4(1)(200)

Q=
2(1)

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10 ± 100 + 800
Q=
2
10 ± 900
Q=
2
10 ± 30
Q=
2
Q = 20 and –10

Ignoring the negative quantity gives Q = 20.

(c) By symmetry of the graph of a quadratic function the maximum profit occurs mid-way
between the break-even points at 5.

10. The graphs of TR and TC are sketched in Figure S2.19.

(a)
π = TR − TC
= −2Q 2 + 14Q − (2Q + 10)
= −2Q 2 + 14Q − 2Q − 10
= −2Q 2 + 12Q − 10

At the break-even point, π = 0 so − 2Q 2 + 12Q − 10 = 0

Q 2 − 6Q + 5 = 0 (divide both sides by −2 )

−(−6) ± (−6)2 − 4(1)(5)

Q=
2(1)
6 ± 36 − 20
Q=
2
6 ± 16
Q=
2
6±4
Q=
2
Q = 1 and 5

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(b) By symmetry of the graph of a quadratic function the maximum profit occurs mid-way
between the break-even points at 3.

Figure S2.19

11. (a) TR = PQ = 60Q − Q 2

The graph is an inverted parabola passing through (0,0), (60,0).

(b) TC = 100 + (Q + 6)Q = Q 2 + 6Q + 100

TC Q 2 + 6Q + 100 100
AC = = =Q+6+
Q Q Q
2
The four missing values of AC are 31, 26, 27 , 31
3
The lowest point of the graph occurs at Q = 10.

(c) π = TR − TC = 60Q − Q 2 − (Q 2 + 6Q + 100) = − 2Q 2 + 54Q − 100

Multiplying out the brackets in the expression given in the question gives
2(2 − Q )(Q − 25) = 2(2Q − 50 − Q 2 + 25Q )

= 2( −Q 2 + 27Q − 50)

= −2Q 2 + 54Q − 100

which agrees with the expression for profit found previously.
From the factorisation, 2(2 − Q )(Q − 25) the break-even points are Q = 2 and 25.
Profit is maximised at the mid-point, Q = 13.5 which gives
π = 2(2 − 13.5)(13.5 − 25) = 264.5

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Section 2.3 Indices and logarithms

Practice Problems

1. (a) 100 (b) 10 (c) 1 (d) 1/10

(e) 1/100 (f) 1 (g) −1 (h) 1/343

(i) 81 (j) 72 101 (k) 1

2. (a) 4, because 42 = 16.

(b) 3, because 33 = 27.

(c) 32, because 45/2 = (41/2)5 = 25.

(d) 1/4, because 8−2/3 = (81/3) −2 = 2−2 = 1/22.

(e) 1, because 1n = 1 for any index, n.

3. (a) (x 3/4)8 = x(3/4)×8 = x6 (rule 3)

(b) x 2 ÷ x3/2 = x 2–(3/2) = x1/2 (rule 2)

(c) (x 2y4)3 = (x 2)3( y4)3 (rule 4)

= x 2×3y4×3 (rule 3)
6 12
=xy

(d) √x(x 5/2 + y 3) = x1/2(x 5/2 + y 3) (definition of b1/n)

= x1/2x 5/2 + x1/2y 3 (multiply out the brackets)
(1/2)+(5/2) 1/2 3
=x +x y (rule 1)
3 1/2 3
=x +x y
The term x1/2y 3 cannot be simplified, because x 1/2 and y 3 have different bases.

4. (a) f(K, L) = 7KL2

f(λ K, λ L) = 7(λ K)(λ L)2
= 7λ K λ 2L2 (rule 4)
= (λλ )(7KL )
2 2

= λ 3f(K, L) (rule 1)

Increasing returns to scale because 3 > 1.

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(b) f(K, L) = 50K1/4L3/4

f(λ K, λ L) = 50(λ K)1/4(λ L)3/4
= 50λ 1/4K 1/4λ 3/4L3/4 (rule 4)
= (λ 1/4λ 3/4)(50K 1/4L3/4)
= λ 1f(K, L) (rule 1)

Constant returns to scale.

5. (1) (a) 3 (b) 2 (c) 1 (d) 0 (e) −1 (f ) −2

(2) Same as part (1), because if M = 10n then log10 M = n.

(3) On most calculators there are two logarithm function keys, log10 (possibly labelled log
or log10) and ln (possibly labelled ln or loge). The latter is known as the natural
logarithm and we introduce this function in the next section. This question wants you to
evaluate logarithms to base 10, so we use the key log.
Warning: There is no standard layout for the keyboard of a calculator. It may be
necessary for you first to use the shift key (sometimes called the inverse function or
second function key) to activate the log10 function.

 x
6. (a) logb   + logb z (rule 2)
 y
 xz 
= logb   (rule 1)
 y

(b) logb x 4 + logb y 2 (rule 3)

= logb(x4y 2) (rule 1)

7. (a) 3x = 7

log(3x) = log 7 (take logarithms of both sides)

x log 3 = log 7 (rule 3)

log 7
x= (divide both sides by log 3)
log 3

0.845098040
x= (using base 10 on a calculator)
0.477121255

x = 1.77 (to two decimal places)

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(b) 5(2)x = 10x

log[5(2)x ] = log(10)x (take logarithms of both sides)

log 5 + log(2x) = log(10)x (rule 1)
log 5 + x log 2 = x log 10 (rule 3)

x(log 10 – log 2) = log 5 (collect terms and factorise)

x log 5 = log 5 (rule 2)

x=1 (divide both sides by log 5)
which is, of course, the obvious solution to the original equation! Did you manage to
spot this for yourself before you started taking logs?

Exercise 2.3 (p. 168)

1. (a) 64 (b) 2 (c) 1/3 (d) 1

(e) 1 (f) 6 (g) 4 (h) 1/343

2. (a) a11 (b) b 5 (c) c 6 (d) x 2 y 2

(e) x 3 y 6 (f) y −4 (g) x 4 (h) f 7

(i) y 3 (j) x 5

1 1
−2
3. (a) x2 (b) x (c) x3 (d) x −1

1 3
−
(e) x 2 (f) x2

1 2
4. (a) Q = 200 × 16 4 × 27 3 = 200 × 2 × 9 = 3600
1 2
(b) Q = 200 ×10000 4 ×1000 3 = 200 ×10 ×100 = 200000

5. The functions in parts (a) and (b) are homogeneous of degree 7/12 and 2, respectively, so
(a) displays decreasing returns to scale and (b) displays increasing returns to scale. The
function in part (c) is not homogeneous.

6. (a) 2 (b) − 1 (c) −3 (d) 6 (e) 1/2 (f) 0

7. (a) 2 (b) 1 (c) 0 (d) 1/2 (e) −1

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8. (a) logb x + logb z = logb ( xz ) (rule 1)

(b) 3 log b x − 2 log b y = log b x 3 − log b y 2 (rule 3)

 x3 
= logb  2  (rule 2)
y 
 

(c) log b y − 3log b z = log b y − log b z 3 (rule 3)

 y
= log b  3  (rule 2)
z 

9. (a) log b x 2 y = log b x 2 + log b y (rule 1)

= 2logb x + logb y (rule 3)

 x 
(b) logb  2  = logb x − logb y 2 (rule 2)
y 
(rule 3)
= logb x − 2logb y

(c) log b x 2 y 7 = log b x 2 + log b y 7 (rule 1)

= 2logb x + 7logb y (rule 3)

10. Taking logs to base 10 we get:

(a) 5 x = 8

log 5 x = log8
x log 5 = log8
log8
x= = 1.29
log 5

(b)
log10 x = log 50
x log10 = log 50
x = log 50 = 1.70

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(c)

1.2 x = 3
log1.2 x = log3
x log1.2 = log3
log3
x= = 6.03
log1.2

(d)

1.05 x = 1.5
log1.05 x = log1.5
x log1.05 = log1.5
log1.5
x= = 8.31
log1.05

1
11. (1) (a) 5 (b) −
2
(2) 2 log b x − 4 log b y = log b x 2 − log b y 4 (rule 3)

 x2 
= logb  4  (rule 2)
y 
 

(3) 10(1.05) x = 300

1.05 x = 30
log1.05 x = log 30
x log1.05 = log 30
log 30
x= = 69.7
log1.05

12. (1) (a) 4 (b) −2 (c) 2

(2) (a) x 3 y (b) ( x 3 y ) 5 = ( x 3 ) 5 y 5 = x15 y 5

1 1 1
x9 y 4
(c)
x5
4 4
= x y = ( )
x4 y 4 2 4 2 4 2
= (x ) ( y ) = x2 y 2

13. (a)

t 1 2 3 4 5 6
N 98 115 125 134 140 146

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(b) The graph is sketched in Figure S2.20.

Figure S2.20
The number of complaints increases at a decreasing rate.

14. 108 L = 4 L2
Divide both sides by 4:

27 L = L2
Square both sides:

729L = L4
L is non-zero so we can divide both sides by L to get:

L3 = 729
Cube root both sides:

L = 7291/3 = 9

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Section 2.4 The exponential and natural logarithm functions

Practice Problems

x −3 −2 −1 0 1 2 3
1. 3x 0.04 0.11 0.33 1 3 9 27
−x
3 27 9 3 1 0.33 0.11 0.04

The graphs of 3x and 3−x are sketched in Figures S2.21 and S2.22, respectively.

Figure S2.21

Figure S2.22

2. (a) 2.718145927, 2.718268237, 2.718280469

(b) 2.718281828; values in part (a) are getting closer to that of part (b).

3. (1) Substituting t = 0, 10, 20 and 30 gives

55
(a) y ( 0) = = 0.07%
1 + 800e0

55
(b) y (10) = = 1.35%
1 + 800e−3

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55
(c) y ( 20) = = 18.44%
1 + 800e−6

55
(d) y ( 30) = = 50.06%
1 + 800e−9

(2) As t increases, e−0.3t goes to zero, so y approaches

55
= 55%
1 + 800 ( 0 )

(3) A graph of y against t, based on the information obtained in parts (1) and (2), is sketched in
Figure S2.23. This shows that, after a slow start, microwave ownership grows rapidly
between t =10 and 30. However, the rate of growth then decreases as the market approaches
its saturation level of 55%.

Figure S2.23

4. (a) ln a2 + ln b3 (rule 1)
= 2 ln a + 3 ln b (rule 3)

(b) ln x1/2 − ln y3 (rule 3)

 x1 2 
= ln  3  (rule 2)
 y
 

5. (a) Putting t = 0 and 2 into the expression for TR gives

TR = 5e0 = $5 million
TR = 5e−0.3 = $3.7 million

(b) To solve 5e−0.15t = 2.7 we divide by 5 to get e−0.15t = 0.54 and then take natural
logarithms, which gives
−0.15t = ln(0.54) = −0.62
Hence t = 4 years.

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6. (1) Missing numbers are 0.99 and 2.80.

(2) The graph is sketched in Figure S2.24.

Intercept, 0.41; slope, 0.20.

(3) A = 0.2, B = e0.41 = 1.5.

(4) (a) 9100 (b) 2.4 × 108; answer to part (b) is unreliable since t = 60 is well outside the
range of given data.

Figure S2.24

Exercise 2.4 (p. 182)

1. (1) (a) N = 100 − 100e −0.4 = 33

(b) N = 100 − 100e −0.8 = 55

(c) N = 100 − 100e −4 = 98

(2) 100

(3) The graph of N against t is sketched in Figure S2.25.

Figure S2.25

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The graph sketched in Figure S2.25 is called a learning curve. It shows that immediately
after training the worker can produce only a small number of items. However, with practice,
output quickly increases and finally settles down at a daily rate of 100 items.

2. (a) ln xy = ln x + ln y (rule 1)

(b) ln xy 4 = ln x + ln y 4 (rule 1)
= ln x + 4 ln y (rule 3)
(c) ln( xy ) 2 = 2 ln xy (rule 3)
= 2(ln x + ln y )
= 2 ln x + 2 ln y

x5
(d) ln 7
= ln x 5 − ln y 7 (rule 2)
y
= 5 ln x – 7 ln y (rule 3)

1
x  x 2 1 x
(e) ln = ln   = ln (rule 3)
y  y 2 y

= 1 ( ln x − ln y ) (rule 2)
2
= 1/2 ln x − 1/2 ln y

1
xy 3  xy 3  2 1  xy 3 
(f) ln = ln  = ln  (rule 3)
z  z  2  z 

 

=
1
2
(
ln x + ln y 3 − ln z ) (rules 1 and 2)

1
= ( ln x + 3ln y − ln z ) (rule 3)
2

= 1 ln x + 3 ln y − 1 ln z
2 2 2

3. (a) ln x + 2ln x = 3ln x = ln x3 (rule 3)

(b) 4 ln x − 3 ln y + 5 ln z = ln x 4 − ln y 3 + ln z 5 (rule 3)

 x4 z5 
= ln  3  (rules 1 and 2)
 y 
 

4. (a) e x = 5.9
x = ln5.9 = 1.77

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(b) e x = 0.45
x = ln0.45 = −0.80

(c) no solution since the left-hand side is always positive so cannot be equal to a negative
number

(d) e3 x = 13.68
3x = ln13.68
1
x = ln13.68 = 0.87
3

(e) e−5 x = 0.34

−5x = ln0.34
1
x = − ln 0.34 = 0.22
5

(f) 4e 2 x = 7.98

e2 x = 1.995
2x = ln1.995
1
x = ln1.995 = 0.35
2

5. We are told that y = 50 000 when t = 0 so

Ae 0 = 50 000

A = 50000 (because e 0 = 1 )

Hence y = 50 000e − at
Also, y = 38 000 when t = 2 so
50 000e − 2 a = 38 000

e−2a = 0.76
−2a = ln0.76
a = 0.137
Hence y = 50 000e −0.137 t

(a) y = 50 000e −0.685 = $25 205

(b) $0 since a negative exponential function decreases to zero in the long run.

6. (a) e5 (b) 1

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7
2e0.02t = 5e0.01t
e0.01t = 2.5
0.01t = ln 2.5
t = 100 ln 2.5 = 91.6
8.
( ) ( ) ( )
f (λ K , λ L) = ( λ K ) + ( λ L ) eλ K / λ L = λ 2 K 2 + λ 2 L2 e K / L = λ 2 K 2 + L2 e K / L = λ 2 f ( K , L)
2 2

Increasing returns to scale.

Examination Questions

(a) Q = 100 × 8 2/3 × 251/ 2 = 100 × 4 × 5 = 2000

(b) 9000 = 100 × 27 2/3 × L1/2 = 900 L1/2

Hence

L1/2 = 10  L = 102 = 100

(c) 3200 = 100 K 2/3 × 41/2 = 200 K 2/3

Hence

K 2/3 = 16  K = 163/2 = 64

(d)

f (λ K , λ L) = 100(λ K ) 2/3 (λ L)1/2

= 100λ 2/3 K 2/3λ1/2 L1/2
= 100λ 7/6 K 2/3 L1/2
= λ 7/6Q

Homogeneous of degree 7/6 > 1, so increasing returns to scale.

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2 π = TR − TC

= (8 − Q )Q − (8 + 2Q )
= −Q 2 + 6Q − 8
= −(Q − 2)(Q − 4)

The graph is sketched in Figure S2.26

Figure 2.26

(a) Q = 2, 4
(b) Symmetry shows that the maximum occurs halfway between 2 and 4 at Q = 3.
Substituting Q = 3 into the profit function gives π = 1.
(c) Shifts vertically upwards.

3
(a) In equilibrium,

2Q 2 + 3Q + 10 = −Q 2 − 3Q + 154
3Q 2 + 6Q − 144 = 0
Q 2 + 2Q − 48 = 0
(Q − 6)(Q + 8) = 0
Q>0  Q=6  P = 100

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(b) The new supply equation is: P = 2QS2 + 3QS + 15 so in equilibrium,

2Q 2 + 3Q + 15 = −Q 2 − 3Q + 154
3Q 2 + 6Q − 139 = 0
−6 ± 1704
Q=
6
Q>0  Q = 5.88  P = 101.79

Hence the consumer pays $1.79 of the tax and the firm pays $3.21.

4
(i) TR = (10 − Q )Q = 10Q − Q 2
π = TR − TC
= 10Q − Q 2 − (12 + 2Q )
= −Q 2 + 8Q − 12

(ii)
−Q 2 + 8Q − 12 ≥ 3
−Q 2 + 8Q − 15 ≥ 0
−(Q − 3)(Q − 5) ≥ 0

Figure 2.27

The graph shown in Figure S2.27 is above the horizontal axis between 3 and 5 so
3≤Q ≤5.

Hence 5 ≤ P ≤ 7 .

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5
(a) (i)
5log a x − 2log a y + log a xy
= log a x5 − log a y 2 + log a xy
 x5 × xy 
= log a 
 y 2 
 
 x6 
= log a  
 y 
 
(ii)
1
log 2 5 + log 2 36 − log 2 120
2
= log 2 5 + log 2 361/2 − log 2 120
= log 2 5 + log 2 6 − log 2 120
= log 2 30 − log 2 120
1
log 2  
4
= −2

1100 1210
(b) = 1.1 = , so there is a common growth factor.
1000 1100

A = 1000, b = 1.1

(i) 1000 × 1.110 = $2594

(ii) 1000 × 1.1n = 8000

1.1n = 8
n log1.1 = log8
log8
n= = 21.8
log1.1

so the target is reached at the beginning of year 22.

6
14
(a) TC = 14 + 2Q; AC = +2
Q
The graphs are sketched in Figures S2.28 and S2.29.

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Figure S2.28 Figure S2.29

(b) When the firm sells no goods the total cost is the fixed cost of 14 and there is no
revenue so at Q = 0, TC = 14 and TR = 0 giving a loss of 14 so that π = −14 .

Substituting Q = 0 into the given quadratic gives π = c . Hence c = −14 .

(c) a + b − 14 = −6  a + b = 8 (1)
36a + 6b − 14 = 4  36a + 6b = 18  6a + b = 3 (2)

Subtract (2) from (1): −5a = 5  a = −1  b=9

π = − Q 2 + 9Q − 14

(d) π = −(Q − 2)(Q − 7) = 0  Q = 2, 7

Maximum profit occurs at the midpoint, Q = 4.5 giving π = 6.25 .

(e) π = TR − TC rearranges to give TR = π + TC

Hence TR = −Q 2 + 9Q − 14 + 14 + 2Q = −Q 2 + 11Q

P = TR/Q, so the demand function is P = 11 − Q .

a 5b 3
7 (a) (i) (ii) 4 x 2 y 4 (iii) 6
2
(iv) logb  xy × xz ×  = logb ( xy 2 z 2 )
yz
 x 

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(b) 3x = 2 × 5 x

log 3x = log 2 + log 5 x

x log3 = log 2 + x log 5
x(log 3 − log 5) = log 2
x log 0.6 = log 2
log 2
x= = −1.36
log 0.6

Check: 3−1.36 = 0.224 and 2 × 5−1.36 = 0.224

(c) (i) 659 360

(ii) 2 000 000(1 − e −0.2 t ) = 1000 000

1 − e −0.2t = 0.5
e −0.2t = 0.5
−0.2t = ln 0.5
t = 3.5

(iii) Figure S2.30 shows how the graph approaches the limiting value of 2 million as
t tends to infinity.

Figure S2.30

8
(a) Ab2 = 45,125 and Ab4 = 40,725
40725
Divide to get b2 =  b = 0.95
45125
2
Hence 45125 = A × 0.95  A = 50,000

A is the initial price.

(b) Now 0.95 = eln 0.95 = e −0.0513 so the equation V = 50 000 × 0.95t can be written as

V = 50000e−0.0513t  r = −0.0513

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(c) Take logs of both sides to get

(
ln V = ln 50000e −0.0513t )
= ln 50000 + ln e−0.0513t
= 10.8 − 0.0513t

which is the equation of a straight line with gradient −0.0513 and vertical
intercept, 10.8.

9
(a) IT: TC = 1 + (0.04Q + 0.5)Q

= 1 + 0.5Q + 0.04Q 2

1
Hence AC = + 0.5 + 0.04Q
Q
Retail: TC = 5 + 0.5Q
5
Hence AC = + 0.5
Q
Printing: TC = Q
Hence AC = 1

(b) The function AC = 1, is a horizontal line so curve B corresponds to the printing

department.
5 5
As Q → ∞, → 0 so the function, AC = + 0.5 → 0.5 .
Q Q
The curve decreases and approaches a horizontal line so curve C corresponds to the
retail department.

1 1
As Q → ∞, → 0 so the function AC = + 0.5 + 0.04Q → 0.5 + 0.04Q .
Q Q
The curve decreases before approaching an oblique asymptote so curve A corresponds
to the data processing department.

(c)
1
+ 0.5 + 0.04Q < 1
Q
 1 + 0.5Q + 0.04Q 2 < Q
 0.04Q 2 − 0.5Q + 1 < 0
 (Q − 10)(0.04Q − 0.1) < 0
 2.5 < Q < 10

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Mathematics of Finance

Section 3.1 Percentages

Practice Problems

10
1. (a) × 2.90 = 0.1 × 2.90 = $0.29
100

75
(b) × 1250 = 0.75 × 1250 = $937.50
100

24
(c) × 580 = 0.24 × 580 = $139.20
100

2. (a) The rise in annual sales is

55 000 − 50 000 = 5000
As a fraction of the original this is
5000 10
=
50000 100
so the percentage rise is 10%.

(b) As a fraction
15
15% is the same as = 0.15
100
so the tax is
0.15 × 1360 = 204
Hence the consumer pays
1360 + 204 = $1564

(c) As a fraction
7
7% is the same as = 0.07
100
so the fall in value is
0.07 × 9500 = 665
Hence the final value is
9500 − 665 = $8835

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3. (a) The scale factor is

13
1+ = 1.13
100
We are going forwards in time, so we multiply to get
6.5 × 1.13 = $7.345 million

(b) The scale factor is

63
1+ = 1.63
100
We are going backwards in time, so we divide to get
1.24 ÷ 1.63 = $76 billion (correct to the nearest billion)

(c) The scale factor is

123050
= 1.07
115000
which can be thought of as
7
1+
100
so the rise is 7%.

4. (a) The scale factor is

65
1− = 0.35
100
so the new level of output is
25 000 × 0.35 = 8750

(b) The scale factor is

24
1− = 0.76
100
so before restructuring the number of employees was
570 ÷ 0.76 = 750

(c) The scale factor is

2.10
= 0.2
10.50
which can be thought of as
80
1−
100
so the fall is 80% (not 20%!).

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5. (a) 1.3 × 1.4 = 1.82, which corresponds to an 82% increase.

(b) 0.7 × 0.6 = 0.42, which corresponds to a 58% decrease.

(c) 1.1 × 0.5 = 0.55, which corresponds to a 45% decrease.

6. 100, 101.5, 105.4, 104.3, 106.9.

7. (a) 5.7% increase.

105.7
(b) = 1.184 so 18.4% increase.
89.3

100
(c) = 1.120 so 12.0% increase.
89.3

8. The Year 1 adjusted salary is

17.3 × 1.049 = 18.1

The Year 3 adjusted salary is

19.8
= 19.0
1.043

and so on. The complete set of ‘constant Year 2 prices’ is listed in Table S3.1.

Table S3.1
Year
1 2 3 4 5
Real salaries 18.1 18.1 19.0 21.7 23.2

During Year 1/2 salaries remain unchanged in real terms. However since Year 2, salaries have
outpaced inflation with steady increases in real terms.

Exercise 3.1 (p. 210)

7 22 1 7 1
1. (a) (b) (c) 2 (d) (e)
20 25 2 40 500

2. (a) 0.05 × 24 = 1.2 (b) 0.08 × 88 = 7.04 (c) 0.48 × 4563 = 2190.24

(d) 1.12 × 56 = 62.72

132
3. (a) × 100 = 60%
220

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(b) If the number of additional male staff is x then

140
×100 = 56
228 + x
140 = 0.56(228 + x)
250 = 228 + x
x = 22

4. (a) 1.19 (b) 3.5 (c) 0.98 (d) 0.57

5. (a) 4% increase (b) 42% increase (c) 14% decrease

(d) 245% increase (e) 0.25% increase (f) 96% decrease

6. (a) 16.25 × 1.12 = $18.20 (b) 113 566 × 1.05 = 119 244 (c) 87.90 × 1.15 = $101.09

(d) 2300 × 0.7 = $1610 (e) 23000 × 0.68 = $15 640

80.6
7. = 0.65 so the student discount is 35%.
124

8. (a) 12.40 ÷ 0.8 = $15.50 (b) 12.40 × 0.85 = $10.54 (c) 0.8 × 0.85 = 0.68

so the overall reduction is 32%.

9. Excluding the sales tax the price is 900 ÷1.2 = 750 so after the new tax is applied the price
will be 750 ×1.15 = $862.50.

18000
10. (a) 18000 × 1.45 = $26 100 (b) = 0.69 which corresponds to a 31% decrease
26100
(nearest percentage).

11. (a) 1.1×1.25 = 1.375 , so 37.5% increase (b) 0.66 ×1.65 = 1.089 , so 8.9% increase

(c) 1.25 × 0.75 = 0.9375 , so 6.25% decrease

12. 10.8 ×1.021×1.029 ×1.024 = $11.6 million

13. 50 60 72 86 100

Prices rise consistently over the past five years at a steadily increasing rate.

150
14 (a) Jan (b) × 3840 = 4800
120
100
(c) Sales in Jan are × 3840 = 3200 so the index number in May is
120
4256
×100 = 133
3200

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15. (1) 1995 because in this year the index number is 100
198 224
(2) (a) 30% (b) = 1.523 so 52.3% (c) = 1.131 so 13.1%
130 198
245
(d) = 1.094 so 9.4%
224
180 199
(3) (a) 25% (b) = 1.44 so 44% (c) = 1.106 so 10.6%
125 180
221
(d) = 1.111 so 11.1%
199
(4) Public transport costs have risen at a faster rate than private transport throughout the
period 1995–2010. However, for the final 5 years there are signs that the trend has
stopped and has possibly reversed.

13.5 2.5 10.5

16. × 100 = 964, 100, ×100 = 179, × 100 = 750; e.g. seasonal variations.
1.4 1.4 1.4

40 44 56 60 71
17. (a) × 100 = 83.3,100, × 100 = 91.7, × 100 = 116.7, × 100 = 125, ×100 = 147.9
48 48 48 48 48

(b) 48 ×1.35 = 64.8

44 44 ×100
(c) ×100 = 73  x = = 60.3
x 73
So Year 5.

Section 3.2 Compound interest

Practice Problems

1. S =1000(1.08)10 =$2158.92

2. 9000(1.03)n =10 000

(1.03)n =1.11
log(1.03)n = log(1.11)
n log(1.03) = log(1.11)
log(1.11)
n= = 3.53
log(1.03)

so the firm makes a profit for the first time after 4 years.

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3. (1) (a) S = 30(1.06)2 = $33.71

(b) S = 30(1.03)4 = $33.77
(c) S = 30(1.015)8 = $33.79
(d) S = 30(1.005)24 = $33.81
(e) S = 30(1.001 15)104 = $33.82
(f) S = 30(1.000 164)730 = $33.82

(2) S = 30e0.12 = $33.82

The results in part (1) are settling down at this value.

4. 4000 = 1000e0.1r

4 = e0.1r
0.1r = ln 4
= 1.386
r = 13.86%

5. The quarterly scale factor is 1.03, so the overall scale factor for a year is
1.034 = 1.1255

which corresponds to a 12.55% increase.

6. After n years, the annual turnover of A will be 560(1.015)n and the corresponding
expression for B is 480(1.034)n. To find when supermarket B overtakes A, we need to solve
the equation
480(1.034)n = 560(1.015)n
1.034n 560
n
=
1.015 480
n
 1.034  7
  =
 1.015  6
 1.034  7
n log   = log  
 1.015  6
log(7 / 6)
n= = 8.31
log(1.034 / 1.015)

so it will take 9 years.

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Exercise 3.2 (p. 226)

1. 4500 × 1.076 = $6753.29; 1.076 = 1.50 , so 50%.

2. 20 000 × 1.028 = $23 433.19

3. (a) 100 000 × 1.210 = $619 173.64

(b)
100 000 × 1.2n = 1 000 000
1.2n = 10
log1.2n = log10
n log1.2 = log10
log10
n= = 12.6
log1.2

so 13 years.

4.

1.05n = 2
log1.05n = log 2
n log1.05 = log 2
log 2
n= = 14.2
log1.05

so 15 years.

5. $50 000 (0.95)3 = $42 868.75.

6. (a) 7000 × 1.098 = $13 947.94 (b) 7000 × 1.04516 = $14 156.59

(c) 7000 × 1.007596 = $14 342.45 (d) 7000 × e 0.72 = $14 381.03

7. A: 1.040252 = 1.08212 ,so the AER is 8.212%

B: (1.006625)12 = 1.08246 ,so the AER is 8.246%
Account B has the greater return.

8. 100 × e 0.72 = $205.44.

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9. e0.03t = 3

0.03t = ln 3
1
t= × ln 3 = 36.6
0.03

so 36.6 years

10. 0.96n = 0.5

log 0.96n = log 0.5

n log 0.96 = log 0.5
log 0.5
n= = 17.0
log 0.96
so 17.0 years

11. We are charged interest on the interest;

1.0212 = 1.2682 so APR = 26.82%.

12. e0.07 = 1.0725 so APR = 7.25%.

13. (a)

78 × 1.058n = 104
4
1.058n =
3
4
log1.058n = log
3
4
n log1.058 = log
3
4
log
n= 3 = 5.10
log1.058
so 6 years

(b)

104 × a50 = 78 × 1.05850

104 × a50 = 1307.308
a50 = 12.570
a = 50 12.570 = 1.0519
so 5.19%.

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14. 4000 × 1.052 = $4410;

4410 × 1.082 = $5143.82 ;

5143.82
= 1.2860 so 28.60%
4000

15. 1.016512 = 1.2170 so 21.70%

n
 r 
16. P  1 +  =S
 100 

Divide both sides by the bracket to get

−n
S  r 
P= n
= S 1 + 
 r   100 
 1 + 
 100 

1/7
 7.419 
17.   = 1.0575 so 5.75%
 5.015 

18. (a) The value goes down by $4 000 a year so in Year 3 the value would be $28 000.

(b) Each year the value gets multiplied by 28800/32000 = 0.9 so in Year 3 the price would
be 0.9 × 28800 = $25920

(c) Values of Car A: 36 000, 32 000, 28 000, 24 000, 20 000

Values of Car B: 32 000, 28 800, 25 920, 23 328, 20 955.20
The value of car A drops below that of car B in Year 5.

Section 3.3 Geometric series

Practice Problems

1. The geometric ratios of (a), (c), (d) and (e) are 2, −3, 1 2 and 1.07, respectively. The
sequence in part (b) is an arithmetic progression, not a geometric progression, because to go
from one number to the next we add on the fixed value of 5.

2. (a) The geometric ratio is 2, so the next term is 8 × 2 = 16.

1 + 2 + 4 + 8 + 16 = 31
For this series, a = 1, r = 2 and n = 5, so its value is
 25 − 1 
(1)  = 32 − 1 = 31
 2 − 1 
 

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(b) For this series, a = 100(1.07), r = 1.07 and n = 20, so its value is
 1.0720 − 1 
100(1.07) 
 1.07 − 1 
= 4386.52
 

3. (a) The first $1000 payment is invested for the full 10 years at 8% interest compounded
annually, so its future value is
1000(1.08)10

The second $1000 payment is invested for 9 years, so its future value is
1000(1.08)9
and so on.

The final payment of $1000 is invested for just 1 year, so its future value is
1000(1.08)1

Total savings
= 1000(1.08)10 + 1000(1.08)9 +  + 1000(1.08)
 1.0810 − 1 
= 1000(1.08) 
 1.08 − 1 
 
= $15 645.49

(b) After n years,

 1.08n − 1 
total savings = 1000(1.08) 
 1.08 − 1 
 
= 13 500(1.08n − 1)
so we need to solve
13 500(1.08n − 1) = 20 000
This can be done by taking logarithms following the strategy described in Section 2.3.
The corresponding value of n is 11.8, so it takes 12 years.

4. If $x denotes the monthly repayment, the amount owed at the end of the first month is

2000(1.01) − x
After 2 months the amount owed is

[2000(1.01) − x](1.01) − x

= 2000(1.01)2 − x(1.01) − x
Each month we multiply by 1.01 to add on the interest and subtract x to deduct the
repayment, so after 12 months the outstanding debt is

2000(1.01)12 − x[1.0111 + 1.0110 +  + 1]

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 1.0112 − 1 
= 2253.650 − x 
 1.01 − 1 
 

= 2253.650 − 12.683x
If the debt is to be cleared then

2253.650
x= = $177.69
12.683

5. If the annual percentage rise is 2.6%, the scale factor is 1.026, so after n years the total
amount of oil extracted (in billions of units) will be
45.5 + 45.5(1.026) + 45.5(1.026)2 +  + 45.5(1.026)n−1
 1.026n − 1 
= 45.5  = 1750(1.026n − 1)
 1.026 − 1 
 

Oil reserves are exhausted after n years where n satisfies the equation
1750(1.026n − 1) = 2625
1.026n − 1 = 1.5
n log(1.026) = log(2.5)
n = 35.7

so oil will run out after 36 years.

Exercise 3.3 ( p. 238)

 1.0310 − 1 
1. 1000  =
 1.03 − 1  11 463.88.
 

2. (a)

5000 × 1.0810 + 5000 × 1.089 +  + 5000 × 1.08

= 5000 × 1.08 + 5000 × 1.082 +  + 5000 × 1.0810
 1.0810 − 1 
= 5000 × 1.08 ×  = $78227.44
 1.08 − 1 
 

(b) Interest of 4% is applied to the first investment of $5000 for 20 periods.

Interest of 4% is applied to the second investment of $5000 for 18 periods
This continues until the final $5000 which is invested for only 2 periods.
The total is

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5000 × 1.0420 + 5000 × 1.0418 +  + 5000 × 1.042

= 5000 × 1.042 + 5000 × 1.044 +  + 5000 × 1.0420

( 
)
10
 1.042 − 1 
2
= 5000 × 1.04 ×  2  = $78941.10
 1.04 − 1 
 

3. If each repayment is $x then amount owed at the end of the first year is
125000 × 1.07 − 12x

After 2 years the debt is

(125000 ×1.07 − 12 x ) ×1.07 − 12 x = 125000 ×1.072 − 12 x(1 + 1.07)

After 20 years the debt is
125 000 × 1.07 20 − 12 x (1 + 1.07 + 1.07 2 +  + 1.0719 )

The value of the sum inside the brackets is

 1.0720 − 1 
  = 40.99549
 1.07 − 1 

so the debt is cleared when x is chosen to satisfy the equation

125 000 × 1.07 20 − 12 × 40.99549 x = 0

which has solution x = $983.26

4. At the end of the first year the value of the fund (after the first prize is awarded) is
5000 ×1.07 − 500

At the end of the second year the value is

(5000 × 1.07 − 500) × 1.07 − 500 = 5000 × 1.07 2 − 500(1 + 1.07)

At the end of n years the value is

5000 × 1.07 n − 500(1 + 1.07 + 1.07 2 +  + 1.07 n −1 )

 1.07 n − 1 
= 5000 × 1.07 n − 500 
 1.07 − 1 
 
= 5000 × 1.07 n − 500 ×
100
7
(
× 1.07 n − 1 )
100 15000
= 500 × − × 1.07 n
7 7

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The nth prize can be awarded provided:

100 15 000
500 × − ×1.07n ≥ 0
7 7

so we need

500 × 100 − 15 000 × 1.07 n ≥ 0

10
1.07 n ≤
3
10
log1.07 n ≤ log
3
10
n log1.07 ≤ log
3
log (10 3)
n≤ = 17.8
log1.07

so the prize can be awarded for 17 years.

5. In the first year, the amount extracted is 12 million tonnes.

In the second year, it is 12 × 0.94

In the third year, it is 12 × 0.942 and so on.

The total amount extracted (in millions of tonnes) during the first n years is
12 + 12 × 0.94 + 12 × 0.942 + 12 × 0.943 +  + 12 × 0.94n −1
 0.94n − 1 
= 12 
 0.94 − 1 
 
 0.94n − 1 
= 12 
 −0.06 
 
= 200(1 − 0.94n )

As n tends to infinity 0.94n converges to zero so the total approaches 200 million tonnes.

6.

5000(1.045)10 + 1000(1.045)9 + 1000(1.045)8 +  + 1000(1.045)

 1.0459 − 1 
= 5000(1.045)10 + 1000(1.045) 
 1.045 − 1 
 
= $19 053.06

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7. (a) If the annual repayment is x then at the end of 1 year the amount owed is

100 000(1.06) − x

After 2 years the debt is

(100 000(1.06) − x )1.06 − x = 100 000(1.06) 2 − 1.06 x − x

After 3 years the debt is

(100 000(1.06) 2 − 1.06 x − x )1.06 − x = 100 000(1.06)3 − 1.06 2 x − 1.06 x − x

After 10 years the debt is

100 000(1.06)10 − (1.069 + 1.068 +  + 1.06 + 1) x

 1.0610 − 1 
= 100 000(1.06)10 − 
 1.06 − 1 
x
 
= 179 084.7697 − 13.18079 x

If the debt is cleared after 10 years, then

179 084.7697 − 13.18079 x = 0 , giving x = $13 586.80

(b) 10 ×13 586.80 − 100 000 =$35 868.01

If the debt is cleared after 5 years, then

 1.065 − 1 
100 000(1.06)5 −  x=0
 1.06 − 1 
 
giving x = $23 739.64 so the interest is 5 × 23 739.6 − 100 000 = $18 698.20 which is a
saving of $17 169.80.

8. If x denotes the monthly savings the total is

 1.00418 − 1 
x(1.00418 + 1.00417 +  + 1.004) = x  = 18.625 x
 1.004 − 1 
 
Hence
18 000
x= = $966.43
18.625

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Section 3.4 Investment appraisal

Practice Problems

1. (a) P = 100 000(1.06)−10 = $55 839.48

(b) P = 100 000e−0.6 = $54 881.16

2. (a) NPV = $17 000(1.15)−5 − $8000 = $452

Worthwhile since this is positive.

(b) The IRR, r, is the solution of

5
 r 
8000 1 +  = 17,000
 100 
5
 r 
1 +  = 2.125 (divide by 8000)
 100 
r
1+ = 1.16 (take fifth roots)
100
r = 16%
Worthwhile since the IRR exceeds the market rate.

3. NPV of Project A is
NPVA = $18 000(1.07)−2 − $13 500 = $2221.90
NPV of Project B is
NPVB = $13 000(1.07)−2 − $9000 = $2354.70
Project B is to be preferred since
NPVB > NPVA

4. Rate of interest per month is 1/2%, so the present value, P, of $S in t months’ time is
P = S(1.005)−t
The total present value is
2000(1.005)−1 + 2000(1.005)−2 +  + 2000(1.005)−120
because there are 120 months in 10 years. Using the formula for a geometric series gives
 1.005−120 − 1 
2000(1.005)−1  = $180 146.91
 1.005−1 − 1 
 

5. The formula for discounting is

P = S(1.15)−t
The results are given in Table S3.2.

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There is very little to choose between these two projects. Both present values are
considerably less than the original expenditure of $10 000. Consequently, neither project is
to be recommended, since the net present values are negative. The firm would be better off
just investing the $10 000 at 15% interest!

Table S3.2
Discounted revenue
($)
End of year Project 1 Project 2
1 1739.13 869.57
2 1512.29 756.14
3 1972.55 1315.03
4 1715.26 3430.52
5 1491.53 1988.71
Total 8430.76 8359.97

6. The IRR satisfies the equation

−1 −2 −3 −4
 r   r   r   r 
12000 = 8000  1 +  + 2000  1 +  + 2000  1 +  + 2000  1 + 
 100   100   100   100 
Values of the right-hand side of this equation corresponding to r = 5, 6,  , 10 are listed in
the table below:
r 5 6 7 8 9 10
value 12 806 12 591 12 382 12 180 11 984 11 794

This shows that r is between 8 and 9. To decide which of these to go for, we evaluate
r = 8.5 , which gives 12 081, which is greater than 12 000, so r = 9% to the nearest
percentage. This exceeds the market rate, so the project is worthwhile.

7. If the yield is 7%, then each year the income is $70 with the exception of the last year, when
it is $1070 because the bond is redeemed for its original value.

The present values of this income stream are listed in Table S3.3 and are calculated using
the formula P = S(1.08)−t

Table S3.3
End of year Cash flow Present value
($) ($)
1 70 64.81
2 70 60.01
3 1070 849.40
Total present value 974.22

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Exercise 3.4 (p. 253)

1. (a) 7000 ÷ 1.028 = $5974.43 (b) 7000e

−0.16
= $5965.01

2. (a)
5
 r 
20000 1 +  = 28000
 100 
5
 r 
1 +  = 1.4
 100 
r
1+ = 1.070
100
r = 7%

(b) Yes, provided there are no risks, since the IRR exceeds 6%.

3. Project 1: PV = 250 000 × 1.07 −4 = $190 723.80

Project 2: PV = 350 000 × 1.07 −8 = $203 703.19
Choose Project 2.

4. −20 × 1.08−1 − 14 × 1.08−2 + 5 × 1.08−3 + 39 × 1.08−4 + 64 × 1.08−5 = 45.67138807 , so the

present value of the revenue stream is $4 567 138.81.

5. For Option 2, the present value of the revenue stream is

 1.0015−5 − 1 
15000(1 + 1.0015−1 + 1.0015−2 + 1.0015−3 + 1.0015−4 ) = 15000  = $74755.67
 1.0015−1 − 1 
 
This is greater than $73 000, so choose Option 2.

6.
3
 r 
250000  1 +  = 300000
 100 
3
 r 
1 +  = 1.2
 100 
r
1+ = 1.0627
100
r = 6.27%

7. (a) The net present value is zero when the discount rate is between 4% and 5%.
Also since the NPV at r = 4 is much closer to zero than the NPV at r = 5, the answer
could be estimated to be about 4.1% or 4.2%.

(b) Since 5.5 > 4.2 you would be better off investing elsewhere.

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8. NPVA = 25 000(1.05)–3 –20 000 = $1595.94;

NPVB = 37 000(1.05)–3 –30 000 = $1961.99;

NPVC = 117 000(1.05) −3 − 100 000 = $1069.00, so Project B is best.

9. (a)

100(1.1)−1 + 100(1.1) −2 + … + 100(1.1)−5

 1.1−5 − 1 
= 100(1.1)−1  −1  = $379.08
 1.1 − 1 
 

(b)
100(1.1) −1 + 100(1.1) −2 + 100(1.1) −3 + 
100(1.1) −1
= = $1000
1 − 1.1−1

10. Project A NPV = 15 000(1.09) −4 − 10 000 = $626.38

Project B NPV = 25 000(1.09) −5 − 15 000 = $1248.28

Choose B

−1 −2
11. 130000 = 40000 1 +
r   r 
 + 140000 1 + 
 100   100 
2
 r   r 
130000 1 +  = 40000 1 +  + 140000
 100   100 
130000 + 2600r + 13r 2 = 40000 + 400r + 140000
13r 2 + 2200r − 50000 = 0
−2200 ± 22002 − 4(13)(−50000)
r=
2(13)
−2200 ± 7 440000
r=
26
r = 20.3

Examination Questions

1 (a) 4000 × 1.0120 = $4880.76

(b) 4000e 0.2 = $4885.61

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4
(c) 1.01 = 1.0406  4.06%

e0.04 = 1.0408  4.08%

(d) 4000e0.04t = 4500

e0.04t = 1.125
0.04t = ln1.125
t = 2.94

(a) 1.024 × 0.951 = 0.973824  2.62% decrease

6
(b) P ×1.024 = 700  P = 607.15
(c) Debt after 1 year = P ×1.06 − 12 ×1500 = 1.06P − 18000
Debt after 2 years =
(1.06 P − 18 000) × 1.06 − 18 000 = 1.06 2 P − 18 000(1 + 1.06)

Debt after 25 years = 1.06 25 P − 18 000(1 + 1.06 +  + 1.06 24 )

 1.0625 − 1 
= 1.0625 P − 18000 
 1.06 − 1 
 
= 4.29187 P − 987561.2159

987561.2159
Hence P = = $230000 .
4.29187
3

(a) (i) 4000 × 0.9 + 350 = 3950

(ii) 3950 × 0.9 + 350 = 3905
(b) 1 year = 4000 × 0.9 + 350
2 years = (4000 × 0.9 + 350) × 0.9 + 350

= 4000 × 0.9 2 + 350(1 + 0.9)

N years = 4000 × 0.9 N + 350(1 + 0.9 +  + 0.9 N −1 )

= 4000 × 0.9 N + 3500(1 − 0.9 N )

= 3500 + 500 × 0.9 N

(c) 0.9 N → 0 , so the number of trees decreases but settles down to 3500.

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6 × 35 + 15 ×15
(a) ×100 = 122.54
5 × 35 + 12 ×15
6 × 30 + 15 × 20
(b) × 100 = 135.21
5 × 35 + 12 × 15
(c) Paasche index reflects changes in actual purchases made. However, the amounts bought
in Year 2 may be unavailable and you are not really comparing like with like.

5
3
 r 
Project A: 10000 1 +  = 11500
 100 

3
 r 
1 +  = 1.15
 100 
r
1+ = 3 1.15
100
r = 4.77%
4
 r 
Project B: 10000 1 +  = 12100
 100 
4
 r 
1 +  = 1.21
 100 
r
1+ = 4 1.21
100
r = 4.88%

These figures suggest that investment in Project B is recommended. However, there is

very little to choose between the two projects and the prevailing market rate. In practice,
other considerations such as project viability and access to funds need to be taken into
account before any decision is made.

6 (a) Let B denote the current GDP of country B so that the current GDP of country A is 2B
After n years the GDPs of countries A and B will be 2 B (1.01) n and B (1.04) n
respectively. Hence they are equal when

2 B(1.01)n = B(1.04)n
n
 1.04 
2= 
 1.01 

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Take logs of both sides:

 1.04 
n log   = log 2
 1.01 
log 2
n= = 23.68
log (1.04 / 1.01)

so it will take 24 years.

(b) After 1 month the debt is 4000 ×1.004 − x

After 2 months the debt is ( 4000 × 1.004 − x )1.004 − x
= 4000(1.004) 2 − 1.004 x − x
After n months the debt is
(
4000 (1.004 ) − x 1 + 1.004 + ... + 1.004n −1
n
)
 1.004 n − 1 
= 4000(1.004) n − x 
 1.004 − 1 
 
= 4000(1.004) n − 250 x(1.004n − 1)

(i) 4000(1.004) n − 25 000(1.004 n − 1) = 0

21000(1.004) n = 25000
25
1.004n =
21
log(25/21)
n= = 43.7
log1.004
i.e. 44 months
(ii) 4000(1.004)12 − 250 x (1.00412 − 1) = 0

4196.28083 − 12.26755x = 0
x = $342.06
(ii) Debt remains at $4000 and does not change each month.

n
7 (a) The basic formula is S = P  1 +
r 

 100 

(i) S = 4000 × 1.036 = $4776.21

(ii) P = 3149.28 × 1.08−3 = $2500

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2
 r 
(iii) 5000  1 +  = 5283.92
 100 
2
 r 
1 +  = 1.056784
 100 
r = 2.8%
(iv) 75 000 × 1.1n = 120 788.25

1.1n = 1.61051
log1.61051
n= =5
log1.1
(b)
(i) 5000 × 1.04−1 + 5000 × 1.04−2 +  + 5000 × 1.04−10
−10
−1  1.04 −1
= 5000 (1.04 ) 
 1.04−1 − 1 
 
= $40 554.48
(ii) After n years the present value of the annuity would be
−n
−1  1.04 −1 
5000 (1.04 ) 
 1.04−1 − 1 
 
As n →∞ this becomes
−1  0 −1 
5000 (1.04 )   = $125000
 1.04−1 − 1 

8 (a)

2000 × 1.018 20 +2000 × 1.01818 +  + 2000 × 1.0182


( ) + (1.018 ) 
( )
10 2 9
= 2000  1.0182 +  + 1.0182 
 

( 
)
10
1.0182 − 1 
2
= 2000(1.018) 
 1.0182 − 1 

= $24, 464.35

(b) 145 000 × 1.0225 −2 + 80 000 × 1.0225 −4 − 200 000 = $11876.26

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Differentiation

Section 4.1 The derivative of a function

Practice Problems

11 − 3 8
1. (a) = =2
3 − (−1) 4

−2 − 3 −5
(b) = = −1
4 − (−1) 5

3−3 0
(c) = =0
49 − (−1) 50

2. Using a calculator, the values of the cube function, correct to 2 decimal places, are
x −1.50 −1.25 −1.00 −0.75
f(x) −3.38 −1.95 −1.00 −0.42
x −0.50 −0.25 0.00 0.25 0.50
f(x) −0.13 −0.02 0.00 0.02 0.13
x 0.75 1.00 1.25 1.50
f(x) 0.42 1.00 1.95 3.38

The graph of the cube function is sketched in Figure S4.1.

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Figure S4.1

1.5
f ′( −1) = = 3.0
0.5

f ′(0) = 0 (because the tangent is horizontal at x = 0)

1.5
f ′(1) = = 3.0
0.5

[Note: f ′(−1) = f ′(1) because of the symmetry of the graph.]

3. If n = 3, then the general formula gives

f ′(x) = 3x 3−1 = 3x 2

Hence
f ′(−1) = 3(−1)2 = 3
f ′(0) = 3(0)2 = 0
f ′(1) = 3(1)2 = 3

4. (a) 5x4 (b) 6x

5
(c) 100x 99

(d) −x−2 (that is, −1/x 2)

(e) −2x−3 (that is, −2/x 3)

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Exercise 4.1 (p. 277)

9−5 −5 − ( −1) 19 − 19
1. (a) =2 (b) = −1 (c) =0
4−2 7−3 4−7

2. 2 × 0 + 3× 2 = 6 and 2 × 3 + 3 × 0 = 6

0−2 2
= − , which is negative so the line is downhill.
3−0 3

3. The graph of f(x) = 5 is sketched in Figure S4.2. The graph is horizontal, so has zero slope
at all values of x.

Figure S4.2

4. 7x6; f′(2) = 7 × 26 = 448

5. (a) 8x7 (b) 50x49 (c) 19x

18
(d) 999x
998

−3
6. (a) f ( x) = x−3  f ′( x) = −3x−4 =
x4

1 1
1 −2 1
(b) f ( x) = x 2  f ′( x) = x =
2 2 x

1 3
− 1 − 1 1
(c) f ( x ) = x 2  f ′( x ) = − x 2 = − 3 = −
2 2x x
2x 2

1 3 1
3 2 3 x
(d) f ( x ) = x1 x 2 = x 2  f ′( x ) = x =
2 2

7. 3, 1.25, 0, −0.75, −1, −0.75, 0, 1.25;

(a) −3 (b) 0 (c) 1

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Section 4.2 Rules of differentiation

Practice Problems

1. (a) 4(3x 2) = 12x 2

(b) −2/x 2 because 1/x = x−1, which differentiates to −x−2

2. (a) 5x4 + 1 (b) 2x + 0 = 2x

3. (a) 2x – 3x 2 (b) 0 − (−3x −4 ) = 3

x4

4. (a) 9(5x 4) + 2(2x) = 45x 4 + 4x

(b) 5(8x 7) − 3(−1)x−2 = 40x 7 + 3/x 2
(c) 2x + 6(1) + 0 = 2x + 6
(d) 2(4x 3) + 12(3x 2) – 4(2x) + 7(1) – 0
= 8x 3 + 36x 2 − 8x + 7

5. f ′(x) = 4(3x 2) − 5(2x) = 12x 2 − 10x

f ʺ(x) = 12(2x) − 10(1) = 24x − 10
f ʺ(6) = 24(6) − 10 = 134

Exercise 4.2 (p. 286)

2
1. (a) 10x (b) −3/x (c) 2 (d) 2x +1

(e) 2x − 3 (f ) 3 + 7/x2 (g) 6x

2
− 12x + 49

(h) a (i) 2ax +b

3 14
(j) f ( x) = 4x1 − 3x −1 + 7 x−2  f ′( x) = 4 x0 + 3x−2 − 14 x−3 = 4 + 2
−
x x3

2. (a) f ′( x ) = 27 x 8  f ′(1) = 27

(b) f ′( x) = 2x − 2  f ′(3) = 4

(c) f ′( x ) = 3 x 2 − 8 x + 2  f ′(0) = 2

(d) f ( x ) = 5 x 4 − 4 x −4  f ′( x ) = 20 x 3 + 16 x −5  f ′( −1) = −36

1 1 − 12 3
(e) f ( x ) = x 2 − 2 x −1  f ′( x ) = x + 2 x −2  f ′( x ) =
2 8

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3. 4x 3 + 6x2;

(a) f ( x ) = 3 x 3 − 4 x 2  f ′( x ) = 9 x 2 − 8 x

(b) f ( x ) = 3 x 4 − 2 x 3 + 6 x 2 − 7 x  f ′( x ) = 12 x 3 − 6 x 2 + 12 x − 7

(c) f ( x ) = x 2 − 5 x − 6  f ′( x ) = 2 x − 5

3
(d) f ( x) = x − 3x−1  f ′( x) = 1 + 3x −2 = 1 +
x2

2 4
(e) f ( x) = x−2 − 4 x−1  f ′( x) = −2 x−3 + 4 x−2 = − 3
+
x x2

3 10
(f) f ( x) = 1 − 3x −1 + 5 x −2  f ′( x) = 3x −2 − 10 x −3 = 2
−
x x3

dy d2 y
4. (a) = 14 x − 1  2 = 14
dx dx

−2 dy d2 y 6
(b) y = x  = −2 x−3  2 = 6 x−4 = 4
dx dx x

dy d2 y
(c) =a 2 =0
dx dx

5. f ′( x ) = 3 x 2 − 8 x + 10  f ′′( x ) = 6 x − 8  f ′′(2) = 4

6. f ′( x) = 2x − 6  f ′(3) = 0 ; horizontal tangent, i.e. vertex of parabola must be at x = 3.

1 1
− 1
7. f ( x) = 2 x 2  f ′( x) = x 2 =
x
1 1
5 −2 5
(a) f ( x) = 25 x = 25 × x = 5 x 2  f ′( x) = x =
2 2 x
1 2
−
(b) f ( x) = 3 27 x = 3 27 × 3 x = 3 x 3  f ′( x) = x 3

3 1
4 4 3 −4 3
(c) f ( x) = 16 x3 = 4 16 × x3 = 2 x 4  f ′( x) = x = 4
2 2 x
1 3
25 25 − 5 −
(d) f ( x) = = = 5 x 2  f ′( x) = − x 2
x x 2

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8. (a) 2P + 1
(b) 50 − 6Q
d (AC) 30
(c) AC = 30Q −1 + 10  = −30Q −2 = − 2
dQ Q
(d) 3
1 1
dQ − 5
(e) Q = 10 L2  = 5L 2 =
dL L
(f) –6Q2 + 30Q – 24

Section 4.3 Marginal functions

Practice Problems

1. TR = PQ = (60 – Q)Q = 60Q – Q 2

(1) MR = 60 – 2Q
When Q = 50, MR = 60 − 2(50) = −40
(2) (a) TR = 60(50) − (50)2 = 500
(b) TR = 60(51) − (51)2 = 459
so TR changes by −41, which is approximately the same as the exact value obtained in
part (1).

2. MR = 1000 − 8Q, so when Q = 30

MR = 1000 − 8(30) = 760

(a) Δ(TR) ≅ MR × ΔQ = 760 × 3 = 2280, so total revenue rises by about 2280.

(b) Δ(TR) ≅ MR × ΔQ = 760 × (−2)

= −1520
so total revenue falls by about 1520.

 100 
3. TC = (AC)Q =  + 2  Q = 100 + 2Q
 Q 
This function differentiates to give MC = 2, so a 1 unit increase in Q always leads to a 2 unit
increase in TC irrespective of the level of output.

4. If K = 100, then

Q = 5L1/2(100)1/2 = 50L1/2 because √100 = 10.

Differentiating gives

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25
MPL = 50(1/2 L−1/2 ) =
L
25 25 25
(a) = 25 (b) = = 8.3
1 9 3
25 25
(c) = = 0.25
10,000 100
The fact that these values decrease as L increases suggests that the law of diminishing
marginal productivity holds for this function. This can be confirmed by differentiating a
second time to get
d 2Q −25
2
= 25(−1/2 L−3/2 ) =
dL 2 L3/2
which is negative for all values of L.
5. The savings function is given, so we begin by finding MPS. Differentiating S with respect to
Y gives
MPS = 0.04Y − 1

so when Y = 40,
MPS = 0.04(40) − 1 = 0.6
To find MPC we use the formula
MPC + MPS = 1
that is,
MPC = 1 – MPS = 1 − 0.6 = 0.4
This indicates that, at the current level of income, a 1 unit increase in national income
causes a rise of about 0.6 units in savings and 0.4 units in consumption.

Exercise 4.3 (p. 301)

1. TR = PQ = (100 − 4Q )Q = 100Q − 4Q 2

d(TR)
MR = = 100 − 8Q
dQ

When Q = 12, MR = 4 so Δ (TR) ≈ 4 × 0.3 = 1.2

2. TR = PQ = (80 − 3Q )Q = 80Q − 3Q 2 ,

d(TR)
so MR = = 80 − 6Q = 80 − 6(80 − P)/3 = 2P − 80 .
dQ

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3. TR = PQ = (100 − Q )Q = 100Q − Q 2

d(TR)
MR = = 100 − 2Q
dQ
Graphs of TR and MR are sketched in Figures S4.3 and S4.4, respectively.

MR = 0 when Q = 50. This is the value of Q at which TR is a maximum.

Figure S4.3

Figure S4.4

 15 
4. TC = AC × Q =  + 2Q + 9  Q = 15 + 2Q 2 + 9Q
Q 

Fixed costs are 15 since this is the constant term in the expression for TC

d(TC)
MC = = 4Q + 9
dQ

dQ
5. MPL = = 50 − 0.02 L
dL

(a) 49.98 (b) 49.8

(c) 48 (d) 30.

Yes, because d2Q/dL2 = −0.02 < 0.

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1 1
dC −
6. C = 50 + 2 Y = 50 + 2Y 2  MPC = =Y 2
dY

1 5
When Y = 36, MPC = so MPS = 1 − MPC =
6 6

If national income rises by 1 unit, the approximate increase in consumption and savings is
1/6 and 5/6, respectively.

dC
7. MPC = = 0.04Y + 0.1
dY

MPS = 1 − MPC = 1 − (0.04Y + 0.1) = 0.9 − 0.04Y

 0.9 − 0.04Y = 0.38
 −0.04Y = −0.52
 Y = 13

8. At midday on 6 January, the company’s share price is increasing at a rate of 25 cents a day.
By 7 January, shares will have risen by 25 cents (approximately).

9. TR = (3000 − 2 Q )Q = 3000Q − 2Q3/2  MR = 3000 − 3 Q

At Q = 9, MR = 2991.

If Q rises from 9 to 10, the approximate change in TR is 2991.

Section 4.4 Further rules of differentiation

Practice Problems

1. (a) The outer power function differentiates to get 5(3x − 4)4 and the derivative of the inner
function, 3x − 4, is 3, so
dy
= 5(3 x − 4) 4 (3) = 15(3 x − 4) 4
dx
(b) The outer power function differentiates to get 3(x 2 + 3x + 5)2 and the derivative of the
inner function, x2 + 3x + 5, is 2x + 3, so
dy
= 3( x 2 + 3 x + 5) 2 (2 x + 3)
dx
(c) Note that y = (2x − 3)−1. The outer power function differentiates to get −(2x − 3)−2 and
the derivative of the inner function, 2x − 3, is 2, so
dy −2
= −(2 x − 3)−2 (2) =
dx (2 x − 3)2

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(d) Note that y = (4x − 3)1/2. The outer power function differentiates to get 1/2(4x − 3)−1/2
and the derivative of the inner function, 4x − 3, is 4, so
dy 2
= 1/2(4 x − 3)−1/2 (4) =
dx (4 x − 3)

2. (a) u = x v = (3x − 1)6

du dv
=1 = 18(3 x − 1)5
dx dx

So
dy
= 18x(3x − 1)5 + (3x − 1)6
dx
= (3x − 1)5[18 x + (3x − 1)]
= (3x − 1)5 (21x − 1)

(b) u = x3 v = (2x + 3)1/2

du dv 1
= 3x2 = (2 x + 3) −1/2 =
dx dx (2 x + 3)

So
dy x3 x 2 (7 x + 9)
= + 3 x 2 (2 x + 3) =
dx (2 x + 3) 2x + 3

(c) u = x v = (x − 2)−1
du dv
=1 = − ( x − 2) −2
dx dx

So
dy −x 1
= +
dx ( x − 2) 2 x−2
− x + ( x − 2)
=
( x − 2)2
−2
=
( x − 2)2

3. (a) u = x v=x−2
du dv
=1 =1
dx dx

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So
dy ( x − 2) − x
=
dx ( x − 2) 2
−2
=
( x − 2) 2
(b) u = x − 1 v=x+2
du dv
=1 =1
dx dx

So
dy ( x + 1) − ( x − 1)
=
dx ( x + 1)2
2
=
( x + 1)2

Exercise 4.4 (p. 312)

dy
1. (a) = 3(5 x + 1) 2 × 5 = 15(5 x + 1) 2
dx

dy
(b) = 8(2 x − 7) 7 × 2 = 16(2 x − 7)7
dx

dy
(c) = 5( x + 9) 4 × 1 = 5( x + 9) 4
dx

dy
(d) = 3(4 x 2 − 7) × 8 x = 24 x (4 x 2 − 7) 2
dx

dy
(e) = 4( x 2 + 4 x − 3) × (2 x + 4) = 8( x + 2)( x 2 + 4 x − 3)
dx

1 1
dy 1 − 1
(f) y = (2 x + 1) 2  = (2 x + 1) 2 × 2 =
dx 2 2x + 1

dy −3
(g) y = (3x + 1)−1  = (−1)(3x + 1)−2 × 3 =
dx (3x + 1)2

dy −8
(h) y = (4 x − 3) −2  = (−2)(4 x − 3) −3 × 4 =
dx (4 x − 3)3

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1 3 3
− dy 1 − − −1
(i) y = (2 x + 5) 2  = − (2 x + 5) 2 × 2 = −(2 x + 3) 2 =
dx 2 (2 x + 3) (2 x + 3)

2. (a) 1 × (3 x + 4) 2 + x × 2(3 x + 4)1 (3) = (3 x + 4) 2 + 6 x (3 x + 4) = (9 x + 4)(3 x + 4)

(b) 2 x × ( x − 2)3 + x 2 × 3( x − 2) 2 (1) = 2 x ( x − 2)3 + 3 x 2 ( x − 2) 2 = x (5 x − 4)( x − 2) 2

1 1 1
dy 1 − x 3x + 4
(c) y = x( x + 2) 2  = 1× ( x + 2) 2 + x × ( x + 2) 2 (1) = x + 2 + =
dx 2 2 x+2 2 x+2

(d) 1 × ( x + 6)3 + ( x − 1) × 3( x + 6) 2 (1) = ( x + 6)3 + 3( x − 1)( x + 6) 2 = (4 x + 3)( x + 6) 2

(e) 2 × ( x + 5)3 + (2 x + 1) × 3( x + 5) 2 (1) = 2( x + 5) 3 +3(2 x + 1)( x + 5) 2 = (8 x + 13)( x + 5) 2

(f) 3 x 2 × (2 x − 5) 4 + x 3 × 4(2 x − 5)3 (2) = 3 x 2 (2 x − 5) 4 + 8 x 3 (2 x − 5)3

= x 2 (14 x − 15)(2 x − 5) 3

( x − 5) × 1 − x × 1 x−5− x −5
3. (a) 2
= 2
=
( x − 5) ( x − 5) ( x − 5)2

( x + 7) × 1 − x × 1 x+7−x 7
(b) 2
= 2
=
( x + 7) ( x + 7) ( x + 7) 2

( x − 2) × 1 − ( x + 3) × 1 x−2− x−3 −5
(c) 2
= 2
=
( x − 2) ( x − 2) ( x − 2) 2

(3x + 1) × 2 − (2 x + 9) × 3 6 x + 2 − 6 x − 27 −25
(d) 2
= 2
=
(3x + 1) (3x + 1) (3 x + 1) 2

(5 x + 6) × 1 − x × 5 5x + 6 − 5x 6
(e) 2
= 2
=
(5 x + 6) (5 x + 6) (5 x + 6) 2

(3 x − 7) × 1 − ( x + 4) × 3 3x − 7 − 3x − 12 −19
(f) 2
= 2
=
(3x − 7) (3 x − 7) (3x − 7) 2

4. (a) 2(5 x + 7)(5) = 10(5 x + 7)

dy
(b) y = 25 x 2 + 70 x + 49  = 50 x + 70 = 10(5 x + 7)
dx

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5. (a) 5x4 × (x + 2)2 + x5 × 2(x + 2)(1) = 5x4(x + 2)2 + 2x5 (x + 2)

= 5x4(x2 + 4x + 4) + 2x6 + 4x5 = 7x6 + 24x5 + 20x4

dy
(b) y = x 5 ( x 2 + 4 x + 4) = x 7 + 4 x 6 + 4 x 5  = 7 x 6 + 24 x 5 + 20 x 4
dx

6. (a)

TR = PQ = (100 − Q )3 Q
d(TR)
MR = = 3(100 − Q ) 2 ( −1) × Q + (100 − Q )3 × 1 = −3Q (100 − Q ) 2 + (100 − Q )3
dQ

= (100 − 4Q )(100 − Q ) 2

1000Q
(b) TR = PQ =
Q+4
d(TR) (Q + 4) × 1000 − 1000Q × 1 4000
MR = = 2
=
dQ (Q + 4) (Q + 4) 2

dC (1 + Y ) × 4Y − (300 + 2Y 2 ) × 1 2Y 2 + 4Y − 300
7. MPC = = =
dY (1 + Y )2 (1 + Y )2

When Y = 36, MPC = 1.78 and MPS = 1 − MPC = −0.78. If national income rises by 1 unit,
consumption rises by 1.78 units, whereas savings actually fall by 0.78 units.

Section 4.5 Elasticity

Practice Problems

1. We are given that P1 = 210 and P2 = 200. Substituting P = 210 into the demand equation
gives
1000 − 2Q1 = 210
−2Q1 = −790
Q1 = 395

Similarly, putting P = 200 gives Q2 = 400. Hence

ΔP = 200 − 210 = −10
ΔQ = 400 − 395 = 5

Averaging the P values gives

1
P= (210 + 200) = 205
2

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Averaging the Q values gives

1
Q= (395 + 400) = 397.5
2

Hence, arc elasticity is

 205   5 
 ×  = − 0.26
 397.5   −10 

2. The quickest way of solving this problem is to find a general expression for E in terms of P
and then just to replace P by 10, 50 and 90 in turn. The equation
P = 100 − Q

rearranges as
Q = 100 − P

so
dQ
= −1
dP

Hence
P dQ P
E= × = × (−1)
Q dP 100 − P
P
=
P − 100

(a) If P = 10 then |E| = 1/9 < 1 so inelastic.

(b) If P = 50 then |E| = 1 so unit elastic.

(c) If P = 90 then |E| = 9 so elastic.

At the end of Section 4.5, it is shown quite generally that the price elasticity of demand for a
linear function
P = aQ + b

is given by
P
E=
P−b

The above is a special case of this with b = 100.

3. Substituting Q = 4 into the demand equation gives

P = − (4) 2 − 10(4) + 150 = 94

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Differentiating the demand equation with respect to Q gives

dP
= −2Q − 10
dQ
so
dQ 1
=
dP −2Q − 10

When Q = 4
dQ 1
=−
dP 18

The price elasticity of demand is then

 94   1  47
 ×−  = −
 4   18  36

From the definition

percentage change in demand
E=
percentage change in price

we have
47 10
− =
36 percentage change in price

Hence the percentage change in price is −10 × 36/47 = −7.7%: that is, the firm must reduce
prices by 7.7% to achieve a 10% increase in demand.

4. (a) Putting P = 9 and 11 directly into the supply equation gives Q = 203.1 and 217.1,
respectively, so
ΔP = 11 − 9 = 2
ΔQ = 217.1 − 203.1 = 14
Averaging the P values gives
1
P= (9 + 11) = 10
2
Averaging the Q values gives
1
Q= (203.1 + 217.1) = 210.1
2
Arc elasticity is
10 14
× = 0.333175
210.1 2

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(b) Putting P = 10 directly into the supply equation, we get Q = 210. Differentiating the
supply equation immediately gives
dQ
= 5 + 0.2 P
dP
so when P = 10, dQ/dP = 7.
Hence
10 1
E= ×7 =
210 3
Note that, as expected, the results in parts (a) and (b) are similar. They are not identical,
because in part (a) the elasticity is ‘averaged’ over the arc from P = 9 to P = 11,
whereas in part (b) the elasticity is evaluated exactly at the midpoint, P = 10.

Exercise 4.5 (p. 326)

1. When Q = 8, P = 500 − 4 × 82 = 244

When Q = 10, P = 500 − 4 × 102 = 100

ΔP = 100 − 244 = −144

ΔQ = 10 − 8 = 2
1
P = ( 244 + 100 ) = 172
2
1
Q = (8 + 10) = 9
2
P ΔQ 172 2 −43
Hence E = × = × = = −0.27 (to 2 decimal places)
Q ΔP 9 −144 162

2. Putting Q = 9 into the demand function gives P = 500 − 4 × 92 = 176

dP dP
= −8Q so when Q = 9, = −72
dQ dQ
dQ 1
Hence =−
dP 72

P dQ 176 −1 22
E= × = × = − = −0.27 (to 2 decimal places)
Q dP 9 72 81

The values agree to 2 decimal places.

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3. (a)

30 − 2Q = 6
−2Q = −24
Q = 12

dP dQ −1
= −2 so =
dQ dP 2

Hence
P dQ 6 −1 1
E= × = × =−
Q dP 12 2 4

(b)
30 − 12Q = 6
−12Q = −24
Q=2

dP dQ −1
= −12 so =
dQ dP 12

Hence
P dQ 6 −1 1
E= × = × =−
Q dP 2 12 4

(c) 100 − 2Q = 6
100 − 2Q = 36
−2Q = −64
Q = 32

1 1 1
dP 1 − −
P = (100 − 2Q ) 2  = (100 − 2Q ) 2 × (−2) = − (100 − 2Q ) 2
dQ 2

dP −1 dQ
so = giving = −6
dQ 6 dP

Hence
P dQ 6 9
E= × = × (−6) = −
Q dP 32 8

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−2.5
4. (a) E = = −0.3125 so inelastic
8

(b) Would expect demand for economy class flights to be more sensitive to price rises so
the magnitude of E would be larger.

dQ 2000
5. (a) =− 3
dP P
dQ
At P = 5, Q = 40 and = −16 .
dP
5
Hence E = × ( −16) = −2
40
Percentage change in demand is −2 × 2% = −4% so when price rises by 2%, demand
falls by 4%.

1.5532
(b) At P = 5.1, Q = 38.447 so the percentage change in demand is − × 100 = −3.88 %.
40

dP dQ
6. (a) = −0.05  = −20
dQ dP
P dQ 20 − 0.05Q 400
E= × = × −20 = 1 −
Q dP Q Q

(b) E = −1  Q = 200

(c) TR = (20 − 0.05)Q = 20Q − 0.05Q2  MR = 20 − 0.1Q

At Q = 200, MR = 20 − 0.1× 20 = 20 − 20 = 0

7. (a) 0.2P

(b) 0.1P 2 = Q − 4

P 2 = 10(Q − 4) = 10Q − 40

P = √(10Q – 40)
1 1
dP 1 − 5
P = (10Q − 40) 2  = (10Q − 40) 2 × (10) =
dQ 2 (10Q − 40)

1 (10Q − 40)
(c) =
dP /dQ 5
P dQ
= = 0.2 P =
5 dP

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dQ
(d) Q = 14  P = 10 and =2
dP
P dQ 10 10
E= × = ×2 =
Q dP 14 7

dQ
8. = 0.1 + 0.008 P
dP

dQ
At P = 80, Q = 40.6 and = 0.74
dP

P dQ 80
Hence E = × = × 0.74 = 1.46
Q dP 40.6

(a) elastic (b) percentage change in supply = 5 ×1.46 = 7.3 %

Section 4.6 Optimisation of economic functions

Practice Problems

1. (a) Step 1
dy
= 6 x + 12 = 0
dx
has solution x = −2.
Step 2
d2 y
=6>0
dx2
so minimum.
Finally, note that when x = −2, y = −47, so the minimum point has coordinates
(−2, −47). A graph is sketched in Figure S4.5.

Figure S4.5

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(b) Step 1
dy
= −6 x 2 + 30 x − 36 = 0
dx

has solutions x = 2 and x = 3.

Step 2
d2 y
= −12 x + 30
dx2

which takes the values 6 and −6 at x = 2 and x = 3, respectively. Hence minimum at x = 2

and maximum at x = 3.

Figure S4.6

A graph is sketched in Figure S4.6 based on the following table of function values:

x –10 0 2 3 10
f(x) 3887 27 –1 0 –833

Q 300 L2 − L4
2. APL = = = 300 L − L3
L L

Step 1
d(APL )
= 300 − 3L2 = 0
dL

has solution L = ±10. We can ignore −10 because it does not make sense to employ a
negative number of workers.

Step 2

d 2 (APL )
= −6 L
dL2

which takes the value −60 < 0 at L = 10. Hence L = 10 is a maximum.

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Now
dQ
MPL = = 600 L − 4 L3
dL

so at L = 10
MPL = 600(10) − 4(10)3 = 2000

APL =300(10) − (10)3 = 2000

that is, MPL = APL.

3. (a) TR = PQ = (20 – 2Q)Q = 20Q – 2Q2

Step 1
d(TR)
= 20 − 4Q = 0
dQ

has solution Q = 5.

Step 2
d 2 (TR)
= −2 < 0
dQ 2

so maximum.

(b) π = TR − TC

= (20Q − 2Q 2 ) − (Q3 − 8Q 2 + 20Q + 2)

= −Q3 + 6Q 2 − 2

Step 1
dπ
= −3Q2 + 12Q = 0
dQ

has solutions Q = 0 and Q = 4.

Step 2
d2 π
= −6Q + 12
dQ 2

which takes the values 12 and −12 when Q = 0 and Q = 4, respectively. Hence minimum at
Q = 0 and maximum at Q = 4.

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Finally, evaluating π at Q = 4 gives the maximum profit, π = 30. Now

d(TR)
MR = = 20 − 4Q
dQ

so at Q = 4, MR = 4;
d(TC)
MC = = 3Q2 − 16Q + 20
dQ

so at Q = 4, MC = 4.

36
4. AC = Q + 3 +
Q

Step 1
d(AC) 36
=1− 2 = 0
dQ Q

has solution Q = ±6. A negative value of Q does not make sense, so we just take Q = 6.

Step 2
d 2 (AC) 72
2
=
dQ Q3
is positive when Q = 6, so it is a minimum.
Now when Q = 6, AC = 15. Also
d(TC)
MC = = 2Q + 3
dQ

which takes the value 15 at Q = 6. We observe that the values of AC and MC are the same:
that is, at the point of minimum average cost.

average cost = marginal cost

There is nothing special about this example and in the next section we show that this result
is true for any average cost function.

5. After tax the supply equation becomes

P = 1 2 QS + 25 + t

In equilibrium, QS = QD = Q, so
P = 1 2 Q + 25 + t
P = −2Q + 50

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Hence

2 Q + 25 + t = −2Q + 50
1

which rearranges to give

2
Q = 10 − t
5

Hence the tax revenue, T, is

2
T = tQ = 10t − t 2
5

Step 1
dT 4
= 10 − t = 0
dt 5
has solution t = 12.5.
Step 2
d 2T −4
2
= <0
dt 5
so maximum. Government should therefore impose a tax of $12.50 per good.

Exercise 4.6 (p. 345)

dy
1. (a) Step 1 = −2 x + 1
dx
At a stationary point,
−2 x + 1 = 0
−2 x = −1
1
x=
2

1 5
The coordinates of the stationary point are  , 
 2 4
d2 y
Step 2 = −2 < 0 so the point is a maximum.
dx2

The graph is sketched in Figure S4.7.

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Figure S4.7
dy
(b) Step 1 = 2x − 4
dx
At a stationary point,
2x − 4 = 0
2x = 4
x=2
The coordinates of the stationary point are (2,0)
d2 y
Step 2 = 2 > 0 so the point is a minimum.
dx2
The graph is sketched in Figure S4.8.

Figure S4.8

dy
(c) Step 1 = 2 x − 20
dx
At a stationary point,
2 x − 20 = 0
2 x = 20
x=0
The coordinates of the stationary point are (10,5)

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d2 y
Step 2 = 2 > 0 so the point is a minimum.
dx2

The graph is sketched in Figure S4.9.

Figure S4.9

dy
(d) Step 1 = −3 x 2 + 3
dx
At a stationary point,

−3 x 2 + 3 = 0
−3 x 2 = −3
x2 = 1
x = ±1

The coordinates of the stationary points are (−1, −2) and (1,2)

d2 y
Step 2 = −6 x
dx2

d2 y
At x = –1, = 6 > 0 so this point is a minimum
dx2

d2 y
At x = 1, = −6 < 0 so this point is a maximum
dx2

Maximum at (1, 2), minimum at (−1, −2)

The graph is sketched in Figure S4.10.

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Figure S4.10

2. TR = PQ = (40 − 2Q)Q = 40Q − 2Q2

d(TR)
Step 1 = 40 − 4Q
dQ
At a stationary point,

40 − 4Q = 0
4Q = 40
Q = 10

d 2 (TR)
Step 2 = −4 < 0 so the stationary point is a maximum.
dQ 2

Q
3. APL = = 30 L − 0.5 L2
L

d( APL )
Step 1 = 30 − L so there is one stationary point at L = 30.
dL

d 2 ( APL )
Step 2 = −1 < 0 so it is a maximum.
dL
At L = 30 APL = 30 × 30 − 0.5 × 302 = 450
dQ
MPL = = 60 L − 1.5 L2
dL

At L = 30, MPL = 60 × 30 − 1.5 × 302 = 450

4. (a) TC = 13 + (Q + 2)Q

= 13 + Q 2 + 2Q

TC 13
AC = = +Q+2
Q Q

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Q 1 2 3 4 5 6
AC 16 10.5 9.3 9.3 9.6 10.2

The graph of AC is sketched in Figure S4.11.

Figure S4.11

(b) From Figure S4.11, minimum average cost is 9.2.

(c) Step 1
d(AC) −13
AC = 13Q −1 + Q  = −13Q −2 + 1 = 2 + 1
dQ Q
At a stationary point
−13
+1 = 0
Q2
Q 2 = 13
Q = 13

Step 2
d 2 (AC)
2
= 26Q−3 > 0 when Q = 13 so the stationary point is a minimum.
dL

At Q = 13 , AC = 9.21.

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2
 Q Q
5. (a) TR = PQ =  4 −  Q = 4Q −
 4  4

 Q2   3Q 2 Q3  −Q3 Q 2
π = TR − TC =  4Q −  −  4 + 2Q − + = + + 2Q − 4
 4   10 20  20 20

d(TR) Q
MR= =4−
dQ 2
d(TC) 3Q 3Q 2
MC = =2− +
dQ 5 20

(b) Step 1

dπ −3Q 2 Q
= + + 2 = 0  3Q 2 − 2Q − 40 = 0
dQ 20 10
−( −2) ± ( −2) 2 − 4(3)( −40) 2 ± 484
Q= =
2(3) 6
2 ± 22 10
Q= =− , 4
6 3

Ignoring the negative solution gives, Q = 4.

Step 2
d 2π −3Q 1
2
= +
dQ 10 10

d 2π 11
At Q = 4, 2
=− < 0 so maximum.
dQ 10

d(TR) Q
(c) MR = = 4 − which takes the value 2 at Q = 4
dQ 2

d(TC) 6Q 3Q 2
MC = =2− + also takes the value 2 at Q = 4.
dQ 10 20

6. The new supply equation is

3( P − t ) − QS = 3
3P − 3t − QS = 3
which can be rearranged as QS = 3P − 3t − 3
The demand equation can be rearranged as QD = 14 − 2P.
In equilibrium, QS = QD = Q

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so
 3P − 3t − 3 = 14 − 2 P
 5P − 3t − 3 = 14
 5P = 3t + 17
1
 P = (3t + 17)
5
2 6
Hence Q = 14 − (3t + 17) = (6 − t )
5 5
6 6
TR = PQ = (3t + 17)(6 − t ) = ( −3t 2 + t + 102)
25 25
d(TR) 6 1
Step 1 = ( −6t + 1) = 0  t =
dt 25 6

d2 (TR) 36
Step 2 2
=− < 0 so the stationary point is a maximum.
dt 25

7. (a) TC = (2Q − 36)Q + 200 = 2Q2 − 36Q + 200

TC 200
AC = = 2Q − 36 +
Q Q

−1 d( AC )
(b) Step 1 AC = 200Q + 2Q − 36  = −200Q−2 + 2
dQ

At a stationary point,
200
− 2
+ 2 = 0  Q 2 = 100  Q = 10 (ignoring the negative solution)
Q

d 2 ( AC )
Step 2 2
= 400Q −3
dQ

d 2 ( AC )
When Q = 10, = 0.4 > 0 so the stationary point is a minimum.
dQ 2

(c) Q = 10  AC = 4

d(TC)
MC = = 4Q − 36
dQ
Q = 10  MC = 4 = AC

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8 π = 50Q − 10 L = 150 L − 10 L

Step 1

At a stationary point,
dπ 75
= − 10 = 0
dL L
Hence

L = 7.5  L = 56.25

Step 2
d 2π 37.5
2
=− < 0 for any positive L so the stationary point is a maximum.
dL L L

9. Step 1

At a stationary point,

d(AC)
= 6Q − 192 = 0
dQ

Hence 6Q = 192 so Q = 32.

Step 2
d 2 (AC)
This is a minimum since =6>0
dQ 2
However, the maximum party size is only 30 people so on the interval 0 ≤ Q ≤ 30 , AC is
least at Q = 30 and the corresponding average cost is $440.

10. Step 1
At a stationary point,
dS
= 2t − 0.006t 2 = 0
dt
1
so either t = 0 or t = 2/0.006 = 333
3

Step 2
d2 S
= 2 − 0.012t
dt 2
d2 S
At t = 0, = 2 > 0 so this is a minimum
dt 2

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2
1 d S
At t = 333 , = 2 − 0.012t = −2 < 0 so this is a maximum.
3 dt 2
The corresponding number of orders is S = 37,037 .

Section 4.7 Further optimisation of economic functions

Practice Problems

1. (a) TR = (25 − 0.5Q )Q = 25Q − 0.5Q 2

TC = 7 + (Q + 1)Q = Q 2 + Q + 7
MR = 25 − Q
MC = 2Q + 1

(b) From Figure S4.12, the point of intersection of the MR and MC curves occurs at Q = 8.
The MC curve cuts the MR curve from below, so this must be a maximum point.

Figure S4.12

2. MC = 100.

(a) Domestic market P1 = 300 − Q1

TR1 = 300Q1 = Q12

so
MR1 = 300 – 2Q1
To maximise profit, MR1 = MC: that is,
300 − 2Q1 = 100
which has solution Q1 = 100.
Corresponding price is
P1 = 300 − 100 = $200
Foreign market P2 = 200 − 1 2 Q2

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TR 2 = 200Q2 − 1 2 Q22

so
MR2 = 200 – Q2
To maximise profit, MR2 = MC: that is,
200 – Q2 = 100
which has solution Q2 = 100.
Corresponding price is
1
P2 = 200 − (100) = $150
2

(b) Without discrimination, P1 = P2 = P, say, so individual demand equations become

Q1 = 300 − P
Q2 = 400 − 2 P
Adding shows that the demand equation for combined market is
Q = 700 − 3P
where Q = Q1 + Q2.
700 Q2
TR = Q−
3 3
so
700 2Q
MR = −
3 3
To maximise profit, MR = MC: that is,
700 2Q
− = 100
3 3
which has solution Q = 200.
Corresponding price is
P = 700/ 3 − 200/ 3 = $500/ 3
Total cost of producing 200 goods is
5000 + 100(200) = $25 000
With discrimination, total revenue is
100 × 200 + 100 × 150 = $35 000
so profit is $35 000 – $25 000 = $10 000.

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Without discrimination, total revenue is

500
200 × = $33 333
3
so profit is $33 333 – $25 000 = $8333

3. Domestic market From Practice Problem 2, profit is maximum when P1 = 200, Q1 = 100.
Also, since Q1 = 300 – P1 we have dQ1/dP1 = –1. Hence
P1 dQ1
E1 = ×
Q1 dP1
200
= × (−1) = −2
100

Foreign market From Practice Problem 2, profit is maximum when P2 = 150, Q2 = 100.
Also, since Q2 = 400 – 2P2 we have dQ2/dP2 = –2. Hence
P2 dQ2
E2 = ×
Q2 dP2
150
= × ( −2) = −3
100

We see that the firm charges the higher price in the domestic market, in which the
magnitude of E is lower.

Section 4.8 The derivative of the exponential and natural

logarithm functions

Practice Problems

1.
x 0.50 1.00 1.50 2.00
f(x) −0.69 0.00 0.41 0.69

x 2.50 3.00 3.50 4.00

f(x) 0.92 1.10 1.25 1.39

The graph of the natural logarithm function is sketched in Figure S4.13.

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Figure S4.13
0.50
f ′(1) = = 1.00 = 1
0.50
0.25 1
f ′(2) = = 0.50 =
0.50 2
0.15 1
f ′(3) = = 0.30 =
0.50 3

These results suggest that f ′( x) = 1/ x .

2. (a) 3e3x (b) –e

–x
(c) 1/x (d) 1/x

3. (a) For the product rule we put

u = x4 and v = ln x
for which
du dv 1
= 4 x3 and =
dx dx x

By the product rule

dy 1
= x 4 × + ln x × 4 x3
dx x
= x3 + 4 x3 ln x

= x3 (1 + 4ln x)

(b) By the chain rule

dy 2 2
= e x × 2 x = 2 xe x
dx

(c) If
u = ln x and v = x+2

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then
du 1 dv
= and =1
dx x dx

By the quotient rule

1
( x + 2) × − (ln x) × 1
dy x
=
dx ( x + 2) 2
x + 2 − x ln x
= (multiply top and bottom by x)
x( x + 2)2

4. (a) y = ln x 3 + ln( x + 2) 4 (rule 1)

= 3ln x + 4ln(x +2) (rule 3)
Hence
dy 3 4
= +
dx x x + 2
3( x + 2) + 4 x 7x + 6
= =
x( x + 2) x( x + 2)

(b) y = ln x 2 − ln(2 x + 3) (rule 2)

= 2ln x – ln(2x +3) (rule 3)
Hence
dy 2 2
= − (chain rule)
dx x 2 x + 3
2(2 x + 3) − 2 x
=
x(2 x + 3)
2x + 6
=
x(2 x + 3)

5. In terms of P the total revenue function is given by

TR = PQ = 1000 Pe −0.2 P

and the total cost function is

TC = 100 + 2Q = 100 + 2000e −0.2 P

Hence

π = TR − TC
= 1000 Pe−0.2 P − 2000e−0.2P − 100

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Step 1

At a stationary point
dπ
=0
dP

To differentiate the first term, 1000Pe–0.2P, we use the product rule with
u = 1000P and v = e–0.2P

for which
du dv
= 1000 and = −0.2e −0.2 P
dP dP

Hence the derivative of 1000Pe–0.2P is

dv du
u +v
dP dP
= 1000 P (−0.2e −0.2 P ) + e −0.2 P (1000)

= e −0.2 P (1000 − 200 P )

Now
π = 1000Pe–0.2P – 2000e–0.2P – 100

so
dπ
= e −0.2 P (1000 − 200 P ) − 2000(−0.2e −0.2 P )
dP
= e −0.2 P (1400 − 200 P )

This is zero when

1400 – 200P = 0

because e–0.2P ≠ 0.

Hence P = 7.

Step 2

d 2π
To find we differentiate
dP2
dπ
= e −0.2 P (1400 − 200 P )
dP

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using the product rule. Taking

u = e–0.2P and v = 1400 – 200P

gives
du dv
= −0.2e −0.2 P and = −200
dP dP

Hence
d 2π dv du
2
=u +v
dP dP dP
= e −0.2 P ( −200) + (1400 − 200 P )(0.2e −0.2 P )
= e −0.2 P (10 P − 480)

Putting P = 7 gives
d2π
2
= −200e−1.4
dP

This is negative, so the stationary point is a maximum.

6. To find the price elasticity of demand, we need to calculate the values of P, Q and dQ/dP.
We are given that Q = 20 and the demand equation gives
P = 200 – 40 ln(20 + 1) = 78.22

The demand equation expresses P in terms of Q, so we first evaluate dP/dQ and then use the
result
dQ 1
=
dP dP /dQ

To differentiate ln(Q + 1) by the chain rule we differentiate the outer log function to get
1
Q +1

and then multiply by the derivative of the inner function, Q + 1, to get 1. Hence the
derivative of ln(Q + 1) is
1
Q +1

and so
dP −40
=
dQ Q + 1

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Putting Q = 20 gives dP/dQ = −40/21, so that dQ/dP = −21/40. Finally, we use the formula
P dQ
E= ×
Q dP

to calculate the price elasticity of demand as

78.22  −21 
E= ×  = −2.05
20  40 

Exercise 4.8 (p. 370)

1. (a) 6e6x (b) −342e

−342x
(c) −2e
−x
+ 4ex

(d) 40e4x − 4x

2. (1) (a) $4885.61 (b) $4887.57

4887.57 − 4885.61
Rate of growth is approximately = 196
0.01

(2) 160e0.04t 195.42

3. (a) 1 (b) 1
x x

3 4 x3 + 6 x
4. (a) 3 x 2 e x (b)
x 4 + 3x 2

5. (a) 4 x 3 × e 2 x + x 4 × 2e 2 x = 2 x 3 (2 + x )e 2 x

1
(b) 1 × ln x + x × = ln x + 1
x

( x 2 + 2) × 4e4 x − e4 x × 2 x 2e4 x (2 x 2 − x + 4)
6. (a) =
( x 2 + 2)2 ( x 2 + 2)2

1
(ln x) × e x − e x × x
(b) x = e ( x ln x − 1)
(ln x) 2 x (ln x) 2

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7.

Figure S4.14
dy
(a) Step 1 = 1 × e − x + x × ( − e − x ) = e − x (1 − x )
dx
At a stationary point, e − x (1 − x ) = 0  x = 1  y = e −1

d2 y
Step 2 2
= e− x × (−1) + (−e− x ) × (1 − x) = e− x ( x − 2)
dx
d2 y
When x = 1, = −e−1 < 0
dx 2
Maximum at (1, e−1); the graph is sketched in Figure S4.14.

dy 1
(b) Step 1 = −1
dx x
1 1
At a stationary point, −1 = 0  = 1 x = 1
x x

dy d2 y
Step 2 = x−1 − 1  2 = − x−2
dx dx
d2 y
When x = 1, = −1 < 0
dx 2
Maximum at (1,−1); the graph is sketched in Figure S4.15.

Figure S4.15

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8. (a) When t = 12, S = 3000e−0.24 = 2359.88

When t = 13, S = 3000e−0.26 = 2313.15
Decrease = 46.7

dS dS
(b) = −60e −0.02t so at t = 12, = −47.2 so is a very good approximation to the fall in
dt dt
sales. The two results agree to two significant figures.

9. π = TR − TC = 100 ln(Q +1) − 2Q

dπ 100
Step 1 = − 2 = 0  Q + 1 = 50  Q = 49
dQ Q + 1

dπ d 2π
Step 2 = 100(Q + 1)−1 − 2  = −100(Q + 1)−2
dQ dQ 2

d 2π 100
When Q = 49, 2
=− <0
dQ 2401

so the point is a maximum.

dQ
10. Step 1 = 700 L × ( −0.02e −0.02 L ) + 700 × e −0.02 L = e −0.02 L (700 − 14 L )
dL
dQ
At a stationary point, = 0  700 − 14 L = 0  L = 50
dL

d 2Q
Step 2 = −0.02e−0.02 L ( 700 − 14L ) + e−0.02 L × (−14) = e−0.02 L (0.28L − 28)
dL2
d 2Q
When L = 50, = −14e−1 < 0
dL2
so the stationary point is a maximum .

11. Q = 10  P = 100e −1

dP dP dQ
= −10e−0.1Q , so when Q = 10, = −10e−1  = −0.1e
dQ dQ dP

P dQ 100e −1
E= × = × ( −0.1e) = − 1
Q dP 10

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Examination Questions

1 Q + 4 P = 70

4 P = 70 − Q
35 Q
P= −
2 4
Hence
2
 35 Q  35Q Q
TR =  −  Q = −
 2 4 2 4
35 Q
Differentiate to get MR = −
2 2
5 5 1 5
(a) At Q = 40, MR = − so Δ TR ≈ − × − =
2 2 4 8
Q 35
(b) MR = 0  =  Q = 35
2 2

2 (a)
( )
f ( x) = x 2 + 2 x − 3 ( 9 − 2 x )

= 9 x 2 − 2 x3 + 18 x − 4 x 2 − 27 + 6 x
= −2 x3 + 5 x 2 + 24 x − 27

(b) f ′( x ) = −6 x 2 + 10 x + 24
f ′( x) = 0  − 3x2 + 5 x + 12 = 0

−5 ± 169 4
Hence x = = 3, −
−6 3
The cubic has stationary points at ( 3, 36 ) and ( −4/3, − 1225/27 )

(c) f ′′( x) = −12x + 10

f ′′(3) = −26 < 0  maximum at ( 3, 36 )
f ′′(−4/3) = 26 > 0  minimum at ( −4/3, − 1225/27 )

(d) The cubic is sketched in Figure S4.16. The graph crosses the x-axis at −3 , 1 and
4.5, and crosses the y-axis at −27 .

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Figure S4.16

3
dy dy 27 1 dy 3
(a) (i) = 10 x; 90 (ii) =− 2; − (iii) = ; 1
dx dx x 3 dx x

(b) (i)
P = 20  Q = 54
P = 30  Q = 69
25 15 25
E= × = = 0.610
61.5 10 41
(ii)
dQ
= 0.02 P + 1
dP
dQ
At P = 25, Q = 61.25 and = 1.5
dP

Hence

25 30
E= × 1.5 = = 0.612
61.25 49

(a) (i) f(2) = 31, f(2.1) = 34.222

34.222 − 31
Gradient of chord = = 32.22
2.1 − 2

(ii) f ′( x) = 6 x 2 + 7  f ′(2) = 31

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(iii) Figure S4.17 shows that the gradient of the chord is slightly steeper than that of the
tangent at x = 2.

Figure S4.17

(b) (i) TC = AC × Q = 3Q 2 + 8Q + 15  MC = 6Q + 8

(ii) At Q = 30, MC = 188

Δ TC ≈ 188 × 0.5 = 94
In fact, at Q = 30, TC = 2955 and at Q = 30.5, TC = 3049.75 so
Δ TC = 94.75
(The percentage error is just 0.79%.)

(a) In equilibrium,

P + 2Q = 13

P− Q=4

Subtract to get 3Q = 9  Q=3  P=7

dQ
(b) The supply equation rearranges as Q = P − 4 so =1
dP
7 7
Hence E = ×1 =
3 3

2 7 6
(c) =  % ΔP =
% ΔP 3 7

E > 1 so elastic

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dy dy 2x
(a) (i) = 12e 2 x (ii) = 2
dx dx x + 1
(b)
dy
= 3x 2 + 4 x − 6; 14
dx
d2 y
= 6 x + 4; 16
dx 2

dy
(i) >0  increasing
dx

d2 y
(ii) >0  convex
dx 2

7
dy
= (1 + x ) + 4 x (1 + x ) ;
4 3
(a) (i) 48
dx

dy
( )
2
(ii) = 6x x2 + 6 ; 294
dx

dy 2( x + 1) − 2 x 2 1
(iii) = = ;
dx ( x + 1) 2
( x + 1)2 2

1 dy 1 1 3
(iv) y = ln ( x + 1) − ln ( x + 3)  = − ;
2 dx x + 1 2 ( x + 3) 8

dQ
(b) MPL = = e −0.02 L − 0.02 L e −0.02 L so at L = 50, MPL = 0
dL
Output is a maximum at L = 50.

(a) π (0) = −16 < 0  loss

π (1) = 1 − 9 + 24 − 16 = 0  break even

dπ
(b) =0  3t 2 − 18t + 24 = 0
dt

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 t 2 − 6t + 8 = 0
 ( t − 2 )( t − 4 ) = 0
 t = 2, 4
The stationary points are (2, 4) and (4, 0)

d 2π
(a) = 6t − 18
dt 2
d 2π
At t = 2, = −6 < 0  maximum
dt 2
d 2π
t = 4, =6>0  minimum
dt 2

(b) The graph of profit against time is sketched in Figure 4.18.

Figure 4.18

(e) increasing on 0 ≤ t < 2 ; t > 4 decreasing on 2 < t < 4

d 2π
(f) concave: <0  6t − 18 < 0  t <3
dt 2
d 2π
convex: >0  6t − 18 > 0  t >3
dt 2

(g) From an initial loss of 16, firm’s profit increases so that it breaks even after one year
reaching a maximum of 4 after two years. The profit then decreases so that it only just
breaks even again after four years. After that the profit rises reaching a maximum of 4
again at the end of five-year period.

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9
(a) MPL = 10 + 12 L − 0.3L2 ; APL = 10 + 6 L − 0.1L2

(b) MPL = APL  10 + 12L − 0.3L2 = 10 + 6 L − 0.1L2

 6 L − 0.2 L2 = 0
 L(6 − 0.2 L) = 0
 L = 0, 30
Maximised at L = 30.
d 2Q
(c) = 12 − 0.6L < 0 for all L > 20.
dL2

10 (a) TR = PQ = Q 400 − 6Q

Marginal revenue, MR, is worked out by differentiating using the product rule:

3Q
400 − 6Q −
400 − 6Q
400 − 6Q − 3Q
=
400 − 6Q
400 − 9Q
=
400 − 6Q

(b) Marginal propensity to consume is worked out by differentiating using the

quotient rule:

2Y (10 + Y ) − (200 + Y 2 )
(10 + Y ) 2
20Y + Y 2 − 200
=
(10 + Y )2
Hence
MPS = 1 – MPC

(10 + Y )2 − (20Y + Y 2 − 200)

=
(10 + Y )2
100 + 20Y + Y 2 − 20Y − Y 2 + 200
=
(10 + Y )2
300
=
(10 + Y )2

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11 (a) The supply and demand curves are sketched in Figure S4.19

Figure S4.19

(a) Lines only intersect if the vertical intercept on the supply curve is above the vertical
intercept on the demand curve so d > b.

(b) Post-tax equilibrium is found by solving the simultaneous equations:

P = aQ + b + t
P = −cQ + d
Hence

aQ + b + t = −cQ + d
 (a + c)Q = d − b − t
d −b−t
 Q=
a+c
Substitute into the demand equation to get
−c ( d − b − t ) + d ( a + c ) bc + ct + ad
P= =
a+c a+c
Pre-tax equilibrium values are deduced by setting t = 0:
bc + ad d −b
P= , Q=
a+c a+c
ct
(c) The difference between the pre- and post-tax price is which is paid by the
a+c
consumer. The remaining tax is paid by the firm and is given by
ct t ( a + c ) − ct at
t− = =
a+c a+c a+c
so the ratio of the amount paid by the consumer and producer is c : a.

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(d) Government tax revenue, T, is worked out from tQ so

T=
( d − b)t − t2
a+c
dT
=
( − b ) − 2t
d
dt a+c
dT d −b
At a stationary point, =0  t=
dt 2
d 2T −2
= <0  maximum
dt 2 a+c
12
(a) 0

(b) MC = 0.03Q 2 − 0.8Q + 3 ; AC = 0.01Q 2 − 0.4Q + 3

 0.03Q 2 − 0.8Q + 3 = 0.01Q 2 − 0.4Q + 3
 0.02Q 2 − 0.4Q = 0
 Q(0.02Q − 0.4) = 0

 Q = 0, 20

AC is minimised at Q = 20.
(c) TR = 43Q − 0.3Q2  MR = 43 − 0.6Q

MC = MR  0.03Q 2 − 0.8Q + 3 = 43 − 0.6Q

 0.03Q 2 − 0.2Q − 40 = 0
0.2 ± 4.84
 Q= = 40 (Q > 0)
0.06
Q = 40  P = 31
dP dQ 10
= −0.3  =−
dQ dP 3
Hence
31 10 31
E= ×− = −
40 3 12

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13
(a)
dP b dQ 2 Q
=  =
dQ 2 Q dP b
P dQ
E= ×
Q dP
P 2 Q
= ×
Q b
2P
=
b Q
2P
=
P−a
2P a
E = −1  = −1  2P = a − P  P=
P−a 3
(b)
TR = PQ = aQ + bQ 3/ 2
3
MR = a + b Q
2
2a 4a
At a stationary point, MR = 0  Q =−  Q=
3b 9b2
d 2 (TR) 3b
2
= < 0 since b < 0  maximum
dQ 4 Q
14 (a) Bookwork; see pages 322-323
1
E < 1 and E negative  1+ <0  MR < 0
E
so the gradient of the TR curve is negative which means that TR is decreasing in
regions where the demand is inelastic.
(b) Trade:
 1  1 2
TR1 = 100 − Q1  Q1 = 100Q1 − Q1  MR1 = 100 − Q1
 2  2
Also MC = 20
At maximum profit,

MR1 = MC  100 − Q1 = 20  Q1 = 80  P1 = 60
Individual:

TR2 = ( 250 − Q2 ) Q2 = 250Q2 − Q22  MR2 = 250 − 2Q2

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At maximum profit,

MR2 = MC  250 − 2Q2 = 20  Q2 = 115  P2 = 135

P1 dQ1 60 3
Trade: E1 = × = × −2 = −
Q1 dP1 80 2

P2 dQ2 135 27
Individual: E2 = × = × −1 = −
Q2 dP2 115 23
Firm charges higher price to individual customers which is the market in which the
magnitude of elasticity is lower.
A general explanation based on the result of part (a) can be found on page 354.

15 (a) Stock varies from U to Q + U at a constant rate in each cycle so the average stock level
1 1
is (Q + 2U ) = Q + U . Each item costs H to store
2 2
1 
so the total holding cost is  Q + U  H .
 2 
(b) If D items are delivered, Q at a time, the number of deliveries is D/Q. Each of these
D
orders cost R so the total order cost is × R.
Q
(c)
1  DR
C =  Q +U  H +
2  Q
dC H DR
= −
dQ 2 Q 2

At a stationary point,
dC H DR 2 DR
=0  =  Q=
dQ 2 Q2 H

d 2C 2 DR
2
= >0  minimum
dQ Q3

16 (a)

Q 2 + 2Q + 8 = 128
Q 2 + 2Q − 120 = 0
(Q − 10)(Q + 12) = 0
Q = 10 (Q > 0)

dP dQ 1 1
= 2Q + 2  = =
dQ dP 2Q + 2 22

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128 1 32
E= × =
10 22 55
32 32
Percentage change in supply = ×5 = ; E < 1  inelastic
55 11
(b)

40 − b
P = 40  Q=
a
dP dQ 1
=a  =
dQ dP a
40a 1 40
E= × =
40 − b a 40 − b

E = −1  40 = b − 40  b = 80
Hence P = aQ + 80

Substituting the equilibrium price, 56, into the supply equation gives

Q 2 + 2Q + 8 = 56
 Q 2 + 2Q − 48 = 0
 (Q − 6)(Q + 8) = 0
 Q = 6 (Q > 0)
Substituting this into the demand function gives

56 = 6a + 80  a = −4

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Partial Differentiation

Section 5.1 Functions of several variables

Practice Problems

1. (a) −10 (b) −1 (c ) 2 (d) 21 (e ) 0

(f) 21. The value of g is independent of the ordering of the variables. Such a function is
said to be symmetric.

2. (a) Differentiating 5x4 with respect to x gives 20x 3 and, since y is held constant, y 2
differentiates to zero.
Hence
∂f
= 20 x 3 − 0 = 20 x 3
∂x
Differentiating 5x4 with respect to y gives zero because x is held fixed. Also
differentiating y2 with respect to y gives 2y, so
∂f
= 0 − 2 y = −2 y
∂y

(b) To differentiate the first term, x 2y 3, with respect to x we regard it as a constant multiple
of x 2 (where the constant is y 3), so we get 2xy 3. The second term obviously gives −10,
so
∂f
= 2 xy 3 − 10
∂x
To differentiate the first term, x 2y 3, with respect to y we regard it as a constant multiple
of y 3 (where the constant is x 2), so we get 3x 2y 2. The second term is a constant and goes
to zero, so
∂f
= 3x 2 y 2 − 0 = 3x 2 y 2
∂y

3. (a) fxx = 60x 2

f yy = −2
f yx = f xy = 0

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(b) fxx = 2y 3
f yy = 6 x 2 y
f yx = f xy = 6 xy 2

∂f
4. f1 = = x2 + 5x14
∂x1

∂2 f
f11 = = 20 x13
∂x12
∂2 f
f 21 = =1
∂x2 ∂x1

∂z ∂z
5. = y − 5, = x + 2 , so, at (2, 6)
∂x ∂y

∂z ∂z
= 1, =4
∂x ∂y

(a) Δx = –0.1, Δy = 0.1;

z ≅ 1(−0.1) + 4(0.1) = 0.3, so z increases by approximately 0.3.

(b) At (2, 6), z = 14, and at (1.9, 6.1), z = 14.29, so the exact increase is 0.29.

dy −y
6. (a) =
dx x − 3 y 2 + 1

dy y2
(b) = 4
dx 5 y − 2 xy

Exercise 5.1 (p. 401)

1. 324; 75; 0.

2. (a) f ( a , a ) = 2 a 2 + aa = 3a 2

(b) f (b, − b ) = 2b 2 + b ( −b ) = b 2

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f (2 x, 2 y ) = (2 x)(2 y )2 + 4(2 x)3

= 2 x × 4 y 2 + 4 × 8 x3
= 8 xy 2 + 32 x3
= 8( xy 2 + 4 x3 )
= 8 f ( x, y )

4. (a) fx = 2x, fy = 20y 4

(b) fx = 9x 2, fy = –2e y

(c) fx = y, fy = x + 6

(d) fx = 6x 5y 2, fy = 2x 6y + 15y 2

5. fx = 4x 3y 5 – 2x
fy = 5x 4y 4 + 2y
fx(1,0) = –2
fy(1,1) = 7

∂z ∂z
6. (a) = 2 xy 4 − 6 x 5 so at (1,0), = −6
∂x ∂y
Hence Δz = −6 × 0.1 = −0.6

∂z ∂z
(b) = 4 x2 y3 + 4 so at (1,0), =4
∂y ∂y
Hence Δz ≈ 4 × (−0.5) = −2

(c) Δz ≈ −6 × 0.1 + 4 × (−0.5) = −2.6

7. (a) fx = –3x2 + 2, fy = 1

dy −(−3x2 + 2)
= = 3x 2 − 2
dx 1

(b) y = x3 – 2x + 1, so
dy
= 3x 2 − 2 ✓
dx

∂z ∂z ∂z
8. (a) = 1 + 2v , = 2 v + 2u , = −15 w 2
∂u ∂v ∂w

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∂z ∂z ∂z
(b) = 3u −1/ 2 v1/3 w1/6 , = 2u1/2 v −2/3 w1/6 , = u1/ 2 v1/3 w −5/6
∂u ∂v ∂w

∂z
9. (a) = 3 x 2 − 2 y which takes the value 59 at (5,8).
∂x
∂z
= −2 x which takes the value −10 at (5,8)
∂y
Hence the change in z is approximately 59 × 0.5 − 10 × 0.8 = 21.5 .

(b) The exact change is 69.575 − 45 = 24.575 .

24.575 − 21.5
The percentage error is = 12.5% .
24.575

Section 5.2 Partial elasticity and marginal functions

Practice Problems

1. Substituting the given values of P, PA and Y into the demand equation gives

Q = 500 − 3(20) − 2(30) + 0.01(5000)

= 430

∂Q
(a) = −3 so
∂P

20
EP = × ( −3) = − 0.14
430

∂Q
(b) = −2 so
∂PA
30
E PA = × ( −2) = −0.14
430

∂Q
(c) = 0.01 so
∂Y
5000
EY = × 0.01 = 0.12
430

By definition,
percentage change in Q
EY =
percentage change in Y

so demand rises by 0.12 × 5 = 0.6%. The good is normal since 0 < 0.6 < 1.

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∂U
2. = 1000 + 5x2 − 4 x1
∂x1
∂U
= 450 + 5 x1 − 2 x2 , so at (138,500)
∂x2
∂U ∂U
= 2948 and = 140
∂x1 ∂x2

If working time increases by 1 hour then leisure time decreases by 1 hour, so Δx1 = −1. Also
Δx2 = 15. By the small increments formula
ΔU = 2948(–1) + 140(15) = –848

The law of diminishing marginal utility holds for both x1 and x2 because
∂ 2U
= −4 < 0
∂x12

and
∂ 2U
= −2 < 0
∂x22

3. Using the numerical results in Practice Problem 2,

2948
MRCS = = 21.06
140

This represents the increase in x2 required to maintain the current level of utility when x1
falls by 1 unit. Hence if x1 falls by 2 units, the increase in x2 is approximately
21.06 × 2 = $42.12

4. MPK = 2K and MPL = 4L

MPL 4 L 2L
(a) MRTS = = =
MPK 2K K

∂Q ∂Q
(b) K +L = K (2 K ) + L (4 L )
∂K ∂L

= 2( K 2 + 2 L2 ) = 2Q ✓

Exercise 5.2 (p. 416)

∂Q
1. = 0.015Y 2
∂Y

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∂Q
When P = 15, PA = 20 and Y = 100 we have Q = 5525 and = 150
∂Y

Y ∂Q 100
Hence EY = × = ×150 = 2.71 . This is greater than 1 so the good is superior.
Q ∂Y 5525

∂Q
2. (a) = −2
∂P
When P = 10, PA = 20 and Y = 100 we have Q = 1165
P ∂Q −10 20 −4
Hence EP = × = × (−2) = − =
Q ∂P 1165 1165 233

∂Q
(b) = −1
∂PA

PA ∂Q 15 3
Hence EPA = × = × (−1) = −
Q ∂PA 1165 233

∂Q ∂Q
(c) = 0.2Y so when Y = 100 we have = 20
∂Y ∂Y
Y ∂Q 100 40
Hence EY = × = × 20 =
Q ∂Y 1165 233
3
Percentage change in demand = − × 3 = −0.04%;
233
Complementary since EPA is negative so that an increase in the price of the alternative
good causes a decrease in demand.

3. (a) 2 x 2 + y 2 = 36

∂U ∂U
(b) = 4 x and = 2 y so at (4,2) the marginal utilities are 16 and 4.
∂x ∂y

16
Gradient = − = −4
4

∂U
4. (a) = 4 x so at (20, 8), the marginal utility of good 1 is 80.
∂x

∂U
(b) = 15 y 2 so at (20, 8) the marginal utility of good 2 is 960.
∂y

∂Q PA
5. =
∂Y P2

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Y ∂Q Y P
EY = × = × A2 = 1
Q ∂Y PAY / P 2
P

1 1 1 2
∂U 1 − 2 3 ∂U 1 2 − 3
6. = x1 x2 and = x1 x2 so at the point (25, 8) we have
∂x1 2 ∂x2 3

∂U 1 ∂U 5
= and =
∂x1 5 ∂x2 12

1 5 37 1/5 12
(a) ΔU ≈ × 1 + × 1 = (b) MRCS = =
5 12 60 5/12 25

1 1
∂Q ∂Q 1 −
7. Q = 2 LK + L2  MPK = = 2 L; MPL = = 2 K + L 2 so when K = 7 and L = 4
∂K ∂L 2

MPK = 8, MPL = 14¼;

1
14
57 25
(a) MRTS = 4 = =1
8 32 32

25
(b) This is the value of MRTS so is 1 .
32

∂Q ∂Q
8. MPK = = 6 K 2 + 3L2 and MPL = = 6 LK
∂K ∂L

K (MPK ) + L (MPL ) = K (6 K 2 + 3 L2 ) + L (6 LK ) = 6 K 3 + 9 L2 K = 3Q

9. (a)
P ∂Q P
× =
QA ∂P QA
(
× −0.5 AP −1.5Y 0.5 =
−0.5P
−0.5
AP Y
)0.5
× AP−1.5Y 0.5 = −0.5

P ∂Q P
× =
QB ∂P QB
(
× −1.5BP −2.5Y 1.5 =
−1.5P
)
BP−1.5Y 1.5
× BP−2.5Y 1.5 = −1.5

A is inelastic and B is elastic so B is more sensitive to a change in price.

Y ∂QA Y 0.5Y
(b) × = × 0.5 AP −0.5Y −0.5 = −
× AP −0.5Y −0.5 = 0.5
QA ∂Y QA 0.5
AP Y 0.5

Y ∂QB Y 1.5Y
× = ×1.5 AP −1.5Y 0.5 = −
× BP −1.5Y 0.5 = 1.5
QB ∂Y QB 1.5
BP Y 1.5

A is normal because income elasticity is positive and is less than one

B is superior because income elasticity of demand exceeds one.

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10. (a) 18 ( λ K )
1/6
( λ L )5/6 = 18λ1/6 K 1/6λ 5/6 L5/6 = λ (18K 1/6 L5/6 ) = λQ

(b) MPK = 3K −5/6 L5/6 ; MPL = 15K 1/6 L−1/6

(c) (i) decreases (ii) increases

Section 5.3 Comparative statics

Practice Problems

 b + I* 
1. C = a +b
 I − a 
 
∂C a
= >0
∂I * 1− a
because 0 < a <1
Hence an increase in I* leads to an increase in C. If a = 1/2 then
∂C 1
2
= =1
∂I * 1 − 12
Change in C is
1×2=2

2. (a) Substitute C, I, G, X and M into the Y equation to get

Y = aY + b + I * + G * + X * – (mY + M *)

Collecting like terms gives

(1 – a + m)Y = b + I * + G * + X * – M *

so
b + I * + G* + X * − M *
Y=
1− a + m

∂Y 1
(b) =
∂X * 1− a + m

∂Y b + I ∗ + G∗ + X ∗ − M ∗
=−
∂m (1 − a + m)2
Now a < 1 and m > 0, so 1 – a + m > 0. The autonomous export multiplier is positive, so an
increase in X * leads to an increase in Y. The marginal propensity to import multiplier is
negative. To see this note from part (a) that ∂Y/∂m can be written as

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−Y
1− a + m
and Y > 0 and 1 – a + m > 0.

120 + 100 + 300 + 150 − 40

(c) Y =
1 − 0.8 + 0.1
= 2100
∂Y 1 10
= =
∂X * 1 − 0.8 + 0.1 3
and

ΔX * = 10
so
10 100
ΔY = × 10 =
3 3

3. If d increases by a small amount then the intercept increases and the demand curve shifts
upwards slightly. Figure S5.2 shows that the effect is to increase the equilibrium quantity
from Q1 to Q2, confirming that ∂Q/∂d > 0.

Figure S5.2

Section 5.4 Unconstrained optimisation

Practice Problems

1. fx = 2x, fy = 6 – 6y, fxx = 2, fyy = –6, fxy = 0.

Step 1

At a stationary point

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2x = 0
6 − 6y = 0

which shows that there is just one stationary point at (0, 1).

Step 2
2 2
fxxfyy – f xy
= 2(–6) – 0 = –12 < 0

so it is a saddle point.

2. Total revenue from the sale of G1 is

TR 1 = P1Q1 = (50 − Q1 )Q1 = 50Q1 − Q12

Total revenue from the sale of G2 is

TR 2 = P2Q2 = (95 − 3Q2 )Q2
= 95Q2 − 3Q22

Total revenue from the sale of both goods is

TR = TR1 + TR 2
= 50Q1 − Q12 + 95Q2 − 3Q22

Profit is
π = TR − TC
= (50Q1 − Q12 + 95Q2 − 3Q22 ) − (Q12 + 3Q1Q2 + Q22 )
= 50Q1 − 2Q12 + 95Q2 − 4Q22 − 3Q1Q2

Now
∂π
= 50 − 4Q1 − 3Q2 ,
∂Q1
∂π
= 95 − 8Q2 − 3Q1
∂Q2
∂ 2π ∂ 2π
= −4, = −3,
∂Q12 ∂Q1∂Q2
∂ 2π
= −8
∂Q22

Step 1

At a stationary point
50 − 4Q1 − 3Q2 = 0
95 − 3Q1 − 8Q2 = 0

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that is,
4Q1 + 3Q2 = 50 (1)

3Q1 + 8Q2 = 95 (2)

Multiply equation (1) by 3 and equation (2) by 4 and subtract to get

23Q2 = 230

so Q2 = 10. Substituting this into either equation (1) or equation (2) gives Q1 = 5.

Step 2

This is a maximum because

∂ 2π ∂ 2π
= −4 < 0, = −8 < 0
∂Q12 ∂Q22

and
2
 ∂ 2π  ∂ 2π   ∂ 2π 
 
 ∂Q 2  −  
  ∂Q1∂Q2
2
 ∂Q1  2 
= ( −4)( −8) − ( −3) 2 = 23 > 0

Corresponding prices are found by substituting Q1 = 5 and Q2 = 10 into the original demand
equations to obtain P1 = 45 and P2 = 65.

3. For the domestic market, P1 = 300 – Q1, so

TR 1 = P1Q1 = 300Q1 − Q12

For the foreign market, P2 = 200 − 1 2 Q2 , so

TR 2 = P2Q2 = 200Q2 − 1 2 Q22

Hence
TR = TR1 + TR 2
= 300Q1 − Q12 + 200Q2 − 1 2 Q22

We are given that

TC = 5000 + 100(Q1 + Q2 )
= 5000 + 100Q1 + 100Q2

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so
π = TR − TC
= (300Q1 − Q12 + 200Q2 − 1 2 Q22 ) − (5000 + 100Q1 + 100Q2 )
= 200Q1 − Q12 + 100Q2 − 1 2 Q22 − 5000

Now
∂π 3π
= 200 − 2Q1 , = 100 − Q2
∂Q1 ∂Q2
∂ 2π ∂ 2π ∂ 2π
= −2, = 0, = −1
∂QI2 ∂Q12 ∂Q2 ∂Q22

Step 1

At a stationary point
200 − 2Q1 = 0
100 − Q2 = 0

which have solution Q1 = 100, Q2 = 100.

Step 2

This is a maximum because

∂ 2π
= −2 < 0,
∂Q12
∂ 2π
= −1 < 0
∂Q22

and
2
 ∂ 2π  ∂ 2π   ∂ 2π 
 2 
 2  −  
 ∂Q1  ∂Q2   ∂Q1∂Q2 
= ( −2)( −1) − 0 2 = 2 > 0

Substitute Q1 = 100, Q2 = 100, into the demand and profit functions to get P1 = 200,
P2 = 150 and π = 10 000.

Exercise 5.4 (p. 444)

∂z ∂z
1 (a) = 4 x − 12, = 2y −8
∂x ∂y

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∂z ∂z
At a stationary point, = 0 and = 0 so x = 3 and y = 4.
∂x ∂y

∂2 z ∂2 z ∂2 z
(b) = 4, = 2, =0
∂x 2 ∂y 2 ∂x∂y

Hence

2
 ∂ 2 z  ∂ 2 z   ∂z  2
 2  2 
−  = 4 × 2 − 0 > 0 so the point is not a saddle point
  ∂ ∂
 ∂x  ∂y   x y 

∂2 z ∂2 z
Also > 0, > 0 so the point is a minimum.
∂x 2 ∂y 2

2. (a)
f x = 3x 2 − 3
f y = 3y2 − 3
f xx = 6 x
f yy = 6 y
f xy = 0

Step 1 At a stationary point,

f x = 0  x 2 = 1  x = ±1
f y = 0  y 2 = 1  y = ±1

so there are four stationary points at (1,1), (–1,–1), (1,–1) and (–1,1).

Step 2 At (1,1), f xx = f yy = 6 > 0 and f xx f yy − f x2y = 36 > 0 so the point is a minimum.

At (–1,–1), f xx = f yy = − 6 < 0 and f xx f yy − f x2y = 36 > 0 so the point is a maximum.

At (1,–1) and (–1,1), f xx f yy − f x2y = −36 < 0 so these are both saddle points.

(b)
f x = 3x 2 + 3 y 2 − 6 x
f y = 6 xy − 6 y
f xx = 6 x − 6
f yy = 6 x − 6
f xy = 6 y

Step 1 At a stationary point, fy = (x − 1)y = 0 so either x = 1 or y = 0

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When x = 1 the equation f x = 0  y 2 = 1  y = ±1

When y = 0, the equation, f x = 0  x 2 − 2 x = 0  x ( x − 2) = 0  x = 0 or 2

so there are four stationary points at (2,0), (0,0), (1,1) and (1,–1).

Step 2 At (2,0), f xx = f yy = 6 > 0 and f xx f yy − f x2y = 36 > 0 so the point is a minimum.

At (0,0), f xx = f yy = − 6 < 0 and f xx f yy − f x2y = 36 > 0 so the point is a maximum.

At (1,1) and (1,−1), f xx f yy − f x2y = −36 < 0 so these are both saddle points.

3. At a stationary point,

∂π
= 24 − 2Q1 − Q2 = 0  2Q1 + Q2 = 24
∂Q1
∂π
= −Q1 − 4Q2 + 33 = 0  Q1 + 4Q2 = 33
∂Q2

Subtracting twice the second equation from the first gives: −7Q2 = −42  Q2 = 6

Substituting this into the second equation gives Q1 + 24 = 33  Q1 = 9 .

∂ 2π ∂ 2π
= −2 < 0, = −4 < 0
∂Q12 ∂Q22
2
 ∂ 2π  ∂ 2π   ∂ 2π  2
 2 
 ∂Q 2  −   = ( −2)( −4) − ( −1) = 7 > 0  max
 ∂Q1  2   ∂Q1∂Q2 

4. π = TR − TC = 70Q1 + 50Q2 − (Q12 + Q1Q2 + Q22 ) = 70Q1 + 50Q2 − Q12 − Q1Q2 − Q22

∂π
= 70 − 2Q1 − Q2
∂Q1
∂π
= 50 − Q1 − 2Q2
∂Q2
∂ 2π
= −2
∂Q12
∂ 2π
= −2
∂Q22
∂ 2π
= −1
∂Q1∂Q2

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Step 1 At a stationary point

2Q1 + Q2 = 70
Q1 + 2Q2 = 50

Doubling the second equation and subtracting it from the first give −3Q2 = −30  Q2 = 10

Substituting this into the second equation gives Q1 + 20 = 50  Q1 = 30

2
∂ 2π ∂ 2π ∂π ∂π  ∂ 2π 
Step 2 = − 2 < 0, = − 2 < 0, −   = 3 > 0 so the point is a
∂Q12 ∂Q22 ∂Q12 ∂Q22  ∂Q1∂Q2 
maximum

Finally substituting Q1 = 30 and Q2 = 10 into the formula for profit gives $1300.

5.
∂U
= 260 + 5 x2 − 20 x1
∂x1
∂U
= 310 + 5 x1 − 2 x2
∂x2
∂ 2U
= −20
∂x12
∂ 2U
= −2
∂x22
∂ 2U
=5
∂x1∂x2

Step 1 At a stationary point

20 x1 − 5 x2 = 260
−5 x1 + 2 x2 = 310

Adding four times the second equation to the first gives

3x2 = 1500  x2 = 500

Substituting this into the first equation gives

20x1 − 2500 = 260  20x1 = 2760  x1 = 138

Step 2
2
∂ 2U ∂ 2U ∂ 2U ∂ 2U  ∂ 2U 
= −20 < 0; = −2 < 0; −   = 3 > 0
∂x12 ∂x22 ∂x12 ∂x22  ∂x1∂x2 

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so the stationary point is a maximum.

The individual works for 30 hours a week and earns $500 so the hourly rate of pay is
500
= $16.67
30

6.
TR = PQ = (100 − 2Q)Q = 100Q − 2Q2 = 100(Q1 + Q2 ) − 2(Q1 + Q2 )2
= 100Q1 + 100Q2 − 2Q12 − 2Q22 − 4Q1Q2

Hence

π = TR − TC = 100Q1 + 100Q2 − 2Q12 − 2Q22 − 4Q1Q2 − (8Q1 + Q22 )

= 92Q1 + 100Q2 − 2Q12 − 3Q22 − 4Q1Q2
∂π
= 92 − 4Q1 − 4Q2
∂Q1
∂π
= 100 − 6Q2 − 4Q1
∂Q2
∂ 2π
= −4
∂Q12
∂ 2π
= −6
∂Q22
∂π
= −4
∂Q1∂Q2

Step 1 At a stationary point

4Q1 + 4Q2 = 92
4Q1 + 6Q2 = 100

Subtract the second equation from the first:

−2Q2 = −8  Q2 = 4

Substituting this into the first equation gives

4Q1 + 16 = 92  4Q1 = 76  Q1 = 19

Step 2
2
∂ 2π ∂ 2π ∂ 2π ∂ 2π  ∂ 2π 
= −4 < 0; = −6 < 0; −   = 8 > 0
∂Q12 ∂Q22 ∂Q12 ∂Q22  ∂Q1∂Q2 

so the stationary point is a maximum.

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7. (a)
π = ( 32 − Q1 ) Q1 + ( 40 − 2Q2 ) Q2 − 4(Q1 + Q2 )
= 32Q1 − Q12 + 40Q2 − 2Q22 − 4Q1 − 4Q2

= 28Q1 + 36Q2 − Q12 − 2Q22

(b) At a stationary point

∂π
= 28 − 2Q1 = 0  Q1 = 14
∂Q1
∂π
= 36 − 4Q2 = 0  Q2 = 9
∂Q2

π = 28 × 14 + 36 × 9 − 142 − 2 × 92 = 358
∂ 2π ∂ 2π ∂ 2π
= −2, = −4, =0
∂Q12 ∂Q22 ∂Q1∂Q2

Hence
2
 ∂ 2π  ∂ 2π   ∂π  2
 2  2 
−  = (−2) × ( −4) − 0 > 0 so the point is not a saddle point.
  ∂ ∂
 ∂Q1  ∂Q2   1 2 Q Q

∂ 2π ∂ 2π
Also < 0, < 0 so the point is a maximum.
∂Q12 ∂Q22 ,

8. (a)
P = 32 − Q1  Q1 = 32 − P
1
P = 40 − 2Q2  Q2 = 20 − P
2
3
Add to deduce, Q = 52 − P
2
104 2
The demand equation can be transposed as P = − Q.
3 3
The total cost function becomes TC = 4Q so that the new profit function is

π =
 104 2  1
− Q  Q − 4Q = 92Q − 2Q2
 3 3  3
( )
dπ 1
(b) = (92 − 4Q) = 0  Q = 23
dQ 3

d 2π 4
= − < 0 so the stationary point is a maximum.
2
dQ 3 ,

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1 2
New profit is (92 × 23 − 2 × 232 ) = 352
3 3

1
The reduction in profit is 5 .
3

Section 5.5 Constrained optimisation

Practice Problems

1. Step 1

We are given that y = x, so no rearrangement is necessary.

Step 2

Substituting y = x into the objective function

z = 2 x 2 − 3 xy + 2 y + 10

gives

z = 2 x 2 − 3x 2 + 2 x + 10
= − x 2 + 2 x + 10

Step 3

At a stationary point
dz
=0
dx

that is,
−2x + 2 = 0

which has solution x = 1. Differentiating a second time gives

d2 z
= −2
dx2

confirming that the stationary point is a maximum.

The value of z can be found by substituting x = 1 into

2
z = –2x + 2x + 10

to get z = 11. Finally, putting x = 1 into the constraint y = x gives y = 1. The constrained
function therefore has a maximum value of 11 at the point (1,1).

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2. We want to maximise the objective function

U = x1x2

subject to the budgetary constraint

2x1 + 10x2 = 400

Step 1
x1 = 200 – 5x2

Step 2
U = 200 x2 − 5 x22

Step 3
dU
= 200 − 10 x2 = 0
dx1

has solution x2 = 20.

d 2U
= −10 < 0
dx22

so maximum.

Putting x2 = 20 into constraint gives x1 = 100.

∂U
U1 = = x2 = 20
∂x1

and
∂U
U2 = = x2 = 100
∂x2

so the ratios of marginal utilities to prices are

U1 20
= = 10
P1 2

and
U 2 100
= = 10
P2 10

which are the same.

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3. We want to minimise the objective function

TC = 3 x12 + 2 x1 x2 + 7 x22

subject to the production constraint

x1 + x2 = 40

Step 1
x1 = 40 – x2

Step 2

TC = 3(40 − x2 )2 + 2(40 − x2 ) x2 + 7 x22

= 4800 − 160 x2 + 8 x22

Step 3
d(TC)
= −160 + 16 x2 = 0
dx2

has solution x2 = 10.

d 2 (TC)
= 16 > 0
dx22

so minimum.

Finally, putting x2 = 10 into constraint gives x1 = 30.

Exercise 5.5 (p. 457)

1. (a) 9 x + 3 y = 2

3 y = 2 − 9 x (subtract 9 x from both sides)

2
y = − 3x (divide both sides by 3)
3

2  2
(b) z = 3xy = 3x  − 3x  = 2 x − 9 x
3 
dz 1
At a stationary point, = 0  2 − 18 x = 0  x =
dx 9
2 1 1 1 1 1
Hence y = − = and z = 3 × × =
3 3 3 9 3 9

d2 z
= −18 < 0 so the stationary point is a maximum
dx2

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2. y − x 2 = 2  y = x 2 + 2  z = 6 x − 3 x 2 + 2( x 2 + 2) = 6 x − x 2 + 4

dz
At a stationary point, = 0  6 − 2x = 0  x = 3
dx

Hence y = 11 and z = 13.

d2 z
= −2 < 0 so the stationary point is a maximum
dx 2

3. x + y = 500  y = 500 − x  z = 80 x − 0.1x 2 + 100(500 − x ) − 0.2(500 − x ) 2

z = 80 x − 0.1x 2 + 50000 − 100 x − 50000 + 200 x − 0.2 x 2 = 180 x − 0.3x 2

dz
At a stationary point, = 0  180 − 0.6 x = 0  x = 300
dx

Hence y = 200 and z = 27 000.

d2 z
= −0.6 < 0 so the stationary point is a maximum
dx2

4. 50 KL=1200  K = 24 L−1

TC = 2 K + 3 L = 48 L−1 + 3 L

d(TC)
At a stationary point, = 0  −48 L−2 + 3 = 0  L2 = 16  L = 4
dL

Hence K = 6

d 2 (TC) d 2 (TC) 3
2
= 96L−3 , so at L=4 the value of 2
= > 0 , so the stationary point is a
dL dL 2
minimum.

5.

x + y = 20  y = 20 − x  TC = 22 x 2 + 8(20 − x)2 − 5 x(20 − x)

TC = 22 x2 + 3200 − 320 x + 8 x 2 − 100 x + 5 x2 = 35 x 2 − 420 x + 3200

d(TC)
At a stationary point = 0  70 x − 420 = 0  x = 6  y = 14
dx

d2 (TC)
= 70 > 0  min
dx2

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6.

x1 + 4 x2 = 360  x1 = 360 − 4 x2
U = x1 x2 = (360 − 4 x2 ) x2 = 360 x2 − 4 x22

dU
At a stationary point, = 0  360 − 8x2 = 0  x2 = 45  U = 8100
dx2

d 2U
= −8 < 0 , so the stationary point is a maximum.
dx22

7. (a) 1000 since x, y both non-negative.

(b) x + y = 500  y = 500 − x

TC = 0.2 x 2 + 0.05(500 − x)2 + 0.1x(500 − x) + 2 x + 5(500 − x) + 1000

= 0.15 x 2 − 3x + 16000

d(TC)
At a stationary point, = 0.3x − 3 = 0  x = 10  TC = 15985
dx
d 2 (TC)
= 0.3 > 0 so minimum.
dx 2

8 (a) 2K + L = 1000

(b) MPK = AL, MPL = AK

MPK AL L L 2
(c) = =  =  L = 2K
MPL AK K K 1

(d) 4 K = 1000  K = 250  L = 500

Section 5.6 Lagrange multipliers

Practice Problems

1. Step 1
2
g(x, y, λ) = 2x − xy + λ (12 − x − y)

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Step 2
∂g
= 4x − y − λ = 0
∂x
∂g
= −x − y − λ = 0
∂y
∂g
= 12 − x = 0
∂x

that is,
4x − y − λ = 0 (1)
−x − λ = 0 (2)
x + y = 12 (3)

Multiply equation (2) by 4 and add equation (1), multiply equation (3) by 4 and subtract
from equation (1) to get
−y − 5λ = 0 (4)
−5y − λ = −48 (5)

Multiply equation (4) by 5 and subtract equation (5) to get

−24λ = 48 (6)

Equations (6), (5) and (1) can be solved in turn to get

λ = −2, y = 10, x = 2

so the optimal point has coordinates (2, 10). The corresponding value of the objective
function is
2
2(2) – 2(10) = −12

2. Maximise
U = 2x1x2 + 3x1

subject to
x1 + 2x2 = 83

Step 1
g(x1, x2, λ) = 2x1x2 + 3x1 + λ(83 – x1 − 2x2)

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Step 2
∂g
= 2 x2 + 3 − λ = 0
∂x1
∂g
= 2 x1 − 2λ = 0
∂x2
∂g
= 83 − x1 − 2 x2 = 0
∂λ

that is,
2x2 − λ = −3 (1)
2x1 − 2λ = 0 (2)
x1 + 2x2= 83 (3)

The easiest way of solving this system is to use equations (1) and (2) to get
λ = 2x2 + 3 and λ = x1, respectively. Hence
x1 = 2x2 + 3

Substituting this into equation (3) gives

4x2 + 3 = 83

which has solution x2 = 20 and so x1 = λ = 43.

The corresponding value of U is

2(43)(20) + 3(43) = 1849

The value of λ is 43, so when income rises by 1 unit, utility increases by approximately 43
to 1892.

3. Step 1
g ( x1 , x2 , λ ) = x11/ 2 + x1/ 2
2 + λ ( M − P1 x1 − P2 x2 )

Step 2
∂g 1 −1/2
= x1 − λ P1 = 0
∂x1 2
∂g 1 −1/2
= x2 − λ P2 = 0
∂x2 2
∂g
= M − P1 x1 − P2 x2 = 0
∂λ

From equations (1) and (2)

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1 1
λ= and λ = , respectively. Hence
2 x11/ 2 P1 2 x1/2
2 P2

1 1
=
2 x11/ 2 P1 2 x12/2 P2

that is,
x1 P12 = x1 P22

so

x2 P22
x1 = (4)
P12

Substituting this into equation (3) gives

x2 P22
M− − P2 x2 = 0
P1

which rearranges as
P1M
x2 =
P2 ( P1 + P2 )

Substitute this into equation (4) to get

P2 M
x1 =
P1 ( P1 + P2 )

Exercise 5.6 (p. 469)

1. Step 1

g ( x, y, λ ) = x + 2 xy + λ (5 − x − 2 y )

Step 2

∂g
=1+ 2y − λ = 0  λ − 2y =1
∂x
∂g
= 2 x − 2λ = 0  λ = x
∂y
∂g
= 5 − x − 2y = 0  x + 2y = 5
∂λ

From the first two equations we have x − 2 y = 1

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Adding this to the third equation we get 2 x = 6  x = 3

The constraint gives 3 + 2 y = 5  2 y = 2  y = 1

Hence the maximum value of z is 9.

2. (a) Step 1

g ( x, y, λ ) = −4 xy + λ (40 − x − 2 y )

Step 2

∂g λ
= 4y − λ = 0  y =
∂x 4
∂g λ
= 4 x − 2λ = 0  x =
∂y 2
∂g
= 40 − x − 2 y = 0  x + 2 y = 40
∂λ

Substituting the first two equations into the third gives

1 1
λ + λ = 40  λ = 40 and so x = 20 and y = 10
2 2

The minimum value of z is 800

(b) Replacing 40 by 40.5 in part (a) gives λ = 41 and so x = 20.5, y = 10.25 and z = 840.5

(c) The change is 40.5 compared with a multiplier of 40

3. Want to maximise Q = KL subject to 2K + L = 6

Step 1 g ( K , L, λ ) = KL + λ (6 − 2 K − L)

Step 2
∂g
= L − 2λ = 0  L = 2λ
∂K
∂g
= K −λ =0= K =λ
∂L
∂g
= 6 − 2K − L = 0  2K + L = 6
∂λ

Substituting the first two equations into the third:

4λ = 6  λ = 1.5 and so K = 1.5 and L = 3

Hence the maximum level of output is 4.5

4. (a) The constraint is 80 KL = 4000  KL = 50 so the Lagrangian is given by

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g ( K , L, λ ) = 2 K + L + λ [50 − KL ]

∂g ∂g ∂g
(b) = 2 − λ L, =1− λK , = 50 − KL
∂K ∂L ∂λ

2 1
(c) 2 − λ L = 0  L = ; 1− λK = 0  K =
λ λ

2 1 1
Substitute into 50 − KL = 0 to get 50 − 2
= 0  λ2 =  λ=
λ 25 5
Hence L = 10 and K = 5.

∂g ∂g ∂g
5. (a) = 80 L − 3λ , = 80 K − 5λ , = 1500 − 3 K − 5 L
∂K ∂L ∂λ

3λ λ
(b) 80 L − 3λ = 0  L = ; 80 K − 5λ = 0  K =
80 16
3λ
Substitute into 3K + 5L = 1500 to get = 1500  λ = 4000 .
8
Hence K = 250 and L = 150.

(c) 4000

6.

TR = PQ
1 1 + P2Q2 = (50 − Q1 − Q2 )Q1 + (100 − Q1 − 4Q2 )Q2

= 50Q1 − Q12 − Q2Q1 + 100Q2 − Q1Q2 − 4Q22 = 50Q1 + 100Q2 − 2Q1Q2 − Q12 − 4Q22

Hence
π = TR − TC = 50Q1 + 100Q2 − 2Q1Q2 − Q12 − 4Q22 − (5Q1 + 10Q2 ) = 45Q1 + 90Q2 − 2Q1Q2 − Q12 − 4Q22

Step 1
g (Q1 , Q2 , λ ) = 45Q1 + 90Q2 − 2Q1Q2 − Q12 − 4Q22 + λ (100 − 5Q1 − 10Q2 )

Step 2
∂g
= 45 − 2Q2 − 2Q1 − 5λ = 0  2Q1 + 2Q2 + 5λ = 45
∂Q1
∂g
= 90 − 2Q1 − 8Q2 − 10λ = 0  2Q1 + 8Q2 + 10λ = 90
∂Q2
∂g
= 100 − 5Q1 − 10Q2 = 0  5Q1 + 10Q2 = 100
∂λ

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The Lagrange multiplier can be eliminated from the first two equations by doubling the first
and subtracting the second:
2Q1 − 4Q2 = 0  Q1 = 2Q2

Substituting this into the third equation gives 20Q2 = 100  Q2 = 5

Hence Q1 = 10 .

Substituting these values into the formula for π shows that the maximum profit is $600.

Lagrange multiplier is 3, so profit rises to $603 when total cost increases by 1 unit.

Examination Questions

1 (a)
f x = 2 + 6 xy
f y = 3x 2 − 2 y
f xx = 6 y
f yy = −2
f xy = f yx = 6 x

(b) f x (1, 2) = 14, f y (1, 2) = −1

Δz ≈ 14 × 0.2 + ( −1) × (−0.1) = 2.9

(c) f (1, 2) = 2 × 1 + 3 × 12 × 2 − 2 2 = 2 + 6 − 4 = 4
dy f 14
=− x =− = 14
dx fy −1

2
∂Q ∂Q
Q = 800; = − PA = −20; = 0.01
∂PA ∂Y

PA ∂Q 20 1
EPA = × = × −20 = −
Q ∂PA 800 2
Y ∂Q 3000 3
EY = × = × 0.01 =
Q ∂Y 800 80
(a) normal because EY is positive and less than 1.
∂Q ∂Q
(b) ΔQ ≈ × ΔP + × ΔPA = (−2) × 0.5 + (−20) × (−0.25) = 4
∂P ∂PA

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(a) x1 + 2 x2 = 50  x1 = 50 − 2 x2
Substitute into utility function,
U = ( 50 − 2 x2 ) x2 + 2 ( 50 − 2 x2 ) + 2 x2
= 50 x2 − 2 x22 + 100 − 4 x2 + 2 x2
= 48 x2 − 2 x22 + 100

dU
(b) = 48 − 4 x2 = 0  x2 = 12  x1 = 26
dx2
4
K 1 1 K 3
(a) MPL = + 3
× 3KL2 = +
2 KL 4 KL 2 L 4L
L 1 1 L 1
MPK = + 3
× L3 = +
2 KL 4 KL 2 K 4K

1 18 3 63
(b) MPL = + =
2 50 4 × 50 200
1 50 1 61
MPK = + =
2 18 4 × 18 72
63 61 567
MRTS = ÷ = = 0.3718
200 72 1525
Check: At (50, 18), Q = 33.657 and at (49, 18.3718), Q = 33.650
5
(a) As the price of the alternative good rises, demand for the good falls so complementary.
(b)
2Q1 − Q2 = 295 − P1  P1 = 295 − 2Q1 + Q2
Q1 − Q2 = −200 + P2  P2 = 200 + Q1 − Q2

Hence
TR = ( 295 − 2Q1 + Q2 ) Q1 + ( 200 + Q1 − Q2 ) Q2

= 2Q1Q2 − 2Q12 − Q22 + 295Q1 + 200Q2

π = TR − TC = 295Q1 + 200Q2 + Q1Q2 − 3Q12 − 2Q22

(c)
∂π
= 295 − 6Q1 + Q2 = 0  6Q1 − Q2 = 295 (1)
∂Q1
∂π
= 200 + Q1 − 4Q2 = 0  − Q1 + 4Q2 = 200 (2)
∂Q2

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(1) + 6 × (2): 23Q2 = 1495  Q2 = 65  Q1 = 60

∂ 2π ∂ 2π ∂ 2π
= −6 < 0; = −4 < 0; =1
∂Q12 ∂Q22 ∂Q1∂Q2
2
 ∂ 2π  ∂ 2π   ∂π 
 2  −  = 23 > 0
 2  
 ∂Q1  ∂Q2   ∂Q1∂Q 2 

(d) P1 = 240; P2 = 195

6
g ( K , L, λ ) = ( LK )
1/2
+ λ (120 − 4 K − L)
∂g 1 −1/2 L 1 L
=0  L ( LK ) − 4λ = 0  λ= =
∂K 2 8 LK 8 K
∂g 1 −1/2 K 1 K
=0  K ( LK ) −λ =0  λ= =
∂L 2 2 LK 2 L
Hence
L K
=4  L = 4K
K L
Substitute into the constraint, 4K + L = 120 to get

8K = 120  K = 15  L = 60
At this point,
L 1 L K 1 K 1
MPK = = = 1 and MPL = = =
2 LK 2 K 2 LK 2 L 4
Hence
1
MPK : PK = 1 : 4 and MPL : PL = : 1 = 1 : 4
4
7
g ( K , L, λ ) = 80 K + 27 L + λ (102 − 16 K − 6 L )
∂g 8λ
= 80 − = 0  λ = 10 K
∂K K
∂g 3λ
= 27 − =0  λ =9 L
∂L L
Hence
81
10 K = 9 L  100 K = 81L  K= L
100
Substitute into the constraint, 16 K + 6 L = 102 to get
9 102
16 × L + 6 L = 102  L = 102  L =5
10 5

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Hence
L = 25 and K = 20.25
8
Find:
∂C −y
= ( 2 y − 2 x ) e− y = 0  x = y since e ≠ 0
∂x
∂C
∂y
( )
= 2 xe − y − 2 xy − x 2 e − y = 0

( )
 x 2 − 2 xy + 2 x e − y = 0

 2 x − 2 xy + x 2 = 0

Hence

2 x − 2 x2 + x2 = 0  2 x = x2  x = 0, 2

The function has two stationary points at (0, 0) and (2, 2).
Classify:
∂ 2C
2
= −2e− y
∂x
∂ 2C
∂y 2 ( ) (
= −2 xe− y − x 2 − 2 xy + 2 x e− y = e− y −4 x − x 2 + 2 xy )
∂ 2C
= 2e− y − ( 2 y − 2 x ) e− y = e− y ( 2 − 2 y + 2 x )
∂x∂y
At (0, 0):

( )
2
C xx = −2, C yy = 0, C xy = 2  C xx C yy − C xy = −4 < 0

so (0, 0) is a saddle point.

At (2, 2):

( )
2
C xx = −2e−2 < 0, C yy = −4e−2 < 0, C xy = 2e −2  C xx C yy − C xy = 4e−4 > 0 so
(2, 2) is a minimum point.

( λ K )2 ( λ L )
9 (a) f (λ K , λ L) =
λK + 4(λL)

λ3K 2 L
=
λ ( K + 4L )
λ2K 2L
=
K + 4L
= λ 2 f ( K , L)

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2 KL ( K + 4 L ) − K 2 L K 2 L + 8KL2
(b) MPK = =
( K + 4 L )2 ( K + 4 L )2
K 2 ( K + 4L ) − 4K 2 L K3
MPL = =
( K + 4 L )2 ( K + 4 L )2
Hence
K(MPK ) + L(MPL )
K 3 L + 8 K 2 L2 + K 3 L
=
( K + 4 L )2
2K 2 L ( K + 4L )
=
( K + 4 L )2
2K 2 L
=
( K + 4L )
= 2Q
(c) MPK = 9.6, MPL = 6.4 so MRTS = 2/3
If labour decreases by 1 unit then capital would have to increase by 2/3 to maintain current
output.

(d) 1 ≈ 9.6 × ( −0.5) + 6.4 × ΔL  ΔL ≈ 29 / 32

10
W + F = 168
E
E = 20W  W=
20
Hence
E
+ F = 168  E + 20 F = 3360
20
The Lagrangian function is

g ( E , F , λ ) = 6 E1/3 F 2/3 + λ ( 3360 − E − 20 F )

∂g
= 2 E −2/3 F 2/3 − λ = 0  λ = 2 E −2/3 F 2/3
∂E
∂g 1
= 4 E1/3 F −1/3 − 20λ = 0  λ = E1/3 F −1/3
∂F 5
Hence
1 1/3 −1/3
2 E −2/3 F 2/3 = E F  E = 10 F
5
From the constraint,

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30 F = 3360  F = 112  W = 56
Changing the hourly rate of pay makes no difference to the optimal hours.
11

(a) 16 K + 100 = 220  K = 7.5

(b) Make K the subject:

16 K + 25L = 220  16 K = 220 − 25L  K = 13.75 − 1.5625L

so the gradient is −1.5625 .

(c) The budgetary constraint is a tangent to the isoquant at the optimum so MRTS = 1.5625.
The general argument can be found on page 448.
12
(a) ( −2)3 + 2( −2)(3) + 34 = −8 − 12 + 81 = 61

f x = 3 x 2 + 2 y; f y = 2 x + 4 y3
dy 3x2 + 2 y 18 9
=− 3
=− =−
dx 2x + 4 y 104 52

(b) Find:
At a stationary point,
∂z
=0  8x − y − 8 = 0  8x − y = 8 (1)
∂x
∂z
=0  − x + 6y +1 = 0  x − 6 y = 1 (2)
∂y

(1) − 8 × (2) : 47 y = 0  y =0  x =1
The stationary point has coordinates (1, 0).
∂2 z ∂2 z ∂2 z
= 8 > 0; = 6 > 0; = −1
∂x 2 ∂y 2 ∂x∂y
2
 ∂ 2 z  ∂ 2 z   ∂ 2 z 
 2  −  = 47 > 0
 2  
 ∂x  ∂y   ∂x∂y 
The stationary point is a minimum.

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13
(a)

∂U x2 (2 x 1 + x2 ) − 2 x1 x2 x22
= = ;
∂x1 ( 2 x1 + x2 )2 ( 2 x1 + x2 )2
∂U x1 (2 x1 + x2 ) − x1 x2 2 x12
= =
∂x2 ( 2 x1 + x2 )2 ( 2 x1 + x2 )2
∂ 2U −4 x22 ∂ 2U −4 x12
= < 0; = <0
∂x12 ( 2 x1 + x2 )3 ∂x22 ( 2 x1 + x2 )3
so the law of diminishing marginal utilities holds for both goods.
∂U ∂U
(b) = 0.36, = 0.08
∂x1 ∂x2
0.36
MRCS = = 4.5
0.08
4.5 × 0.02 = 0.09
Check: U(1,3) = 0.6 and U(0.98, 3.09) = 0.5996.
x1 x2
(c) g ( x1 , x2 , λ ) = + λ (100 − x1 − 8 x2 )
2 x1 + x2

∂g x22 x22
=0  −λ =0  λ=
∂x1 ( 2 x1 + x 2 )2 ( 2 x1 + x2 )2
∂g 2 x12 x12
=0  − 8λ = 0  λ=
∂x2 ( 2 x1 + x 2 )2 4 ( 2 x1 + x2 )
2

1 2 1
Hence x22 = x1  x2 = x1
4 2
Substitute into constraint to get

x1 + 4 x1 = 100  x1 = 20  x2 = 10

14
g ( K , L, λ ) = 8 KL + λ ( M − K − 2 L )
∂g
=0  8L − λ = 0  λ = 8L
∂K
∂g
=0  8 K − 2λ = 0  λ = 4K
∂L

Hence 8L = 4 K  K = 2L
Substitute into constraint to get

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M M
4L = M  L=  K=
4 2
M M
Q = 8× × =M2
2 4
(a) MPK = 8L = 2M, MPL = 8K = 4M
MPK 2M MPL 4M
= = 2M ; = = 2M
PK 1 PL 2
Last dollar spent on capital yields the same addition to output as the last dollar spent on
labour.
(b) Replacing M by M + 1 increases optimal output to ( M + 1) 2 = M 2 + 2 M + 1 so the
change is
2M + 1 ≈ 2M = λ

2 M2 dK M2
(c) M = 8KL  K=  =− 2
8L dL 8L
M dK
At L = , = −2
4 dL

Cost constraint: K + 2 L = M  K = M − 2L  gradient = −2

The general argument can be found on page 448.

15

(a) Y = aY + b + cr + d  (1 − a ) Y − cr = b + d (1)

(b) M S* = k1Y + k2 r + k3  k1Y + k2 r = M S* − k3 (2)

(c) k2 × (1) + c × (2) : ( (1 − a ) k2 + ck1 ) Y = k2 ( b + d ) + c( M S* − k3 )

k2 (b + d ) + c( M S* − k3 )
Y=
(1 − a)k2 + ck1

∂Y k2
=
∂b (1 − a)k2 + ck1

(1 − a) > 0 and k2 < 0  (1 − a ) k2 < 0

c < 0, k1 > 0  ck1 < 0
Hence
(1 − a)k2 + ck1 < 0
∂Y
is the quotient of two negative numbers so is positive, so Y increases as b increases.
∂b

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 CHAPTER 6

Integration

Section 6.1 Indefinite integration

Practice Problems

1 4 1 19 .
1. (a) x 2 ( b) x
4
(c) x
100
(d) x (e) x
4 19

1 5 1 3 43
2. (a) x +c (b) − +c (c) x +c
5 2 x2 4

1 3x
(d) e +c (e) x + c
3

x2
(f) +c (g) ln x + c
2

2 4 5
3. (a) x − x + c (b) 2x 5 − +c
x

7 3 3 2
(c) x − x + 2x + c
3 2

4. (a) TC =  2dQ = 2Q + c

Fixed costs are 500, so c = 500. Hence

TC = 2Q + 500
Put Q = 40 to get TC = 580

(b) TR =  (100 − 6Q)dQ

= 100Q − 3Q 2 + c
Revenue is zero when Q = 0, so c = 0. Hence

TR = 100Q − 3Q 2
TR 100Q − 3Q 2
P= =
Q Q
= 100 − 3Q
so demand equation is P = 100 − 3Q.

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(c) S =  (0.4 − 0.1Y −1/2 ) dY

= 0.4Y − 0.2Y 1/2 + c

The condition S = 0 when Y = 100 gives
0 = 0.4(100) − 0.2(100)1/2 + c
= 38 + c
so c = −38. Hence
1/2
S = 0.4Y – 0.2Y − 38

5. (a) Try F ( x) = ( 5 x + 1) 4 + c which differentiates to 4(5 x + 1)3 × 5

1
This is 20 times too big so the correct answer is ( 5 x + 1) 4 + c
20

( )
8
(b) Try F ( x) = 1 + x 2 + c which differentiates to 8(1 + x 2 ) 7 × 2 x

1
( )
8
This is 16 times too big so the correct answer is 1 + x2 +c
16

1
(c) Try F ( x ) = ln(2 + x 4 ) + c which differentiates to × 4 x3 which is correct
2 + x4

( )
4
(d) Try F ( x) = 1 + e x + c which differentiates to 4(1 + e x )3 × e x

1
( )
4
This is 4 times too big so the correct answer is 1 + ex +c
4

Exercise 6.1 (p. 496)

6 1 5 10x
1. (a) x + c (b) x +c (c ) e +c (d) ln x+c
5

2 52 1 4
(e) x + c; (f) x − 3x 2 + c
5 2

1 3 ax 2
(g) x − 4 x2 + 3x + c (h) + bx + c
3 2

7 3
(i)  (7 x
3
+ 4e −2 x − 3 x −2 ) dx = x 4 − 2e −2 x + + c.
4 x

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Q2
2. (a) TC =  (Q + 5)dQ = + 5Q + c
2
We know that TC = 20 when Q = 0 so c = 20.
Q2
Hence TC = + 5Q + 20
2

(b) TC =  3e0.5Q dQ = 6e0.5Q + c

We know that TC = 10 when Q = 0 so 6 + c = 10.

0.5Q
Hence c = 4 giving TC = 6e +4

3.

TC =  2Q + 6 dQ = Q 2 + 6Q + c

82 + 6 × 8 + c = 212  c = 100

At Q = 14, TC = 380

4. (a) TR =  (20 − 2Q ) dQ = 20Q − Q 2 + c

We know that TR = 0 when Q = 0 so c = 0.

2
Hence TR = 20Q – Q ;
TR
P= = 20 − Q
Q

1 1
−
(b) TR =  6Q 2 dQ = 12Q 2 +c

We know that TR = 0 when Q = 0 so c = 0.

TR 12
TR = 12 Q ; P= =
Q Q

5. C =  0.6dY = 0.6Y + c

We know that C = 10 when Y = 5 so 10 = 3 + c  c = 7

Hence C = 0.6Y + 7

S = Y − C = Y − (0.6Y + 7) = 0.4Y − 7

6. (a) Q =  (1000 − 3L2 ) dL = 1000 L − L3 + c

We know that Q = 0 when L = 0 so c = 0

3
Hence Q = 1000L − L

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− 12 1
(b) Q =  (6 L − 0.01)dL = 12 L2 − 0.01L + c

We know that Q = 0 when L = 0 so c = 0

Hence Q = 12√L − 0.01L

7. TR =  10 − 4Q dQ = 10Q − 2Q 2 + c

But TR = 0 when Q = 0, so c = 0.

TC =  1dQ = Q + c

Fixed costs are 4 so c = 4.

π = TR − TC = 12 − 6 = 6

8. (1) F ′( x ) = 5(2 x + 1) 4 × 2 = 10(2 x + 1) 4

4 1
This is 10 times too big so  ( 2 x + 1) dx =
10
( 2 x + 1)5 + c

(2) (a) Try F ( x) = ( 3x − 2 ) + c which differentiates to 8 ( 3x − 2 ) × 3

8 7

1
This is 24 times too big so the correct answer is ( 3 x − 2 )8 + c
24

(b) Try F ( x) = ( 2 − 4 x ) + c which differentiates to 10 ( 2 − 4 x ) × ( −4 )

10 9

1
This is −40 times too big so the correct answer is − ( 2 − 4 x )10 + c
40

3
(c) Try F ( x) = ( 2 x + 1)
3/2
+ c which differentiates to ( 2 x + 1)1/2 × 2
2

1
This is 3 times too big so the correct answer is ( 2 x + 1)3/2 + c
3

7
(d) Try F ( x) = ln ( 7 x + 3) + c which differentiates to
7x + 3

1
This is 7 times too big so the correct answer is ln ( 7 x + 3 ) + c
7

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Section 6.2 Definite integration

Practice Problems
1
1 3 1 
1. (a) 
0
x dx =  x4 
 4 0
1 4 1 4 1
= (1) − (0) =
4 4 4
5
2 (2 x + 1)dx = [ x
2
(b) + x]52 = (52 − 5) + (22 − 2) = 24

4
1 ( x
2
(c) − x + 1)dx

4
1 1 
=  x3 − x 2 + x 
3 2 1
1 1  1 1 
=  (4)3 − (4) 2 + 4  −  (1)3 − (1) 2 + 1
3 2  3 2 
= 16.5
1 x x 1
(d) 0 e dx = e 0
= e1 − e0 = e − 1 = 1.71828

2. Substitute Q = 8 to get
2
P = 100 – 8 = 36

8
CS =  (100 − Q 2 )dQ − 8(36)
0
8
 1 
= 100Q − Q 3  − 288
 3 0
 1   1 
= 100(8) − (8)3  − 100(0) − (0) 2  − 288
 3   3 
= 341.33

3. In equilibrium, QS = Q D = Q, so
P = 50 − 2Q
P = 10 + 2Q

Hence
50 – 2Q = 10 + 2Q

which has solution Q = 10. The demand equation gives

P = 50 – 2(10) = 30

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10
(a) CS =  (50 − 2Q)dQ − 10(30)
0

10
= 50Q − Q 2  − 300
 0
= 50(10) − (10) 2  − 50(0) − 02  − 300
   
= 100

10
(b) PS = 10(30) −  (10 + 2Q)dQ
0

10
= 300 − 10Q + Q 2 
 0

 {
= 300 − 10(10) + (10)2  − 10(0) + 02 
   }
= 100

8
8 3 4 3
1 800t dt = 800  4 t 1
13
4. (a)

3 3 
= 800  (8) 4 3 − (1)4 3 
4 4 
= 9000

T
T 3 
(b) 0 800t1 3dt = 800  t 4 3 
 4 0

3 3 
= 800  T 4 3 − (0) 4 3 
 4 4 
= 600T 4 3
We need to solve
4/3
600T = 48 600
that is,
4/3
T = 81
so
3/4
T = 81 = 27

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10
5. P =  5000 e−0.06t dt
0

10
= 5000 e−0.06t dt
0
10
 1 −0.06t 
= 5000  − e 
 0.06 0
5000 −0.6
=− (e − 1)
0.06
= $37,599.03

Exercise 6.2 (p. 509)

3
3 4 3 4 104
1 4 x dx =  3 x 1 = 36 − 3 = 3
2
1. (a)

3
3 2  1 1  1 5
(b) 2 x 3
dx =  − 2  = − −  −  =
 x 2 9  4  36

4 6 4
(c) 1 x
dx = 12 x  = 24 − 12 = 12
1

2 2
(d) 1 4 x
3
− 3 x 2 + 4 x + 2 dx =  x 4 − x 3 + 2 x 2 + 2 x  = 20 − 4 = 16
 1

5 5
2 1  605 25 290
2. (a)  2 x 2 + x + 3dx =  x3 + x + 3x  = − =
1 3 2 1 6 6 3

3 3
 x3  8 1
(b)  x − 4 x + 4 dx =  − 2 x 2 + 4 x  = 3 − =
2

2  3  2 3 3

25
25
(c)  3x1/2 dx =  2 x 3/2  = 250 − 16 = 234
 4
4

1
1
(d)  e x dx = e x  = e − 1
0
0

e
1
 x dx = [ln x]1 = ln e − ln1 = 1
e
(e)
1

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2
2 3  x4 
3. (a)  x dx =   =4−0=4
 4  0
0

2
2  x4 
−2 x dx =  4  = 4 − 4 = 0 .
3
(b)
  −2
The graph is sketched in Figure S6.1.
Integration gives a positive value when the graph is above the x axis and a negative
value when it is below the x axis. In this case, there are equal amounts of positive and
negative area which cancel out.
Actual area is twice that between 0 and 2, so is 8.

Figure S6.1

4. (a) 25 − 2Q = 5  −2Q = −20  Q = 10

10
10
CS =  (25 − 2Q) dQ − 10 × 5 =  25Q − Q 2  − 50 = (150 − 0) − 50 = 100
 0
0

10
(b) =5 Q = 2Q = 4
Q
4
dQ − 4 × 5 =  20Q 2  − 20 = (40 − 0) − 20 = 20
4 − 12 1
CS =  10Q
0   0

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5. (a) P = 12 + 2 × 9 = 30
9 9
PS = 9 × 30 −  (12 + 2Q) dQ = 270 − 12Q + Q2  = 270 − (189 − 0) = 81
0  0

(b) P = 20 9 + 15 = 75
9
9 1
 40 3 
PS = 9 × 75 −  (20Q 2 + 15)dQ = 675 −  Q 2 + 15Q  = 675 − (495 − 0) = 180
0 3 0

10 10
 2 0.01 3  320
 50 − 2Q − 0.01Q dQ − 29 ×10 = 50Q − Q − 3 Q 0 − 290 = 3
2
6. (a)
0

11 11
 2 0.01 3 
 50 − 2Q − 0.01Q dQ − 26.79 ×11 = 50Q − Q − 3 Q 0 − 294.69 = 129.87
2
(b)
0

7. In equilibrium, QS = QD = Q so

Q 2 + 2Q + 12 = −Q 2 − 4Q + 68  2Q 2 + 6Q − 56 = 0  Q 2 + 3Q − 28 = 0

This quadratic has solutions

−3 ± 32 − 4(1)( −28) −3 ± 121

Q= = =4
2(1) 2

(ignoring the negative solution)

Substituting this value into either the supply or demand function gives P = 36.

(a)
4
 Q3 
CS = 
0
4
( −Q 2 − 4Q + 68 ) dQ − 4 × 36 =  −
3
− 2Q 2 + 68Q  − 144 =
656
3
− 144 =
224
3
  0

(b)
4
 Q3 
4
PS = 4 × 36 −  Q + 2Q + 12( 2
) dQ = 144 −  + Q 2 + 12Q  = 144 −
256 176
=
 3 3 3
0
 0

4.5
4.5
1  5
8. 2 5000t 4 dt =  4000t 4  = $16703
 
2

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4
4
1  3
9. (a) 0 2400t 2 dt = 1600t 2  = $12800
 
0

N
N 1
  3 3 3
(b) N −1 2400t 2 dt = 1600t 2  N −1 = 1600( N 2 − ( N − 1) 2 )
First year = $1600; Second year = $2925; Third year = $3788; Fourth year = $4486, so the
first year it happens is the fourth

10. 8 8
P =  12 000e −0.075t dt =  −160 000e −0.075t  = $72190.14
0  0

4 4
11. N =  30t 2 − 4t 3 dt = 10t 3 − t 4  = 384 so 384 000 barrels
0 0

Examination Questions

(a) TC =  6Q 2 + 5Q dQ

5
= 3Q 3 + Q 2 + c
2
5
The fixed costs are 25, so TC = 3Q 3 + Q 2 + 25
2
1
2 P + Q = 510  P = 255 − Q
2
1
TR = PQ = 255Q − Q 2
2
The profit function is given by
π = TR − TC
1 2  3 5 2 
= 255Q − Q −  3Q + Q + 25 
2  2 
= −3Q 3 − 3Q 2 + 255Q − 25
(b) At a stationary point,
dπ
= 0  − 9Q2 − 6Q + 255 = 0
dQ

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 − 3Q 2 − 2Q + 85 = 0
2 ± 1024 2
 Q= = 5, − 5
−6 3
Q>0  Q=5

d 2π
Also = −18Q − 6 < 0 at Q = 5, so maximum.
dQ 2
2
2 2
 x3  2 1 1
 x + 2 x + 3 dx =  3 + x + 3x  = 12 3 − 4 3 = 8 3
2 2
(a)
1  1

x 6 2 x3
(b) (i) − + 9x + c
6 3

(ii) e x + 3ln x + c

x2 1
(iii) − − 6 x3/2 + c
2 x2
1
+
2
=
( x + 3) + 2 ( x − 1) = 3x + 1
(c)
x −1 x + 3 ( x − 1)( x + 3) ( x − 1)( x + 3)
5
1 2 5
 x − 1 + x + 3 dx = ln ( x − 1) + 2ln ( x + 3) 2
2

= ln 4 + 2ln 8 − ln1 − 2ln 5

= ln 4 + ln 82 − ln 52
 4 × 64 
= ln  
 25 
 256 
= ln  
 25 
2
 16 
= ln  
 5
 16 
= 2ln  
 5
3
4
4
(a)  900t
1/2
dt = 600t 3/2  = 600 × 43/2 − 0 = 4800
 0
0

5
5
(b)  900t
1/2
dt = 600t 3/2  = 600 × 53/2 − 600 × 23/2 = 5011.15
 2
2

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(c)
N
N
 900t
1/2
dt = 600t 3/2  = 600 × N 3/2 − 0 = 600 N 3/2
 0
0

600 N 3/2 = 16200

N 3/2 = 27
N = 27 2/3 = 9
4

(a) TR =  140 − 6Q dQ = 140Q − 3Q 2 + c

TR = 0 at Q = 0  c=0  TR = 140Q − 3Q 2

Hence the demand function is P = 140 − 3Q

Q3 Q 2
Q
2
(b) TC = + Q + 20 dQ = + + 20Q + c
3 2
Q3 Q 2
Fixed costs are 10, so c = 10  TC = + + 20Q + 10
3 2
(c) The profit function is given by
π = TR – TC
 Q3 Q 2 
(
= 140Q − 3Q 2 − 
 3)+
2
+ 20Q + 10 

 
7Q 2 Q3
= 120Q − − − 10
2 3
At a stationary point
dπ
= 0  120 − 7Q − Q2 = 0
dQ
Hence
7 ± 529
Q= = 8 (Q > 0)
−2
d 2π
Also at this point, = −7 − 2Q = −23 < 0 so maximum.
dQ 2 ,
1
Substituting Q = 8 into the profit function gives, π = 555
3

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5
(a) Sketch graphs of the supply and demand curves are shown in Figure S6.2.

Figure S6.2

(b) At equilibrium
Q2
32 + Q 2 = 140 −  96 + 3Q 2 = 420 − Q 2
3
 4Q 2 = 324  Q=9  P = 113

Producer’s surplus:
9
9 × 113 −  32 + Q 2 dQ
0
9
 1 
= 1017 − 32Q + Q3 
 3 0
= 1017 − 531
= 486
Consumer’s surplus:
9
Q2
140 − 3
dQ − 1017
0
9
 Q3 
= 140Q −  − 1017
 9 
0
= 1179 − 1017
= 162
(c) (i) No change to demand curve but supply curve shifts upwards as indicated by the
dashed line in Figure S6.3.

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Figure S6.3
Equilibrium price increases and equilibrium quantity decreases.
(ii) Shaded area decreases so CS goes down.
6
(a)
8
−0.04t 8
 4000e dt =  −100,000e −0.04t 
 0
0

(
= −100,000 e −0.32 − 1 )
= $27,385.10
(b)

( )
100,000 1 − e−0.04T = 45,000

1 − e−0.04T = 0.45
e−0.04T = 0.55
−0.04T = ln 0.55
T = 15
7
(a) Use integration by inspection to get
2 1
(i)  1 + 6 x dx = 3
ln(1 + 6 x ) + c

1
( )
3/2
(ii) x 1 + 3x 2 dx =
9
1 + 3x 2 +c

1
(b) aP + bQ = 1  P= (1 − bQ )
a
Producer’s surplus is 18 at Q = 6

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6
1
18 = 12 × 6 −  (1 − bQ ) dQ
0
a
6
1  bQ 2  
18 = 72 −   Q − 
 2  
 a  0
1
18 = 72 − ( 6 − 18b )
a
1
( 6 − 18b ) = 54
a
6 = 54a + 18b
9a + 3b = 1 (1)
We also know that when P = 12, Q = 6 so that

12a + 6b = 1 (2)

1 1
2 × (1) − (2)  6a = 1  a=  b=−
6 6
8

(a) TC =  2Q + 3Q1/2 dQ

= Q 2 + 2Q 3/ 2 + c
Put Q = 4 and TC = 40 to get

40 = 16 + 16 = c  c =8
Hence the total cost function is
TC = Q 2 + 2Q 3/ 2 + 8

(b) P = 2  Q=2
The formula can be transposed to make P the subject:

2 PQ = 10 − P
(2Q + 1) P = 10
10
P=
2Q + 1
Consumer’s surplus:

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2
10
 2Q + 1 dQ − 2× 2
0
2
= 5ln ( 2Q + 1)  − 4
0

= 5ln 5 − 4
= 4.05
9
P dQ P dQ 1
× =− 2  =−
Q dP 2Q dP 2Q
This equation can be solved by reciprocating both sides and using the fact that
−1
 dQ  dP dP
  = to get = −2Q
 dP  dQ dQ
This can be integrated to get
P = −Q 2 + c
We know that when Q = 5, P = 10 so

10 = −25 + c  c = 35
The demand function is
P = 35 − Q 2

10
(a) (b) Figure S6.4 shows both the supply curve and horizontal line drawn on the same
axes.

Figure S6.4
(c) The area of the rectangle with width 3 and height 13 is 39.
The area under the curve is

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3 3
 Q3 

2
4 + Q d Q =  4Q +  = 21
0  3 
0

The shaded area is 39 − 21 = 18 .

The represents the producer’s surplus at Q = 3.
11
(a) The savings and cost functions are sketched in Figure S6.5.

Figure S6.5

(b)

0.5t 2 + 2t = 0.3t + 45.6

0.5t 2 + 1.7t − 45.6 = 0
−1.7 ± 9.7
t= =8 (t > 0)
1
Savings exceed costs when t < 8 .
(c)
Area under line − Area under curve
8 8

 0.3t + 45.6 dt −  0.5t

2
+ 2t dt
0 0
8
=  45.6 − 0.5t 2 − 1.7t dt
0
8
 0.5 3 1.7 2 
=  45.6t − t − t
 3 2  0
1
= 225
15
so net savings are $225 066.67.

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12
−1/3 dP 80 dQ 3
(a) P = 80Q  = − Q−4/3  = − Q4/3
dQ 3 dP 80
Hence
P dQ 80Q −1/3 −3Q 4/3
E= × = × = −3
Q dP Q 80
(b) The demand curve is sketched in Figure S6.6

Figure S6.6

(c)
80 80
P= 3
= = 20
64 4
64
−1/3
CS =  80Q dQ − 20 × 64
0
64
= lim 120Q 2/3  − 1280
N →0  N

(
= lim 1920 − 120 N 2/3 − 1280
N →0
)
= 1920 − 1280
= 640

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 CHAPTER 7

Matrices

Section 7.1 Basic matrix operations

Practice Problems

1. (a) 2 × 2, 1 × 5, 3 × 5, 1 × 1.

(b) 1, 4, 6, 2, 6, ?, 6; the value of c43 does not exist, because C has only three rows.

1 3 2 2 
4 7 1 −5

2. AT = 0 6 3 1 
 
1 1 5 8 
 2 4 −1 0 

1 
5
BT =  
7 
 
9 

1 2 3
CT =  2 4 5  = C
 3 5 6 

T
Matrices with the property that C = C are called symmetric. Elements in the top right-hand
corner are a mirror image of those in the bottom left-hand corner.

1 7   3  2 0 0 
3. (a)   (c)   (d)  2 (e)  
 3 −8   2   0 0 

Part (b) is impossible because A and C have different orders.

 2 −4   0 −2 
4. (1) (a)  6 10  (b)  4 14 
   
 0 8   2 12 

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(c) (d)
1 −3  2 −6 
5 12  10 24 
   
1 10   2 20 

From (a) and (b)

 2 −4   0 −2   2 −6 
2 A + 2B =  6 10  +  4 14  = 10 24 
 0 8   2 12   2 20 

which is the same as (d), so

2(A + B) = 2A + 2B

 3 −6   −6 12 
(2) (a) 9 15  (b)  −18 −30 
   
0 12   0 −24 

From (a),
 3 −6   −6 12 
−2(3A) = −2 9 15  =  −18 −30 
 0 12   0 −24 

which is the same as (b), so

–2(3A) = –6A

5. (a) [8] because

1(0) + (−1)(−1)
+ 0(1) + 3(1) + 2(2) = 8

(b) [0] because 1(–2) + 2(1) + 9(0) = 0.

(c) This is impossible, because a and d have different numbers of elements.

6.

Figure S7.1

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1 2  c11 c12 
  1 2   
AB = 0 1    = c21 c 22 
3 4
3 l    c
 3l c32 
1 2  7 c12 
   1 2  
AB = 0 1    = c21 c22 
3 1   3 4  c
   31 c32 
1 2  7 10 
  1 2   
AB = 0 1    = c21 c22 
   3 4  c
3 1   31 c32 
1 2  7 10 
 1 2  
AB =  0 1   = 3 c22 
3 1   3 4  
  c31 c32 

1 2  7 10 
  1 2  
AB =  0 1   = 3 4 
3 1  3 4  
  c31 c32 

1 2  7 10 
 1 2  
AB = 0 1    = 3 4 
 3 1   3 4  
c32 
  6
1 2   7 10 
  1 2  
AB = 0 1    = 3 4 
 3 1  3 4   
   6 10 

5 4 3 
 9 6 13 
7. (a) 7  (d)  2 −1 (f)  
5  5 5   27 15 28 

5 7 9
5 6
(g)  3 3 3 (h)  
 
 6 9 12  11 15 

Parts (b), (c) and (e) are impossible because, in each case, the number of columns in the first
matrix is not equal to the number of rows in the second.

8. Ax is the 3 × 1 matrix
x + 4 y + 7z 
2 z + 6 y + 5z 
 
8 x + 9 y + 5 z 

However, x + 4y + 7z = –3, 2x + 6y + 5z = 10 and 8x + 9y + 5z = 1, so this matrix is just

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 −3 
10 
 
 1 

which is b. Hence Ax = b.

Exercise 7.1 (540)

35 27 13   31 17 3 
1. (a) J =  ; F=  .
 42 39 24   25 29 16 

(b)
 66 44 16 
 67 68 40 


(c)
 4 10 10 
17 10 8 
 

2. (a)
 4 6 2 18 
 2 0 10 0 
 
12 14 16 8 

(b)
 2 14 18 12 
 4 2 0 10 
 
12 8 10 6 

(c)
 4 20 20 30 
 6 2 10 10 
 
 24 22 26 14 

(d) Same answer as (c).

3. 4B, (CB)T, CBA are possible with order 2 × 3, 3 × 4, 4 × 3 respectively.

4. (a) 5900 
1100 
 
Total cost charged to each customer.

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(b)
13 7 23 22 
3 1 4 5 
 
Amount of raw materials used to manufacture each customer’s goods.

(c)
 35 
 75 
 
30 

Total raw material costs to manufacture one item of each good.

1005
(d)  
 205 
Total raw material costs to manufacture requisite number of goods for each customer.

(e) [7000]
Total revenue received from customers.

(f) [1210]
Total cost of raw materials.

(g) [5790]
Profit before deduction of labour, capital and overheads.

12 
5. (a) [8 30 15] 30  = [1371]
 25

12 
(b) [9.6 27 15] 30  = [1300.2]
 
 25 

1300.2
= 0.948 so the overall change is a 5.2% decrease.
1371

1 3 5 
6. (1) (a)  
2 4 6
 1 2 −3 
(b)  
 −1 1 4 
2 1 
(c)  5 5 
 2 10 

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2 5 2 
(d)  
 1 5 10 
T T T
(A + B) = A + B : that is, ‘transpose of the sum is the sum of the transposes’.

1 5
(2) (a)  
4 9
 2 −1
(b) 1 0 
 0 1 

 −2 1 4 
(c)  
 1 5 9
 −2 1 
(d)  1 5
 4 9 

T T T
(CD) = D C : that is ‘transpose of a product is the product of the transposes multiplied in
reverse order’.

0 6 
7. (a) B + C =  
5 2 
 −15 24 
so A(B + C) =  
 5 14 

 −7 25 
AB =   and
 6 10 

 −8 −1
AC =   , so
 −1 4 
 −15 24 
AB + AC =  
 5 14 

 −7 25 
(b) AB =   , so
 6 10 

32 43
(AB)C =  
 4 26 
 4 11
BC =   , so
 −4 4 

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32 43 
A(BC) =  
 4 26 

1 2 −4 3 
7 14 −28 21
8. AB = [9]; BA =  
 3 6 −12 9 
 
 2 4 −8 6 

7 x + 5 y 
9. (a)  
 x + 3y 

 2 3 −2   x 6 
(b) A =  1 −1 2  x =  y b =  3 .
     
 4 2 5   z  1

Section 7.2 Matrix inversion

Practice Problems

1. A = 6(2) − 4(1) = 8 ≠ 0

so A is non-singular and its inverse is given by

1  2 −4   1 / 4 − 1 / 2 
=
8  −1 6   −1 / 8 3 / 4 
| B |= 6(2) − 4(3) = 0

so B is singular and its inverse does not exist.

2. We need to solve Ax = b, where

9 l  P   43 
A=  x= 1 b= 
2 7  P2  57 

Now
1  7 −1
A −1 =
61  −2 9 

so
 P1  1  7 − l   43   4 
 P  =  −2 9  57  =  7 
 2  61     

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3. In equilibrium, QS = QD = Q, say, so the supply equation becomes

P = aQ + b

Subtracting aQ from both sides gives

P – aQ = b (1)

Similarly, the demand equation leads to

P + cQ = d (2)

In matrix notation equations (1) and (2) become

 l − a   P  b 
 l c  Q  =  d 
    

The coefficient matrix has an inverse,

1  c a
c + a  − l 1 

so that
P 1  c a  b 
Q  = c + a  −l l   d 
    

that is,
cb + ad −b + d
P= and Q=
c+a c+a

The multiplier for Q due to changes in b is given by the element in row 2, column 1, of the
inverse matrix so is
−1
c+a

Given that c and a are both positive it follows that the multiplier is negative. Consequently,
an increase in b leads to a decrease in Q.

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4 3
4. A11 = + =7
3 4

1 3
A12 = − = −1
1 4
1 4
A13 = + = −1
1 3
3 3
A21 = − = −3
3 4
1 3
A22 = + =1
1 4
1 3
A23 = − =0
1 3
3 3
A31 = + = −3
4 3
1 3
A32 = − =0
1 3
1 3
A33 = + =1
1 4

5. Expanding along the top row of A gives

A = a11 A11 + a12 A12 + a13 A13
= 1(7) + 3( −1) + 3( −1) = 1

using the values of A11, A12 and A13 from Practice Problem 4. Other rows and columns are
treated similarly. Expanding down the last column of B gives
B = b13 B13 + b23 B23 + b33 B33
= 0( B13 ) + 0( B23 ) + 0( B33 ) = 0

6. The cofactors of A have already been found in Practice Problem 4. Stacking them in their
natural positions gives the adjugate matrix
 7 −1 −1
 −3 1 0 
 
 −3 0 1 

Transposing gives the adjoint matrix

 7 − 3 −3 
 −1 1 0 

 −1 0 1 

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The determinant of A has already been found in Practice Problem 5 to be 1, so the inverse
matrix is the same as the adjoint matrix.

The determinant of B has already been found in Practice Problem 5 to be 0, so B is singular

and does not have an inverse.

7. Using the inverse matrix in Practice Problem 6,

 P1   7 −3 −3 32  8 
 P  =  −1 1 0  37  = 5 
 2     
 P3   −1 0 1  35  3

Exercise 7.2 (p. 560)

1. (a) (i) 1 (ii) 2 (iii) 2 (iv) 10

 4 −7   2 −3   2 5  −0.7 0.4 
(b) (i)   (ii)   (iii)   (iv)  
 −1 2   −1.5 2.5   −0.5 −1  0.8 −0.6 

2. (1) (a) A = −3

(b)
B =4

4 4
(c) AB =  
7 4 

so | AB | = −12. These results give | AB | = | A | | B |: that is, ‘determinant of a product is the

product of the determinants’.
 −l / 3 l / 3 
(2) (a) A −1 =  
 5 / 3 −2 / 3

 l 0 
(b) B −1 =  
 −1 / 2 −1 / 4 
 −1 / 3 l / 3 
(c) ( AB ) −1 =  
 7 / 12 −l / 3

These results give (AB)−1 = B−1A−1: that is, ‘inverse of a product is the product of the
inverses multiplied in reverse order’.

3. 2a + 3 = 0  a = −3/2
−8 − 3b = 0  b = −8/3

 5 −3  8 3 10 0  1  5 −3

4.  −10 8   l0 5  =  0 10  = 10I so the inverse is 10  −10 8 
      

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x  1  −1 −4   −1  l 
5. (a)   = −  = Hence x = 1, y = −1
 y 23  −5 3   6   −l 

x  1  −1 −3  8   2 
(b)   = −  = Hence x = 2, y = 2
 y 13  −4 1   6   2 

6. (a) 50 − 2P1 + P2 = −20 + P1  3P1 − P2 = 70

10 + P1 − 4P2 = −10 + 5P2  −P1 + 9P2 = 20

1 9 1 
(b) Inverse =
26 1 3

1 9 1   70   25 
=
26  l 3  20   5 

P1 = 25, P2 = 5

a 0
7. (a) (i) = a×0 −b×0 = 0
b 0

a b
(ii) = kab − kab = 0
ka kb

a b
a b
(iii) 1 l = − = 1 −1 = 0
a b
b a

a b
(b) (i) = ak − 0 = ak ≠ 0 since a and k are both non-zero.
0 k

0 a
(ii) = 0 − − a 2 = a 2 ≠ 0 since a is non-zero.
−a 0

a b
(iii) = a 2 − −b 2 = a 2 + b 2 > 0 since a and b are non-zero
−b a

Section 7.3 Cramer’s rule

Practice Problems

1. (a) By Cramer’s rule

det( A2 )
x2 =
det( A)

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where
2 16
det( A 2 ) = = −66
3 −9
2 4
det( A ) = = −22
3 −5

Hence
−66
x2 = =3
−22

(b) By Cramer’s rule

det(A3 )
x3 =
det(A)
where
4 l 8
det( A3 ) = −2 5 4
3 2 9
5 4 −2 4 −2 5
=4 −1 +8
2 9 3 9 3 2
= 4(37) − 1(−30) + 8(−19)
= 26
and
4 1 3
det( A) = −2 5 1
3 2 4
5 1 −2 1 −2 5
=4 −1 +3
2 4 3 4 3 2
= 4(18) − 1(−11) + 3(−19)
= 26
Hence
26
x3 = =1
26

2. The variable Yd is the third, so Cramer’s rule gives

det(A3 )
Yd =
det(A)

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where

 1 −1 I * + G* 0
 
0 1 b 0
A3 = 
−1 0 0 1
 
 −t 0 T* 1 

Expanding along the second row gives

1 I * + G* 0 1 −1 0
det( A3 ) = 1 −1 0 1 − b −1 0 1
−t T *
1 −t 0 0

since along the second row the pattern is ‘– + – +’. Now

1 I * + G* 0
0 4 −1 1
−1 0 1 =1 − ( I * + G* )
T *
1 −t 1
−t T* 1
= T * − ( I * + G* )( −1 + t )

(expanding along the first row) and

1 −1 0
−1 1
−1 0 1 = −( −1) = −1 + t
−t 1
−t 0 1

(expanding down the second column).

Hence
det(A3) = –T* – (I* + G*)(–1 + t) – b(–1 + t)

From the worked example given in the text,

det(A) = 1 – a + at

Hence
−T * − ( I * + G* )(−1 + t ) − b(−1 + t )
yd =
1 − a + at

3. Substituting C1, M1 and I*1 into the equation for Y1 gives

Y1 = 0.7Y1 + 50 + 200 + X1 – 0.3Y1

Also, since X1 = M2 = 0.1Y2, we get

Y1 = 0.7Y1 + 50 + 200 + 0.1Y2 – 0.3Y1

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which rearranges as
0.6Y1 – 0.1Y2 = 250

In the same way, the second set of equations leads to

–0.3Y1 + 0.3Y2 = 400

Hence
 0.6 −0.1  Y1   250 
 −0.3 0.3   Y  =  400 
  2  

In this question both Y1 and Y2 are required, so it is easier to solve using matrix inverses
rather than Cramer’s rule, which gives
 Y1  1  0.3 0.1  250 
Y  =   
 2  0.15  0.1 0.6   400 
1 115 
=
0.15 315

Hence Y1 = 766.67 and Y2 = 2100. The balance of payments for country 1 is

X1 − M1 = M 2 − M1
= 0.1Y2 − 0.3YI
= 0.1(2100) − 0.3(766.67)
= −20

Moreover, since only two countries are involved, it follows that country 2 will have a
surplus of 20.

Exercise 7.3 (p. 572)

1. (a) (i) 10 (ii) −31 (iii) 27

−31 27
(b) x = = −3.1, y= = 2.7
10 10

4 −3
7 5 41
2. (a) x = = =1
7 −3 41
2 5

5 4
12 5 −23
(b) x = = =1
−3 4 −23
2 5

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9 4
3 −7 −75
(c) x = = =5
1 4 −15
2 −7

1 9
2 −2 −20
3. (a) y = = =2
1 3 −10
2 −4

5 7
2 −1 −19
(b) y = = = −1
5 −2 19
2 3

2 7
3 1 −19
(c) y = = =1
2 3 −19
3 −5

1 3 4 1
−3 5 14 2 −3 −14
4. (a) x = = = 1; y= = = −1
4 3 14 4 3 14
2 5 2 5

1 3 4 1
11 5 −28 2 11 42
(b) x = = = −2; y= = =3
4 3 14 4 3 14
2 5 2 5

−2 3 4 −2
−36 5 98 2 −36 −140
(c) x = = = 7; y= = = −10
4 3 14 4 3 14
2 5 2 5

5. (a)
400 − 5 P1 − 3P2 = −60 + 3P1  8 P1 + 3P2 = 460
300 − 2 P1 − 3P2 = −100 + 2 P2  2 P1 + 5P2 = 400

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460 3
400 5 1100 550 6
(b) = = = 32
8 3 34 17 17
2 5
6. (a)

Y − C = I*
− aY + C = b
 1 −1 Y   I * 
 − a 1  C  =  
    b 

(b) 1 I*
−a b b + aI *
C= =
1 −1 1− a
−a 1

 2 4   a  14 
7. (a)    =  
3 9  b  9 

14 4 2 14
9 9 90 3 9 −24
(b) a = = = 15; b = = = −4
2 4 6 2 4 6
3 9 3 9

TR = 15Q − 4Q 2 , so when Q = 1, TR = 11.

Examination Questions

1
 1 0  12 −6   13 −6 
(a) AT + 2B = 
− 2 4  +  −8 4  =  −10 8 
     
 1 −2   6 −3   14 −7 
(b) AB =     =  
 0 4   −4 2   −16 8 

1  4 2  1 1 / 2 
(c) A-1 = =
4  0 1   0 1 / 4 
(d) det(B) = 0 so the inverse of B does not exist and this calculation is impossible.

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2
In equilibrium,
1 4   P   61
3 −1 Q  = 14 
    

P 1  −1 −4   61  9 
(a) Q  = − 13  −3 1  14  = 13
      
(b)
61
4
14 −1 −117
P= = =9
1 4 −13
3 −1
1 61
3 14 −169
Q = = = 13
1 4 −13
3 −1

3
(a) (i) impossible since A and C do not have the same order.

(ii) 2A – CT
 6 −2 0 12  1 3 − 2 −1
=  −8 10 4 −
 4  6
 0 4 −2 
 5 −5 2 13 
=  −14 10
 0 6 

(iii) impossible since the number of columns of A does not equal the number of
rows of B
 4 −3  3 −1 0 6   24 −19 −6 18 
(iv)  2 5   −4 =
  5 2 2   −14 23 10 22 

1
(b) (i) X = (C – AT)
2
 1 6   3 − 4    −1 5 
     
1 3 0   −1 5    2 −2.5
=  − =
2   −2 4   0 2    −1 1 
       
  −1 − 2   6 2    −3.5 −2 

(ii) X = B−1A
1  5 3  3 −1 0 6 1  3 10 6 36 
= =
26  −2 4   −4 5 2 2  26  −22 22 8 −4 

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4
(a)

40 − 3P1 − P2 = −6 + 5 P1  8P1 + P2 = 46
30 − 4 P1 − 0.5 P2 = −5 + 2 P2  4 P1 + 2.5 P2 = 35

8 1   P1   46 
 4 2.5  P  =  35 
  2  

 P1  1  2.5 −1  46  5 
 P  =  −4 8   35  = 6 
 2  16     
3 −12 4
0 0 7
1 −20 −2 336
(b) y = = = −7
3 5 4 −48
0 2 7
1 3 −2

5
(a) The number of customers using Airme in month t are made up of two types: those who
used Airme the previous month who are 80% of At −1 and those who switched from
,
Blight who are 25% of Bt −1 .
Hence
At = 0.8 At −1 + 0.25Bt −1
Similarly, Bt = 0.2 At −1 + 0.75Bt −1

 At   0.8 0.25  At −1 
 B  =  0.2 0.75  B 
 t    t −1 
(b) (i)
 A1   0.8 0.25  10000  12000 
 B  =  0.2 0.75  16000  = 14000 
 1     
so 12 000 customers fly Airme one month later.

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(ii)
 A2   0.8 0.25 12000  13100 
 B  = 0.2 0.75 14000  = 12900 
 2     

 A3   0.8 0.25 13100  13705 

 B  = 0.2 0.75 12900  = 12295 
 3     
so 13 705 customers fly Airme three months later.
(c) Use the inverse matrix to go back in time:
1  0.75 −0.25   7300   7500 
=
0.55  −0.2 0.8   5400   5200 

so 7500 and 5200 flew using Airme and Blight, respectively.

6
(a) The determinant is
5 1 −2 1 −2 5
4 +2 −
1 a −4 a −4 1
= 4(5a − 1) + 2( −2a + 4) − 18
= 16a − 14
The inverse matrix is
 5a − 1 2 a − 1 3 
1  2 a − 4 4 a − 4 −2 
16a − 14  
 18 4 16 

7
Matrix is singular when 16 a − 14 = 0  a= .
8
(b)

2 P1 − 7 = −2 P1 + 2 P2 + P3 + 16  4 P1 − 2 P2 − P3 = 23

4 P2 − 4 = 2 P1 − P2 − P3 + 8  − 2 P1 + 5 P2 + P3 = 12

2 P3 − 3 = 4 P1 − P2 − 4 P3 + 4  − 4 P1 + P2 + 6 P3 = 7

 4 −2 −1  P1   23
 −2 5 1   P  = 12 
  2  
 −4 1 6   P3   7 

Use the result of part (a) with a = 6.

 P1   29 11 3   23 10 
 P  = 1  8 20 −2  12  =  5 
 2  82     
 P3  18 4 16   7   7 

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4 P1 − 4t − 5 = 27 − 3P1 + P2  7 P1 − P2 = 32 + 4t

P2 − 3 = 25 + 2 P1 − 3P2  − 2 P1 + 4 P2 = 28

Hence
 7 −1  P1  32 + 4t 
 −2 4   P  =  28 
  2  
 P1  1  4 1  32 + 4t 
P  =   
 2  26  2 7   28 
1 156 + 16t 
=
26  260 + 8t 
 8 
 6 + 13 t 
= 
10 + 4 t 
 13 

4
The taxation multiplier for P2 is .
13
Note: It is, of course, acceptable to divide both sides of the second equation by either 2
or −2 to produce an alternative A and A−1.
8
(a) Subtract C from both sides of the first equation to get:
Y − C = I * +G * + X * −M *
Substitute Yd = Y − T into the second equation to get:

C = a (Y − T ) + b  C = aY − aT + b  − aY + C + aT = b
Subtract tY from both sides of the third equation to get:
−tY + T = 0
In matrix form, these three equations may be written as
 1 − 1 0   Y   I * + G * + X * − M *
 − a 1 a  C  =  b 
    
 −t 0 1   T   0 

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(b) Expand along top row

1 −1 0
1 a −a a
−a 1 a = 1× − (−1)
0 1 −t 1
−t 0 1
= 1 + (−a + at )

= 1 − a (1 − t )
(c) Expand along top row
I * +G * + X * − M * −1 0
b 1 a
0 0 1
1 a b a
= ( I * +G * + X * − M *) − (−1)
0 1 0 1
= I * +G * + X * − M * +b
By Cramer’s rule
I * +G * + X * − M * + b
Y=
1 − a (1 − t )

∂Y 1
(d) =
∂I * 1 − a (1 − t )

Now 0 < 1 − t < 1 and 0 < a < 1  0 < a (1 − t ) < 1

∂Y
The denominator therefore lies between 0 and 1  >1
∂I *
∂Y ( b + I * +G * + X * − M *)(1 − t ) Y (1 − t )
(e) = = >0
∂a (1 − a(1 − t ) ) 2 1 − a (1 − t )

Hence Y increases as a increases.

9
(a) 2
a b  e f  α a + β e α b + β f 
(b) α   +β =
c d  g h  α c + β g α d + β h 

Hence
tr( α A + β B) = α a + β e + α d + β h

= α ( a + d ) + β (e + h)

= α tr(A) + β tr(B)

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(c) (i) False, e.g. using the matrix in part (a)

1  −5 −4  −2
A-1 = − has trace, ≠ 2 −1
27  2 7  27

(ii) True
a b   e f   ae + bg af + bh 
AB =   =
c d   g h   ce + dg cf + dh 

so tr(AB) = ae + bg + cf + dh

e f  a b   ea + fc eb + fd 
BA =  =
g h   c d   ga + hc gb + hd 

so tr(BA) = ea + fc + gb + hd = ae + bg + cf + dh
Hence tr(AB) = tr(BA)

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Linear Programming

Section 8.1 Graphical solution of linear programming problems

Practice Problems

1. The line −x + 3y = 6 passes through (0,2) and (−6,0). Substituting x = 1, y = 4 into the
equation gives

−1 + 3(4) = 11

This is greater than 6, so the test point satisfies the inequality. The corresponding region is
shown in Figure S8.1.

Figure S8.1
2. The non-negativity constraints indicate that we restrict our attention to the positive
quadrant.

The line x + 2y = 10 passes through (0, 5) and (10, 0).

The line 3x + y = 10 passes through (0, 10) and (10/3, 0).

Also the test point (0, 0) satisfies both of the corresponding inequalities, so we are interested
in the region below both lines as shown in Figure S8.2.

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Figure S8.2
3. The answers to parts (a) and (b) are shown in Figure S8.3.

Figure S8.3
(c) Once c becomes greater than 3, the lines no longer intersect the feasible region. The
maximum value of c (that is, the objective function) is therefore 3, which occurs at the
corner (0, 3), when x = 0, y = 3.

4. Step 1

The feasible region is sketched in Figure S8.4.

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Figure S8.4

Step 2

Corners are (0, 0), (1, 0) and (0, 2).

Step 3
Corner Objective function
(0, 0) 0−0=0
(1, 0) 1−0=1
(0, 2) 0 − 2 = −2

Minimum is −2, which occurs at (0, 2).

Step 1

5. The feasible region is sketched in Figure S8.2.

Step 2
Corners are (0, 0), (0, 5), (2, 4) and (10/3, 0).

Step 3
Corner Objective function
(0, 0) 3(0) + 5(0) = 0
(0, 5) 3(0) + 5(5) = 25
(2, 4) 3(2) + 5(4) = 26
(10/3, 0) 3(10/3) + 5(0) = 10

Maximum is 26, which occurs at (2,4).

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Exercise 8.1 (p. 601)

1. 2 × 1 − 3 × 1 = −1 > −5 is true

2 × (−1) − 3 × 1 = −5 > −5 is false

2 × 1 − 3 × (−1) = 5 > −5 is true

2 ×(−1) − 3 × (−1) = 1 > −5 is true

2 × (−2) − 3 × 1 = −7 > −5 is false

2 × 2 − 3 × (−1) = 7 > −5 is true

2 × (−1) − 3 × 2 = −8 > −5 is false

2 × (−2) − 3 × (−1) = −1 > −5 is true

so the points which satisfy the inequality are: (1, 1), (1, −1), (−1, −1), (2, −1), (−2, −1)

2. The feasible region shown in Figure S8.5 shows that there are six points: (0, 1), (1, 1),
(2, 1), (0, 2), (1, 2) and (0, 3).

Figure S8.5

3. The feasible regions for parts (a), (b) and (c) are sketched in Figures S8.6, S8.7 and S8.8,
respectively.

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Figure S8.6

Figure S8.7

Figure S8.8

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4. (a)
Corner Objective Function
(0, 0) 0
(4, 0) 16
(0, 10) 90
(24/11, 70/11) 66

Maximum is 90, which occurs at (0, 10).

(b)
Corner Objective Function
(0, 0) 0
(0, 4) 24
(5, 0) 15
(5/3, 10/3) 25

Maximum is 25, which occurs at (5/3, 10/3). Note that the exact coordinates can be
found by solving the simultaneous equations
2 x + 5 y = 20
x+ y =5
using an algebraic method.

(c)
Corner Objective Function
(1, 0) 1
(3, 0) 3
(5, 1) 6

Minimum is 1, which occurs at (1, 0).

5. Figure S8.9 shows that the problem does not have a finite solution. The lines x + y = c pass
through (c, 0) and (0, c). As c increases, the lines move across the region to the right
without bound.

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Figure S8.9

6. Figure S8.10 shows that the problem does not have a finite solution. The lines 3x − 4y = c
pass through (c/3, 0) and (0, −c/4). As c decreases, the lines move across the region to the
left without bound.

Figure S8.10

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7. Looking at Figure S8.10 we see that

(a) as c increases the lines move across the region to the right and leave the region at the
unique point (2, 0)
(b) the region changes into a simple triangle with corners at (0, 0), (0, 2) and (2, 0). The
other constraint is redundant. As c decreases the lines now leave the region at the
unique point (0, 2)
(c) The new line for the second constraint is now parallel to the family of lines representing
the objective function. As c increases the lines move across the region to the right but
leave the region exactly on top of the new constraint so there are now infinitely many
solutions.

Section 8.2 Applications of linear programming

Practice Problems

1. Let x = weekly output of model TAB1,

y = weekly output of model TAB2.
Maximise 600x + 700y (profit)

subject to
1200 x + 1600 y ≤ 40,000
x + y ≤ 30
x ≥ 0, y ≥ 0

The feasible region is sketched in Figure S8.11.

Figure S8.11
Corner Profit ($)
(0, 0) 0
(0, 25) 17 500
(20, 10) 19 000
(30, 0) 18 000

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The firm should produce 20 computers of model TAB1 and 10 of model TAB2 to achieve a
maximum profit of $19 000.

2. The constraint, x + y ≤ 45 is replaced by x + y ≤ 46.

The simultaneous equations

2 x + y = 70
x + y = 46

have solution (24, 22) so the studio should make 24 bowls and 22 plates giving a new profit
of $5800. The shadow price of sand is therefore, 5800 − 5750 = $50.

3. Maximise 3x + 7y (utility)

subject to
150x + 70y ≤ 2100 (cost)
x ≥ 9, y ≥ 0

The feasible region is sketched in Figure S8.12.

Figure S8.12
Corner Objective function
(9, 0) 27
(14, 0) 42
(9, 75/7) 102

 75 
The maximum value of U occurs at  9,  However, it is impossible to visit the theatre
 7 
75
times. The point in the feasible region with whole-number coordinates which
7

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maximises utility is (9, 10), so we need to buy 9 items of clothing and visit the theatre 10
times per year.

Exercise 8.2 (p. 612)

1. Let x, y denote the number of bikes of models B and C, respectively.

Maximise 180x + 220y

subject to:
6 x + 4 y ≤ 120
3x + 10 y ≤ 180
x≥0
y≥0

Corner Profit ($)

(0, 0) 0
(20, 0) 3600
(0, 18) 3960
(10, 15) 5100

The manufacturer should produce 10 bikes of type B and 15 of type C each month to
achieve a maximum profit of $5100.
2. Let x, y denote the number of cartons of The Caribbean and Mr Fruity, respectively.

Maximise 0.37x + 0.61y

subject to:
1 1
x + y ≤ 300
8 3
3 1
x + y ≤ 1125
4 2
1 1
x + y ≤ 195
8 6
x≥0
y≥0

Corner Profit ($)

(0, 0) 0
(0, 900) 549
(720, 630) 650.70
(1440, 90) 587.70
(1500, 0) 555

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The firm should produce 720 cartons of ‘The Caribbean’ and 630 cartons of ‘Mr Fruity’
each week to give a maximum profit of $650.70.

3. Let x, y denote the number of ounces of beefburgers and chips, respectively.

Minimise 125x + 60y
subject to
1
x+ y≥7
2
4 x + y ≥ 22
x≥0
y≥0

Corner Calories
(0, 22) 1320
(4, 6) 860
(7, 0) 875

The student should order a Quarter Pounder served with 6 oz chips to consume a minimum
of 860 calories. Note that the unbounded feasible region causes no difficulty here, because
the problem is one of minimisation.

4. If x and y denote the number of pasta and pizza meals to be cooked each week then the
problem is to
Maximise 10 x + 8 y (profit)
subject to x + y ≤ 1200 (total number of meals)
3x + 2 y ≤ 3000 (weekly cost)
x ≥ 0, y ≥ 0 (non-negativity)

Corner Objective Function

(0, 0) 0
(0, 1200) 9 600
(600, 600) 10 800
(1000, 0) 10 000

A maximum profit of $10 800 is achieved by making 600 pasta and 600 pizza dishes each
week.

5. If x and y denote the number of goods of type A and B to made each week then the problem
is to
Maximise 0.8 x + 0.7 y (profit)
subject to 6 x + 3 y ≤ 2700 (production cost)
0.2 x + 0.3 y ≤ 120 (transportation cost)
x ≥ 0, y ≥ 0 (non-negativity)

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Corner Objective function

(0,0) 0
(0, 400) 280
(375, 150) 405
(450, 0) 360

A maximum profit of $405 is achieved by making 375 goods of type A and 150 goods of
type B.

6. Let x = number of copies of Microeconomics,

y = number of copies of Macroeconomics.
Maximise 12x + 18y (profit)

subject to
12 x + 15 y ≤ 600 (printing time)
18 x + 9 y ≤ 630 (binding time)
x ≥ 0, y ≥ 0 (non-negativity constraints)

Corner Objective function

(0, 0) 0

(0, 40) 720

(25, 20) 660

(35, 0) 420

The publisher should produce 40 copies of Macroeconomics and no copies of

Microeconomics to achieve a maximum profit of $720.

7 If x and y denote the number of days each week that plants P1 and P2 are operated, then the
problem is to
Minimise 4000 x + 3200 y (weekly cost)
subject to 60 x + 20 y ≥ 120 (output of high-quality beef )
20 x + 20 y ≥ 80 (output of medium-quality beef )
40 x + 120 y ≥ 240 (output of low-quality beef )
x ≤ 7, y ≤ 7 (days in a week)
x ≥ 0, y ≥ 0 (non-negativity)

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Corner Objective function

(7, 0) 28 000
(7, 7) 50 400
(0, 7) 22 400
(0, 6) 19 200
(3, 1) 15 200
(1, 3) 13 600
(6, 0) 24 000

The minimum cost is $13 600 and is obtained by operating plant P1 for 1 day a week
and plant P2 for 3 days a week.

8. (a) 12 000x + 15 000y; maximise

(b) Total number of students is x + y and this must not exceed 9000, so
x + y ≤ 9000
At least ¾ of the students are US citizens, so
3
( x + y ) ≤ x  3x + 3 y ≤ 4 x  x ≥ 3y
4
All non-US students together with a quarter of the US students must be given residential
places, so
1
y+ x ≤ 5000
4
x ≥ 0; y≥0

(c) x and y must be whole numbers

Examination Questions

1 (a) The feasible region is shown in Figure S8.13

Figure S8.13

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Corner x +y x - 3y 1
x+ y
2
(0, 0) 0 0 0
(0, 3) 3 −9 1.5
(5, 0) 5 5 5
(4, 2) 6 -2 5

Maximum is 6 at (4, 2).

(b) (i) Minimum is −9 at (0, 3)

(ii) Maximum is 5 at any point on the line segment joining (5, 0) and (4, 2).

2 The feasible region is sketched in Figure S8.14.

Figure S8.14

Corner 6x + 5y
(0,12) 60
(2,6) 42
(6,2) 46
(10,0) 60

The minimum is 42 at (2, 6).

The maximisation problem has no finite solution since the region is unbounded.

(a) 70 x + 84 y

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(b)

12 x + 18 y ≤ 10800  x + 1.5 y ≤ 900

24 x + 12 y ≤ 19200  2 x + y ≤ 1600

Also we have the non-negativity constraints, x ≥ 0, y ≥ 0 .

(c) The feasible region is sketched in Figure S8.15

Figure S8.15

(d)
Corner 70x + 84y
(0, 0) 0
(0, 600) 50 400
(750, 100) 60 900
(800, 0) 56 000

750 scarves and 100 blouses.

(a) x = number of chocolate cakes made in a week

y = number of fruit cakes made each week

(b) 20 x + 24 y

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(c)

600 x + 300 y ≤ 96000  2 x + y ≤ 320

100 x + 100 y ≤ 20000  x + y ≤ 200

200 x + 300 y ≤ 52000  2 x + 3 y ≤ 520
x ≥ 0, y≥0

(d) The feasible region is sketched in Figure S8.16.

Figure S8.16

Corner 20x + 24y

 1 4160
 0, 173 
 3
(80, 120) 4480
(120, 80) 4320
(160, 0) 3200
(0, 0) 0

(e) 80 chocolate cakes and 120 fruit cakes.

(a) Let x = number of shares in company A

y = number of shares in company B

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Maximise 0.8 x + 0.65 y

subject to

5 x + 10 y ≤ 5000
y ≥ 2x
x ≥ 0,
y≥0

(b) The feasible region is sketched in Figure S8.17.

Figure S8.17

(c)
Corner 0.8x + 0.65y
(0, 0) 0
(0, 500) 325
(200, 400) 420

(d) 200 of A and 400 of B with a profit of $420.

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(a) x = number of kilograms of raspberries

y = number of kilograms of blueberries

Minimise 4.4 x + 3.1 y

subject to

x + y ≥ 200
100 ≤ x ≤ 200
50 ≤ y ≤ 300

(b) The feasible region is sketched in Figure S8.18.

Figure S8.18

(c)
Corner 4.4 x + 3.1y
(100, 100) 750
(150, 50) 815
(200, 50) 1035
(100, 300) 1370
(200, 300) 1810

(d) 100 kg of each

(e) π = 3.6 x + 6.9 y

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Corner 3.6 x + 6.9y

(100, 100) 1050
(150, 50) 885
(200, 50) 1065
(100, 300) 2430
(200, 300) 2790

$2790

(a)

1  7 −3
13  −5 4 

 x  1  7 −3  900  1050 / 13 

 y  = 13  −5 4  1750  =  2500 / 13
      

10 4
i.e. x = 80 , y = 192
13 13

(b) (i) x = number of cartons of Exotic

y = number of cartons of Floridian

Maximise 4.5 x + 4 y

subject to

4 x + 3 y ≤ 900
2 x + y ≤ 400
5 x + 7 y ≤ 1750
x ≥ 0, y ≥ 0

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(ii) The feasible region is sketched in Figure S8.19

Figure S8.19

(iii)

Corner 4.5 x + 4 y
(0, 0) 0
(0, 250) 1000
(200, 0) 900

 10 4  9
 80 ,192  1132
 13 13  13
(150 100) 1075

(iv) Examine the points in the feasible region with whole number coordinates near
 10 4 
the point  80 ,192  .
 13 13 

4.5 x + 4 y
(80, 192) 1128
(81, 192) 1132.50
(79, 193) 1127.50

81 cartons of Exotic and 192 cartons of Floridian.

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Dynamics

Section 9.1 Difference equations

Practice Problems

1. (1) (a) 1, 3, 9, 27; 3t

(b) 7, 21, 63, 189; 7(3t)
(c) A, 3A, 9A, 27A; A(3t)
t
1 1 1 1
(2) (a) 1, , , ;  
2 4 8 2
t
1 1 1 1
(b) 7,7   ,7   ,7   ;7  
 2  4 8  2
t
1 1 1 1
(c) A, A   , A   , A   ; A  
 2  4 8  2

(3) A, Ab, Ab2, Ab3; A(bt).

2. (a) The complementary function is the solution of

1
Yt = − Yt −1
2
so is given by
t
 1
CF = A  − 
 2
For a particular solution we try
Yt = D
Substituting this into
1
Yt = − Yt −1 + 6
2
gives
1
D=− D+6
2
which has solution D = 4, so
PS = 4

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The general solution is

t
 1
Yt = A  −  + 4
 2
The initial condition, Y0 = 0, gives
0=A+4
so A is −4. The solution is
t
 1
Yt = −4  −  + 4
 2

From the staircase diagram shown in Figure S9.1, we see that Yt oscillates about Yt = 4 .
Moreover, as t increases, these oscillations damp down and Yt converges to 4. Oscillatory
convergence can be expected for any solution
Yt = A(b t ) + PS

when −1 < b < 0.

Figure S9.1

(b) The complementary function is the solution of

Yt = −2Yt −1
so is given by

CF = A( −2)t
For a particular solution we try
Yt = D
Substituting this into
Yt = −2Yt −1 + 9
gives

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D = −2 D + 9
which has solution D = 3, so
PS = 3
The general solution is

Yt = A( −2)t + 3

The initial condition, Y0 = 4 gives

4=A+3
so A is 1. The solution is

Yt = ( −2)t + 3

From Figure S9.2, we see that Yt oscillates about 3 and that these oscillations explode with
increasing t. Oscillatory divergence can be expected for any solution
Yt = A(b t ) + PS

when b < −1.

Figure S9.2

3. Yt = Ct + It

= 0.9Yt–1 + 250 + 350

= 0.9Yt–1 + 600

This has solution

Yt = A(0.9)t + 6000

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The initial condition, Y0 = 6500, gives A = 500, so

Yt = 500(0.9)t + 6000

The system is stable because –1 < 0.9 < 1. In fact, Yt converges uniformly to the equilibrium
value, 6000.

4. –2Pt + 22 = Pt–1 – 8
rearranges to give
Pt = –½Pt–1 + 15
so has solution
t
 1
Pt = A  −  + 10
 2

The initial condition, P0 = 11, gives A = 1, so

t
 1
Pt =  −  + 10
 2

From the demand equation,

Qt = –2Pt + 22

we have
  1 t   1
t
Qt = −2  −  + 10  + 22 = −2  −  + 2
 2    2

The system is stable because −1 < −1/2 < 1. In fact, Pt and Qt display oscillatory
convergence and approach the equilibrium values of 2 and 10, respectively as t increases.

5. −2Pt + 80 = 3Pt−1 − 20

rearranges to give
Pt = −1.5Pt−1 + 50

so has solution
Pt = A(−1.5)t + 20

The initial condition, P0 = 8, gives A = −12, so

Pt = −12(−1.5)t + 20

From the demand equation

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Qt = −2 Pt + 80
= −2[−12(−1.5)t + 20] + 80
= 24(−1.5)t + 40

The system is unstable because −1.5 < −1. In fact, Pt and Qt display oscillatory divergence
as t increases.

Exercise 9.1 (p. 639)

1. (a) Y0 = 0, Y1 = 2 = 2 × 1,
Y2 = 4 = 2 × 2, Y3 = 6 = 2 × 3,...
Hence Yt = 2t and displays uniform divergence as shown in Figure S9.3.

Figure S9.3

(b) Y0 = 4, Y1 = 2, Y2 = 4, Y3 = 2,...
So, Yt is 4 when t is even and 2 when t is odd. Hence Yt oscillates with equal
oscillations as shown in Figure S9.4.

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Figure S9.4
(c) Y0 = 3, Y1 = 3, Y2 = 3, Y3 = 3,...
Hence Yt = 3 for all t and remains fixed at this value.

2. (a) The complementary function is given by

t
1
CF = A  
4
and for a particular solution we try,
Yt = D
The difference equation gives
1
D= D+6 D =8
4
t
1
Yt = CF + PS = A   + 8
4
The initial condition,
Y0 = 1  A + 8 = 1  A = −7
Hence
t
1
Yt = −7   + 8
4
The sequence displays uniform convergence to 8.

(b) The complementary function is given by

CF = A( −4)t
and for a particular solution we try,
Yt = D
The difference equation gives
D = −4 D + 5  D = 1
Yt = CF + PS = A(−4)t + 1
The initial condition,
Y0 = 2  A + 1 = 2  A = 1
Hence
Yt = (−4)t + 1
The sequence displays oscillatory divergence.

3. Substituting the second and third equations into the first;

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Yt = 0.7Yt −1 + 400 + 0.1Yt −1 + 100 = 0.8Yt −1 + 500

The complementary function is given by

CF = A(0.8t )
and for a particular solution we try,
Yt = D
The difference equation gives
D = 0.8D + 500  D = 2500
Yt = CF + PS = A(0.8t ) + 1000
The initial condition,
Y0 = 3000  A + 2500 = 3000  A = 500
Hence

Yt = 500(0.8t ) + 2500
The sequence displays uniform convergence to 500 so the system is stable.

4. In equilibrium,
0.4 Pt −1 − 12 = −0.8 Pt + 60
0.8Pt = −0.4 Pt −1 + 72
Pt = −0.5 Pt −1 + 90

This difference equation has general solution

Pt = A( −0.5)t + 60

The initial condition, P0 = 70, gives A = 10, so

Pt = 10(−0.5)t + 60

The system is stable because −1 < −0.5 < 1

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5. C2 = 0.75Y1 + 400

= 0.75(C1 + I1 ) + 400
= 0.75(0.75Y0 + 400 + 200) + 400
= 0.5625Y0 + 850
= 1075

6. Substitute assumptions (1) and (2) into (3) to get

β(Yt – Yt–1) = αYt

which rearranges as
 β 
Yt =   Yt −1
 β −α 

with solution
t
 β 
Yt =   Y0
 β −α 

If α = 0.1 and β = 1.4 then Yt = (1.08)t Y0.

As t increases, Yt diverges uniformly, so unstable.

Section 9.2 Differential equations

Practice Problems

1. (a) The function that differentiates to 4 times itself is y = Ae4t. The condition y(0) = 6 gives
A = 6, so the solution is y = 6e4t.

(b) The function that differentiates to −5 times itself is y = Ae–5t. The condition y(0) = 2
gives A = 2, so the solution is y = 2e–5t.

2. The complementary function is the solution of

dy
= 3y
dt

and is given by
CF = Ae3t

For a particular solution we try a constant function

y(t) = D

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Substituting this into the original equation,

dy
= 3 y − 60
dt

gives
0 = 3D − 60

which has solution D = 20. The general solution is therefore

y(t) = Ae3t + 20

Finally, substituting t = 0 gives

y(0) = A + 20 = 30

and so A is 10. Hence

y(t) = 10e3t + 20

A graph of y against t is sketched in Figure S9.5, which indicates that y(t) rapidly diverges.
We would expect divergence to occur for any solution
y(t) = Aemt + D (A ≠ 0)

when m > 0

Figure S9.5

3. Substituting the expressions for C and I into

dY
= 0.1(C + I − Y )
dt

gives
dY
= 0.1(0.9Y + 100 + 300 − Y )
dt
= −0.01Y + 40

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The complementary function is given by

CF = Ae–0.01t

and for a particular solution we try a constant function

Y(t) = D

Substituting this into the differential equation gives

0 = –0.01D + 40

which has solution D = 4000. The general solution is therefore

Y(t) = Ae–0.01t + 4000

The initial condition, Y(0) = 2000, gives

A + 4000 = 2000

and so A is −2000. Hence

Y(t) = −2000e−0.01t + 4000

This system is stable because the complementary function is a negative exponential and so
Y(t) converges to its equilibrium value of 4000 as t increases.

4. Substituting the expressions for QS and QD into

dP
= 1
3 (QD − QS )
dt

gives
dP
= 1
3 [( − P + 4) − (2 P − 2)] = − P + 2
dt

The complementary function is given by

CF = Ae–t

and for a particular solution we try a constant function

P(t) = D

Substituting this into the differential equation gives

0 = –D + 2

which has solution D = 2. The general solution is therefore

P (t ) = A e − t + 2

The initial condition, P(0) = 1, gives

A+2=1

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and so A is −1. Hence

P (t ) = − e − t + 2

From the supply and demand equations

Qs (t ) = 2 P − 2 = 2(−e−t + 2) − 2 = −2e−t + 2
QD (t ) = − P + 4 = −(−e−t + 2) + 4 = e−t + 2

All three functions involve a negative exponential, so the system is stable.

Exercise 9.2 (p. 654)

1. (a)
y (t ) =  2t dt = t 2 + c

y (0) = 7  c = 7  y (t ) = t 2 + 7

(b) 1
y (t ) =  e−3t dt = − e−3t + c
3
1 1
y (0) = 0  c =  y (t ) = (1 − e −3t )
3 3

(c) 1 3
y (t ) =  t 2 + 3t − 5 dt = t 3 + t 2 − 5t + c
3 2
1 3
y (0) = 1  c = 1  y (t ) = t 3 + t 2 − 5t + 1
3 2

2. The complementary function is the solution of

dy
= −3 y
dt

and is given by

CF = Ae−3t

For a particular solution we try a constant function

y(t) = D

Substituting this into the original equation,

dy
= −3 y + 180
dt

gives
0 = −3D + 180  D = 60

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The general solution is therefore

y (t ) = Ae −3t + 60

(a) y(0) = 40  A = −20  y(t) = −20e−3t + 60; starting at 40, y(t) increases uniformly to
60.

(b) y(0) = 80  A = 20  y(t) = 20e−3t + 60; starting at 80, y(t) decreases uniformly to 60.

(c) y(0) = 60  A = 0  y(t) = 60; y(t) remains at the equilibrium level of 60 for all time.

3. The complementary function is CF = Ae0.002t

For a particular solution, try I(t) = D  0 = 0.002 D + 5  D = −2500

Hence I(t) = Ae0.002t − 2500

The initial condition, I(0) = 60  A = 2560

I (t ) = 2560e0.002t − 2500
I (27) = $202.04

4. If the second and third equations are substituted into the first we get

dY
= 0.5(0.7Y + 500 + 0.2Y + 500 − Y ) = −0.05Y + 500
dt

The complementary function is CF = Ae−0.05t

For a particular solution, try Y(t) = D  0 = −0.05D + 500  D = 10 000

Hence Y(t) = Ae−0.05t + 10 000

The initial condition, Y(0) = 15 000, gives A = 5000

Hence Y(t) = Ae−0.05t + 10 000

The model is stable since Y(t) converges to 10 000 in the long run.

5. If the second and third equations are substituted into the first we get

dY
= 0.3(0.8Y + 300 + 0.7Y + 600 − Y ) = 0.15Y + 270
dt

The complementary function is CF = Ae0.15t

For a particular solution, try Y(t) = D  0 = 0.5D + 2170  D = −1800

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Hence Y(t) = Ae0.15t − 1800

The initial condition, Y(0) = 200  A = 2000

Hence Y(t) = 2000e0.15t − 1800

The model is unstable since Y(t) diverges without bound as t increases.

dP
6. In equilibrium, = 0.5(−2 P + 9 − (3P − 1)) = −2.5 P + 5
dt

The complementary function is CF = Ae−2.5t

For a particular solution try P(t) = D  0 = −2.5D + 5  D = 2

Hence P(t) = Ae−2.5t + 2 and P(0) = 1  A = −1  P(t) = −e−2.5t + 2;

Substituting this into the first equation gives QS(t) = −3e−2.5t + 5;

Substituting this into the second equation gives QD(t) = 2e−2.5t + 5

The system is stable since all three expressions involve negative exponentials

7. (a) N = Ae−kt
−1
A 1 1 1 1 ln 2
(b) Ae− kt =  e− kt =  −kt = ln    t = ln   =
2 2 2
  k 2 k

Examination Questions

1 For the static model:

6 P − 10 = −4 P + 45  10 P = 55  P = 5.5  Q = 23

For the dynamic model:

6 Pt −1 − 10 = −4 Pt + 45
Pt = −1.5Pt −1 + 13.75

The complementary function is A ( −1.5 )

t

For a particular solution, try Pt = D :

D = −1.5 D + 13.75  D = 5.5

The general solution is

Pt = A ( −1.5 ) + 5.5
t

P0 = 8  8 = A + 5.5  A = 2.5

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Hence

Pt = 2.5 ( −1.5 ) + 5.5

t

Oscillatory divergence.

(a) y =  4 x −1/2 + 6 x 2 dx = 8 x1/2 + 2 x3 + c

y (4) = 3  8 × 41/2 + 2 × 43 + c = 3  c = −141

Hence

y = 8 x + 2 x3 − 141
(b)

N = Ae0.015t
N (0) = A  A = 5,000,000
Hence

N = 5,000,000e0.015t
If the population doubles
ln 2
e0.015t = 2  0.015t = ln 2 t = = 46.2
0.015

3 (a) G = Ae−0.05t

G (0) = 500  A = 500  G (t ) = 500e −0.05t

(b) (i) G (6) = 370

(ii)

500 e−0.05t = 125

e −0.05t = 0.25
−0.05t = ln 0.25
ln 0.25
t=− = 27.7
−0.05

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4
(a)
C1 = 0.8Y0 + 200 = 4200
Y1 = C1 + I1 = 5200
C2 = 0.8Y1 + 200 = 4360
Y2 = C2 + I 2 = 5360
(b)
Yt = 0.8Yt −1 + 200 + 1000
= 0.8Yt −1 + 1200

(c) CF = A(0.8)t

For a particular solution, try Yt = D :

D = 0.8D + 1200  0.2 D = 1200  D = 6000

Hence

Yt = A(0.8)t + 6000
The initial condition gives

Y0 = 5000  5000 = A + 6000  A = −1000

Hence

Yt = −1000 ( 0.8 ) + 6000

t

(d) Check: Y2 = −1000 × 0.82 + 6000 = 5360

(e)
Ct = Yt − I t = −1000(0.8)t + 5000
Ct > 4750  − 1000 × 0.8t + 5000 > 4750
 1000 × 0.8t < 250
 0.8t < 0.25
 t ln 0.8 < ln 0.25
ln 0.25
 t> = 6.212....
ln 0.8
[division by a negative number reverses the sense of the inequality]
Hence t = 7

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5 (a)
dY
= 0.6(0.8Y + 600 + 800 − Y )
dt
= −0.12Y + 840

CF = Ae−0.12t
For a particular solution, try Y (t ) = D :

0 = −0.12 D + 840  D = 7000

Hence
Y (t ) = Ae −0.12t + 7000

The initial condition gives

Y (0) = 2000  A = −5000  Y (t ) = 7000 − 5000e−0.12t

This is stable since e−0.12t → 0 as t → ∞ .

(b) A graph of Y against t is sketched in Figure S9.6.

Figure S9.6

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(c) Equilibrium value is 7000, so

7000 − 5000e−0.12t = 6300

5000e−0.12t = 700

e −0.12t = 0.14
− 0.12t = ln 0.14
t = 16.4

( )
(d) C (t ) = 0.8 7000 − 5000e −0.12t + 600 = 6200 − 4000e−0.12t

2 Pt + aPt −1 − 20 = 100 − 8Pt

 10 Pt = 120 − aPt −1
 Pt = 12 − 0.1aPt −1

CF = A ( −0.1a )
t

For a particular solution, try Pt = D :

12
D = 12 − 0.1aD  (1 + 0.1a ) D = 12  D=
1 + 0.1a
Hence
12
Pt = A ( −0.1a ) +
t
1 + 0.1a
The initial condition gives
12 10 + a − 12 a−2
P0 = A + = 10  A= =
1 + 0.1a 1 + 0.1a 1 + 0.1a
The solution is
 a−2  12
 ( −0.1a ) +
t
Pt = 
 1 + 0.1a  1 + 0.1a
The solution displays oscillatory convergence when 0 < a < 10 .
a−2 12
P1 = × (−0.1a ) + = 9.5
1 + 0.1a 1 + 0.1a
 (a − 2)(−0.1a ) + 12 = 9.5(1 + 0.1a )
 −0.1a 2 − 0.75a + 2.5 = 0
 a 2 + 7.5a − 25 = 0
−7.5 ± 156.25
a=
2
 a = 2.5 (a > 0)

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 Excel

Spreadsheets provide a convenient way of solving a range of problems in economics and

business. We present a collection of examples linked to the material in specific sections of the
textbook. Each of these is followed by a practice problem for you to try. Answers to these are
provided at the end of this section.

There is an introductory section for those who need a quick reminder of the basics of Excel.
You may prefer to skip this and move straight on to the worked example.

Getting Started with Excel

A spreadsheet is simply an array of boxes, or cells, into which tables of data can be inserted.
This can consist of normal text, numerical data or a formula, which instructs the spreadsheet
package to perform a calculation. The joy about getting the spreadsheet to perform the
calculation is that it not only saves us some effort, but also detects any subsequent changes that
we make to the table, and recalculates its values automatically without waiting to be asked.

To get the most out of this section, it is advisable to work through it on your own computer, as
there is no substitute for having a go. When you enter the Excel package, either by double-
clicking the icon on your desktop, or by selecting it from the list of programs, a blank worksheet
will be displayed, as shown in Figure E.1

Each cell is identified uniquely by its column and row label. The current cell is where the cursor
is positioned. In Figure E.1, the cursor is in the top left-hand corner: the cell is highlighted, and
it can be identified as cell A1.

Figure E.1

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Example

A shop audits its toy department to see how much profit it makes from sales of its five best-
selling lines. Table E.1 shows the wholesale price (which is the cost to the shop of buying the
toy from the manufacturer), the retail price (which is the price that customers pay for each
toy) and sales (which is the total number of toys of each type that are sold during the year).

(a) Enter the information in this table into a blank spreadsheet, with the title, Annual Profit, in
the first row.

(b) In a fifth column, calculate the annual profit generated by each toy and hence find the total
profit made from all five toys.

(c) Format and print the completed spreadsheet.

Table E.1
Item Wholesale price ($) Retail price ($) Sales
Badminton racket 28 58 236
Doll 36 85 785
Silly putty 1 2 472
Paddling pool 56 220 208
Building bricks 8 26 582

Solution

(a) Entering the data

You can move between the different cells on the spreadsheet using the tab keys or arrow keys,
or by positioning the cursor in the required cell and clicking the left mouse button. Have a go
at this on your blank sheet to get the feel of it before we begin to enter the data.

To give the spreadsheet a title, we position the cursor in cell A1, and type Annual Profit.
Don’t worry that the text has run into the next cell. This does not matter, as we are not going
to put anything more in this row.

Leaving the next row blank, we type in the column headings for the spreadsheet in row 3. To
do this, we position the cursor in cell A3 and type Item; we then move the cursor to cell B3,
and type Wholesale price ($). At this stage, the spreadsheet looks like:

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This text has also run into the next cell. Although it looks as if we are positioned in C3 now,
we are actually still in B3, as shown by the highlighting. The cursor can be positioned in cell
C3 by using the tab, or right arrow key to give:

Notice that the next cell is highlighted, even though it still contains our previous typing. We
can ignore this, and enter Retail price ($). As soon as you start entering this, the previous
typing disappears. It is actually still there, but hidden from view as its own cell is not large
enough to show all of its contents:

There is no need to worry about the hidden typing. We will sort this out when we format our
spreadsheet in part (c). Finally, we position the cursor in cell D3 and type in the heading
Sales.

We can now enter the names of the five items in cells A4 to A8, together with the prices and
sales in columns B, C and D to create the spreadsheet:

If you subsequently return to modify the contents of any particular cell, you will find that
when you start typing, the original contents of the cell are deleted, and replaced. If you simply
want to amend, rather than replace the text, highlight the relevant cell, and then position the
cursor at the required position in the original text, which is displayed on the edit bar. You can
then edit the text as normal.

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(b) Calculating profit

In order to create a fifth column containing the profits, we first type the heading Profit in cell
E3. Excel is capable of performing calculations and entering the results in particular cells.
This is achieved by typing mathematical formulae into these cells. In this case, we need to
enter an appropriate formula for profit in cells E4 to E8.

The profit made on each item is the difference between the wholesale price and retail price.
For example, the shop buys a badminton racket from the manufacturer for $28 and sells it to
the customers at $58. The profit made on the sale of a single racket is therefore

58 − 28 = 30

During the year, the shop sells 236 badminton rackets, so the annual profit is

30 × 236 = 7080

In other words, the profit on the sale of badminton rackets is worked out from

(58 − 28) × 236

Looking carefully at the spreadsheet, notice that the numbers 58, 28 and 236 are contained in
cells C4, B4 and D4, respectively. Hence annual profit made from the sale of badminton
rackets is given by the formula (C4−B4)*D4

We would like the result of this calculation to appear underneath the heading Profit, in column
5, so in cell E4 we type =(C4 – B4)*D4

If you move the cursor down to cell E5, you will notice that the formula has disappeared, and
the answer, 7080, has appeared in its place. To get back to the formula, click on cell E4, and
the formula is displayed in the formula bar, where it can be edited if necessary.

We would like a similar formula to be entered into every cell in column E, to work out the
profit generated by each type of toy. To avoid having to re-enter a similar formula for every
cell, it is possible to replicate the one we just put into E4 down the whole column. The
spreadsheet will automatically change the cell identities as we go.

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To do this, position the cursor in E4, and move the mouse very carefully towards the bottom
right-hand corner of the cell until the cursor changes from a to a +. Hold down the left
mouse button and drag the cell down the column to E8. When the mouse button is released,
the values of the profit will appear in the relevant cells.

To put the total profit into cell E9, we need to sum up cells E4 to E8. This can be done by
typing = SUM(E4:E8) into E9. Pressing the Enter key will then display the answer, 90 605, in
this position.

The spreadsheet is displayed in Figure E.2.

Figure E.2

(c) Formatting and printing the spreadsheet

Before we can print the spreadsheet we need to format it, to make it look more attractive to
read. In particular, we must alter the column widths to reveal the partially hidden headings. If
necessary, we can also insert or delete rows and columns. Perhaps the most useful function is
the Undo, which reverses the previous action. If you do something wrong and want to go back
a stage, simply click on the  button, which is located towards the middle of the toolbar.

Here is a list of four useful activities that we can easily perform to tidy up the spreadsheet.

Adjusting the column widths to fit the data

Excel can automatically adjust the width of each column to reveal the hidden typing. You can
either select an individual column by clicking on its label, or select all the columns at once by
clicking the Select All button in the top left-hand corner (see Figure E.1 earlier). From the
menu bar we then select Format: Column: Autofit Selection. The text that was obscured,
because it was too long to fit into the cells, will now be displayed.

Shading and borders

Although the spreadsheet appears to have gridlines around each of the cells, these will not
appear on the final printout unless we explicitly instruct Excel to do so. This can be done by

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highlighting the cells A3 to E8 by first clicking on cell A3, and then with the left mouse button
held down, drag the cursor across the table until all the cells are highlighted. We then release the
mouse button, and select Format: Cells via the menu bar. Click on the Border tab, choose a
style, and click on the boxes so that each cell is surrounded on all four sides by gridlines.

Sorting data into alphabetical order

It is sometimes desirable to list items in alphabetical order. To do this, highlight cells A4 to

E8, by clicking and dragging, and then click the Sort button on the toolbar.

Figure E.3

Printing the spreadsheet

Before printing a spreadsheet, it is a good idea to select File: Print Preview from the menu
bar to give you some idea of what it will look like. To change the orientation of the paper,
select File: Page Setup. Additional features can be introduced such as headers, footers,
column headings repeated at the top of every page, and so on. You might like to experiment
with some of these to discover their effect. When you are happy, either click on the Print
button, or select File: Print from the menu bar.

The final printout is shown in Figure E.3. As you can see, we have chosen to type in the text
Total: in cell D9 and have also put gridlines around cells D9 and E9, for clarity.

Practice Problem

1. An economics examination paper is in two sections. Section A is multiple choice and is

marked out of 40, whereas Section B consists of essay questions and is marked out of 60.
Table E.2 shows the marks awarded in each section to six candidates.

Table E.2
Candidate Section A mark Section B mark
Fofaria 20 17
Bull 38 12
Eoin 34 38
Arefin 40 52
Cantor 29 34
Devaux 30 49

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(a) Enter the information in this table into a blank spreadsheet, with the title, Economics
Examination Marks, in the first row.

(b) In the fourth column, calculate the total mark awarded to each candidate.

(c) Use Excel to calculate the average examination mark of these six candidates and give it an
appropriate heading.

(d) Format and print the spreadsheet, putting the names of the candidates in alphabetical order.

(e) The second candidate, Bull, asks for a re-mark. Although the Section A mark is correct, the
Section B mark is raised to 42. Produce a new spreadsheet based on the correct results.

Section 1.3 Graphs of linear equations

Example

(a) Use Excel to draw the graphs of

y = 3x + 2
y = −2 x + 2
y = 12 x + 2

on the same set of axes, taking values of x between −3 and 3.

(b) On another set of axes, use Excel to draw the graphs of

y = 2x
y = 2x − 3
y = 2x + 1

for −3 ≤ x ≤ 3.

(c) What do you notice about the two sets of graphs?

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Solution

(a) To draw graphs with Excel, we first have to set up a table of values. By giving a title to
each column, we will be able to label the graphs at a later stage, so we type the headings
x, y = 3x + 2, y = −2x + 2 and y = x/2 + 2 in cells A1, B1, C1 and D1, respectively.

The x values are now typed into the first column, as shown in the diagram below. In the next
three columns, we generate the corresponding values for y by entering formulae for each of
the three lines.

The formula for the first graph goes in cell B2. As the x value is in cell A2, we type 3* A2 + 2

By clicking and dragging this formula down the second column (up to, and including, cell
B8), the values of y are calculated.

Similarly, the formula for calculating the y co-ordinates for the second line is entered into cell
C2 as

= −2* A2 + 2

and the formula for the third line is entered into cell D2 as

= A2 / 2 + 2

To plot these points on a graph, we highlight all the cells in the table, including the column
titles, and click on the Chart Wizard button on the toolbar. The Chart Wizard box will appear:

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From the list of chart types, we choose XY (Scatter), and then choose an appropriate sub-
type. As we are plotting straight lines, we have selected Scatter with data points connected
by lines without markers.

Click Next to see a preview of the graph, with the option to change the range of the cells that
have been plotted. If the graph looks wrong, it is usually because the wrong cells have been
highlighted before going into Chart Wizard, so go back and check this, rather than altering the
range.

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The third screen allows you to label your graph, and alter its gridlines. You should always
label your axes, but you could, for example, delete the Legend if you feel it is inappropriate.
Adding gridlines can make it easier to read values in the graph.

Finally, we click Next and Finish, to transfer the graph on to the spreadsheet, as shown in
Figure E.4. Notice that Excel provides a key showing which line is which.

Figure E.4

b) Following the same procedure for the three lines

y = 2x
y = 2x − 3
y = 2x + 1

produces a graph as shown in Figure E.5

Figure E.5

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(c) Notice that in part (a), all of the graphs cut the y axis at the point (0, 2). In part (b), the
graphs are parallel, which means that they have the same gradient.

This illustrates the fact that every straight line has an equation of the form

y = ax + b

where a is the gradient, and b is the intercept on the y axis.

In (a), the value of b in each equation is equal to 2, so all of the lines cut the y axis at this
point.

In (b), the value of a in each equation is equal to 2, so all of the lines have the same gradient
and are parallel.

It is very useful to be able to recognise these properties from the equations, as it means we
have a fairly good idea of what our graph should look like even before we draw it.

Section 1.5 Supply and demand analysis

Example

The demand and supply functions of a good are given by

P = − 1 2 QD + 20
P = 1 3 (QS + 10)

The government imposes a fixed tax, $α, on each good. Determine the equilibrium price and
quantity in the case when

(a) α = 0

(b) α = 5

(c) α = 10

(d) α = 2.50

In each case, calculate the tax paid by the consumer and comment on these
values.
Solution
(a) In the case when α = 0, there is no tax and the demand and supply functions are as given
above. In equilibrium, QD = QS, so by writing this value as Q, we can find the equilibrium
position by solving the simultaneous equations

P = − 1 2 Q + 20
P = 1 3 (Q + 10)

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In Excel, we first set up a table of values for Q. In Figure E.6, the label Q has been put in cell
A1, and values from 0 to 40 (going up in steps of 10) occupy cells A2 to A6. At this stage, we
need to enter a formula for calculating the corresponding values of P using each of the
equations in turn. As the first value of Q is in cell A2, we type

= − A2 / 2 + 20

in cell B2 for the demand function, and

= 1 / 3* (A2 + 10)

in cell C2 for the supply function. By clicking and dragging down the columns, Excel will
generate corresponding values for demand and supply.

Figure E.6

You will find that the values in the third column look very unfriendly to start with, as they
have lots of figures after the decimal point. However, these can be removed by highlighting
these numbers, and clicking on the Decrease Decimal icon, which can be found on the toolbar:

This has the effect of reducing the number of decimal places by rounding. Each time you click
the icon, another decimal place is removed. As we are dealing with money, we round it to 2
decimal places.

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Finally, we highlight the contents of the first three columns and use Chart Wizard to create a
diagram showing the demand and supply functions, as shown in Figure E.6.

From the graph, it can be seen that the lines cross when Q = 20 and P = 10, which gives us the
equilibrium position. This can also be seen by looking at the fourth row of the table.

(b) If the government imposes a tax of $5 per item, the company producing the goods now
receives $5 less per item sold. The supply equation now becomes
P−5= 1
3 (QS + 10)

so that
P= 1
3 (QS + 10) + 5(add 5 to both sides)

The demand function remains unchanged. We can extend our spreadsheet from part (a) to
include an extra column for this amended supply function, and we can then plot this extra line
on the same graph. This can be done by typing

= 1 / 3* (A2 + 10) + 5

in cell D2, and dragging down to D6.

It is possible to alter the type of line drawn by the Chart Wizard by clicking on the line you
wish to change. This should highlight the points that were plotted. Select Format from the
menu bar, and then click on Data Series, Patterns and finally scroll through the styles of lines
available and select the one required. Figure E.7 shows the new spreadsheet.

Notice that the effect of the tax is to move the supply line up by 5, and the position of
equilibrium has moved to (14, 13). This means that the price has increased from $10 to $13,
with the consumer paying an additional $3 in tax. The remaining $2 is therefore paid by the
company.

(c) The calculations in (b) can obviously be repeated by editing the formula for the supply
equation in cell D2 to
= 1 / 3* (A2 + 10) + 10

The equilibrium quantity and price are now

Q = 8 and P = 16

so the consumer pays $6 of the tax.

(d) Changing D2 to
= 1 / 3* (A2 + 10) + 2.5

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Figure E7

gives equilibrium values

Q = 17 and P = 11.5

so the consumer pays $1.50 of the tax.

Notice that, as expected, the consumer pays increasing amounts of tax as the value of α
increases. More significantly, notice that the fraction of the tax paid by the consumer is the same
in each case. For example, in part (c), the consumer pays $6 of the $10 tax, which is 3/5 of the
tax. You might like to check that in cases (b) and (d), the tax is also split in the ratio of 3:2.

Practice Problems

1. The demand function of a good is given by

Q = 100 − 2P + Y − 3PA

where Q, P, Y and PA denote quantity, price, income and price of an alternative good,
respectively. For each of the following cases, tabulate values of Q, when P is 0, 20, 40, 60.
Hence sketch all three demand curves on the same diagram.

(a) Y = 20, PA = 10

(b) Y = 50, PA = 10

(c) Y = 20, PA = 16

Is the good inferior, superior or normal?

Is the alternative good substitutable or complementary?

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Give reasons for your answers.

2. The supply and demand functions of a good are given by

P = −QD + 240
P = 60 + 2QS

where P, QD and QS denote price, quantity demanded and quantity supplied, respectively.
Sketch graphs of both functions on the same diagram, on the range 0 ≤ Q ≤ 80, and hence
find the equilibrium price. The government now imposes a fixed tax, $60, on each good.
Draw the new supply equation on the same diagram and hence find the new equilibrium
price. What fraction of the $60 tax is paid by the consumer?

Consider replacing the demand function by the more general equation

P = −kQD + 240
By repeating the calculations above, find the fraction of the tax paid by the consumer for the
case when k is

(a) 2 (b) 3 (c) 4

State the connection between this fraction and the value of k. Use this connection to predict
how much tax is paid by the consumer when k = 6.

Section 1.7 National income determination

Example

(a) Given the consumption function

C = 800 + 0.9Y

and the investment function

I = 8000 − 800r

find an equation for the IS schedule.

(b) Given the money supply

M S = 28,500

and the demand for money

M D = 0.75Y − 1500r

find an equation for the LM schedule.

(c) By plotting the IS–LM diagram, find the equilibrium values of national income, Y, and
interest rate, r. If the autonomous investment increases by 1000, what effect will this have
on the equilibrium position?

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Solution

(a) The IS schedule is given by an equation relating national income, Y, and interest rate, r.

In equilibrium, Y = C + I. By substituting the equations given in (a) into this equilibrium

equation, we eliminate C and I, giving

Y = 800 + 0.9Y + 8000 − 800r

0.1Y = 8800 − 800r (subtract 0.9Y from both sides)
Y = 88,000 − 8000r (divide both sides by 0.1)

(b) The LM schedule is also given by an equation relating Y and r, but this time it is derived
from the equilibrium of the money markets: that is, when MS = MD. Substituting the
equations given in (b) into this equilibrium equation gives

0.75 − 1500r = 28,500

0.75Y = 28,500 + 1500r (add 1500r to both sides)
y = 38,000 + 2000r (divide both sides by 0.75)

(c) To find the equilibrium position, we plot these two lines on a graph using Excel in the
usual way. We need to choose values for r and then work out corresponding values for Y.
It is most likely that r will lie somewhere between 0 and 10, so values of r are tabulated
between 0 and 10, going up in steps of 2. We type the formula

= 88,000 − 8000* A2

in cell B2 and type

= 38,000 + 2000* A2

in cell C2. The values of Y are then generated by clicking and dragging down the columns.
Figure E.8 shows the completed Excel screen.

Placing the cursor at the point of intersection tells us that the lines cross when

r = 5% and Y = 48,000

If the autonomous investment increases by 1000, the equation for the IS schedule will change,
as the equation for investment now becomes

I = 9000 − 800r

giving

Y = 98,000 − 8000r

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The new IS schedule can be plotted on the same graph by adding a column of figures into the
spreadsheet, as shown in Figure E.9.

Notice that the point of intersection has shifted towards upwards and to the right. The
equilibrium position has now changed, resulting in a rise in interest rates to 6% and an
increase in income to 50 000.

Figure E.8

Figure E.9

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Practice Problems

1. Consider the consumption function

C = 120 + 0.8Yd
where Yd is disposable income.
Write down expressions for C, in terms of national income, Y, when there is

(a) no tax

(b) a lump-sum tax of $100

(c) a proportional tax in which the proportion is 0.25.

Sketch all three functions on the same diagram, over the range 0 ≤ Y ≤ 800, and briefly
describe any differences or similarities between them.

Sketch the 45 degree line, C = Y, on the same diagram, and hence estimate equilibrium
levels of national income in each case.

2. If the consumption function is

C = 0.9Y + 20

and planned investment I = 10, write down an expression for the aggregate expenditure,
C + I, in terms of Y.

Draw graphs of aggregate expenditure, and the 45 degree line, on the same diagram, over
the range 0 ≤ Y ≤ 500. Deduce the equilibrium level of national income.

Describe what happens to the aggregate expenditure line in the case when

(a) the marginal propensity to consume falls to 0.8

(b) planned investment rises to 15 and find the new equilibrium income in each case.

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Section 2.2 Revenue, cost and profit

Example

A firm’s profit function is given by

π = −Q 3 + 21Q − 18

Draw a graph of π against Q, over the range 0 ≤ Q ≤ 5, and hence estimate

(a) the interval in which π ≥ 0

(b) the maximum profit

Solution

Figure E.10 shows the tabulated values of Q which have been entered in cells A4 to A8. In the
second column, cell B4 contains the formula to work out the corresponding values of π:

= −(A4) ^ 3 + 21* A4 − 18

This has been replicated down the profit column by clicking and dragging in the usual way.

It can be seen that the maximum profit occurs somewhere between 2 and 4, so it makes sense
to add a few extra entries in here so that the graph can be plotted more accurately in this
region.
Initially, inserting extra rows for Q = 2.5 and 3.5 shows that the maximum profit occurs
between 2.5 and 3. Inserting a few more rows enables us to pinpoint the maximum profit value
more accurately, as shown in Figure E.11. At this stage, we can be confident that the
maximum profit occurs between Q = 2.6 and Q = 2.7. The graph of the firm’s profit function
based on this table of values can now be drawn using the Chart Wizard, as shown in Figure
E.11.

This diagram shows that

(a) the firm makes a profit for values of Q between 0.9 and 4.1

(b) the maximum profit is about 19.

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Figure E.10

Figure E.11

Practice Problems

1. Tabulate values of the total cost function

TC = 0.01Q 3 + 0.5Q 2 + Q + 1000

when Q is 0, 2, 4, . . . , 30 and hence plot a graph of this function on the range 0 ≤ Q ≤ 30.
Use this graph to estimate the value of Q for which TC = 1400.

2. A firm’s total revenue and total cost functions are given by

TR = −0.5Q 2 + 24Q
TC = Q Q + 100

Sketch these graphs on the same diagram on the range 0 ≤ Q ≤ 48. Hence estimate the
values of Q for which the firm

(a) break even (b) maximises profit.

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Section 3.1 Percentages

Example

Table E.3 shows the unit costs of labour, energy, communications and raw materials during a
3-year period. In year 0, a firm used 70 units of labour, 25 units of energy, 10 units of
communication and 140 units of raw materials. Taking year 0 as the base year, calculate an
appropriate index number for years 1 and 2.

Table E.3
Year 0 Year 1 Year 2
Labour 16 23 28
Energy 7 10 9
Communications 12 14 10
Raw materials 5 9 12

Solution

We are told to take year 0 as the base year, so the index number for year 0 is 100. One way of
calculating the index number for subsequent years would be to work out the totals of each
column in Table E.3 and find the associated scale factors of these. On this basis, the index
number for year 1 would be calculated as

23 + 10 + 14 + 9
× 100 = 140
16 + 7 + 12 + 5

However, this fails to take into account the fact, for example, that we use twice as many units
of raw materials than labour. It is important that each item is weighted according to how many
units of each type are used. To do this, all we have to do is to multiply each of the unit costs
by the associated quantities. The appropriate index number is then worked out as

23 × 70 + 10 × 25 + 14 × 10 + 9 × 140
× 100 = 154.1
16 × 70 + 7 × 25 + 12 × 10 + 5 × 140

The fact that this number is greater than before is to be expected because the unit price of raw
materials has nearly doubled, and the firm uses a greater proportion of these in its total costs.
Index numbers that are weighted according to the quantity consumed in the base year are
called Laspeyre indices. Spreadsheets provide an easy way of presenting the calculations. For
each year, we simply include an extra column in the table, for the products PnQ0 where Q0
denotes the quantities used in the base year, and Pn denotes the unit prices in year n. The
Laspeyre index for year n is then worked out as

total of column PnQ0

× 100
total of column P0Q0

Figure E.12 shows the completed spreadsheet. The Laspeyre indices for years 1 and 2 are seen
to be 154.1 and 187.5, respectively. Notice that this index has increased rapidly over this
period, in spite of the fact that communication and energy costs have hardly changed. This is

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because expenditure is dominated by labour and raw material costs, which have both increased
substantially during this time.

Figure E.12

Practice Problems

1. Table E.4 shows the annual salaries (in thousands of dollars) of four categories of employee
during a 3-year period. In year 0, the firm employed 24, 250, 109 and 7 people of types A,
B, C and D, respectively. Calculate the Laspeyre index of the total wage bill in years 1 and
2 taking year 0 as the base year. Comment briefly on these values.

Table E.4

Year 0 Year 1 Year 2

Type A 12 13 13
Type B 26 28 29
Type C 56 56 64
Type D 240 340 560

2. In the Laspeyre index, the quantities used for the weights are those of the base year. If these
are replaced by quantities for the current year, then the index is called the Paasche index. In
Problem 1, suppose that the number of employees of types A, B, C and D in year 1 are 30,
240, 115 and 8, respectively. For year 2, the corresponding figures are 28, 220, 125 and 20.
By adding two extra columns for the products P1Q1 and P2Q2 to the spreadsheet of Problem
1, calculate the Paasche index for years 1 and 2. Compare with the Laspeyre index
calculated in Problem 1. State one advantage and one disadvantage of using the Laspeyre
and Paasche methods for the calculation of combined index numbers.

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Section 3.2 Compound interest

Example

A principal of $10 000 is invested at one of the following banks:

(a) Bank A offers 4.75% interest, compounded annually.

(b) Bank B offers 4.70% interest, compounded semi-annually.

(c) Bank C offers 4.65% interest, compounded quarterly.

(d) Bank D offers 4.6% interest, compounded continuously.

For each bank, tabulate the value of the investment at the end of every year, for the next 10
years. Which of these banks would you recommend?

Solution

In Figure E.13, the numbers 0 to 10 have been entered in the first column, together with
appropriate headings. The initial investment is the same for each bank, so the value 10 000 is
typed into cells B4 to E4.

For banks A, B and C, the future values can be worked out using the formula
n
 r 
10 000 1 + 
 100 

for appropriate values of r and n.

Figure E.13

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(a) In Bank A, the interest rate is 4.75% compounded annually, so at the end of year 1, the
investment is

10,000(1 + 0.0475)1

The reason for writing it to the power of 1 is that when we enter it into Excel, and copy down
the first column, the power will automatically increase in accordance with the changing years.
We type

=10 000*(1+0.0475)^A5

in cell B5, and then click and drag down to cell B14.

(b) Bank B offers a return of 4.7% compounded semi-annually, so that at the end of year 1,
the investment is

10,000(1 + 0.047 / 2) 2×1

In general, after t years, the investment is

10,000(1 + 0.0475 / 2) 2×t

so in Excel, we type = 10 000*(1+0.0475/2)^(2*A5) in cell C5, and copy down this column in
the usual way.

(c) B a n k C o f f e r s a r e t u r n o f 4 . 6 5 % c o m p o u n d e d q u a r t e r l y , s o w e t y p e
= 10 000*(1+0.0465/4)^(4*A5) in cell D5, and copy down the column.

(d) Bank D offers a return of 4.6% compounded continuously, so after t years the future value
is given by

10,0004.6t /100 = 10,000e0.046t

The corresponding values are calculated in column E by typing = 10 000*EXP(0.046*A5) in

cell E5 and copying down the column.

The completed spreadsheet is shown in Figure E.14. The amounts have been rounded to 2
decimal places by highlighting cells B5 through to E14, and using the Decrease Decimal icon
on the toolbar.

Figure E14 shows that there is very little to choose between these banks and that, in practice,
other issues (such as any conditions or penalties attached to future withdrawals from the
account) may well influence our recommendation. However, from a purely monetary point of
view, we should advise the investor to put the money into Bank B, as this offers the greatest
return. Notice that Bank B is not the one with the highest rate of interest. This example
highlights the importance of taking into account the frequency of compounding, as well as the
actual rate of interest.

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Figure E.4

Practice Problems

1. A department store charges interest on any outstanding debt at the end of each month. It
decides to produce a simple table of APRs for its customers, based on a variety of monthly
rates. Use a spreadsheet to produce such a table for monthly interest rates of 0.5%, 0.6%,
0.7%, . . . , 3%. Plot a graph of APR against monthly rate and comment briefly on its basic
shape.

2. The sum of $100 is invested at 12% interest for 20 years. Tabulate the value of the
investment at the end of each year, if the interest is compounded

(a) annually (b) quarterly (c) monthly (d) continuously

Draw graphs of these values on the same diagram. Comment briefly on any similarities and
differences between these graphs.

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Section 3.4 Investment appraisal

Example

A proposed investment project costs $11 600 today. The expected revenue flow (in thousands
of dollars) for the next 4 years is

Year 1 2 3 4
Revenue flow 2 3.7 3.8 4.5

Use a graphical method to determine the IRR to the nearest whole number. By tabulating
further values, estimate the IRR correct to 1 decimal place.

Solution

Before we tackle this particular example, it will be useful to review the definition of the
internal rate of return. So far, we have taken it to be the rate of interest at which the total
present values of the revenue stream equal the initial outlay. Of course, this is the same as
saying that the difference between present values and the initial outlay is zero. In other words,
the internal rate of return is the interest rate which gives a net present value (NPV) of zero.
We shall exploit this fact by plotting a graph of net present values against interest rate (r). The
IRR is the value of r at which the graph crosses the horizontal axis.

We begin by typing suitable headings together with values of the years and revenue flows for
this project into a spreadsheet, as shown in Figure E15.

Notice that the initial investment in the project has been input as a negative number, since this
represents an outflow of funds. The present value of this is also −11 600, since this occurs in
year 0. The columns represent interest rates of 2%, 4%, . . . , 10%. The values in the body of
the table will be the present values of the revenue flows, calculated at each of these rates of
interest. For example, the entry in cell C7 will be the present value of the $2000 received at
the end of year 1 when the interest rate is 2%. From the formula
−t
 r 
P = S 1 + 
 100 
this is
−1
 2 
2000 1 + 
 100 

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Figure E.15

Notice that the numbers 2000 and 1 appear in cells B7 and A7, respectively, so the formula
that we need for cell C7 is

=B7*(1.02)^(−A7)

By clicking and dragging this formula down to C10, we complete the present values for 2%
interest rate.

For the next column, we simply change the scale factor 1.02 to 1.04, so we type
= B7*(1.04)^(−A7)

in cell D7 and repeat the process. We can obviously continue in this way along the rest of
the table. Finally, we calculate the net present values by summing the entries for the
present values in each column. For example, to find the NPV for 2% interest rate we type
= SUM(C6:C10) in cell C11. (A quick way of doing this is just to highlight cells C6 to C11
and click on the ∑ icon on the toolbar. This is the Greek letter sigma, which mathematicians
use as an abbreviation for SUM. Excel will then sum these five cells and put the answer in
C11.) Figure E.16 shows the completed spreadsheet. The values have been rounded to 2
decimal places using the Decrease Decimal button on the toolbar.

A graph of NPV against r is shown in Figure E.16. This is plotted by highlighting the cells in
rows 5 and 11, and using the Chart Wizard. (Click and drag from C5 to G5 then, holding
down the Ctrl key, click and drag from C11 to G11.) The graph shows that to the nearest
whole number, the internal rate of return is 7%.

To obtain a more accurate estimate of IRR, we return to the spreadsheet and add more
columns for interest rates near 7%. By looking at the bottom row of the table in Figure E.17
we see that, to 1 decimal place, the IRR is 7.1%.

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Figure E.16

Figure E.17

Practice Problems

1. A proposed investment project costs $970 000 today, and is expected to generate revenues
(in thousands of dollars) at the end of each of the following 4 years of 280, 450, 300, 220,
respectively. Sketch a graph of net present values against interest rates, r, over the range
0 ≤ r ≤ 14. Use this graph to estimate the internal rate of return, to the nearest whole
number. Use a spreadsheet to perform more calculations in order to calculate the value
of the IRR, correct to 1 decimal place.

2. A civil engineering company needs to buy a new excavator. Model A is expected to make a
loss of $60 000 at the end of the first year, but is expected to produce revenues of $24 000
and $72 000 for the second and third years of operation, respectively. The corresponding
figures for model B are $96 000, $12 000 and $120 000, respectively. Use a spreadsheet to
tabulate the revenue flows (using negative numbers for the losses in the first year), together
with the corresponding present values based on a discount rate of 8% compounded
annually. Find the net present value for each model. Which excavator, if any, would you
recommend buying? What difference does it make if the discount rate is 8% compounded
continuously?

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Section 9.1 Difference equations

Example Excel

Consider the supply and demand equations

QSt = Pt0.8
−1

QDt = 12 − Pt

(a) Assuming that the market is in equilibrium, write down a difference equation for price.

(b) Given that P0 = 1, find the values of the price, Pt for t = 1, 2, …, 10 and plot a graph of Pt
against t. Describe the qualitative behaviour of the time path.

Solution

(a) If QDt = QSt

then

12 − Pt = Pt0.8
−1

which rearranges to give

Pt = 12 − Pt0.8
−1

Notice that this difference equation is not of the form considered in this section, so we cannot
obtain an explicit formula for Pt in terms of t.

(b) We are given that P0 = 1, so we can compute the values of P1, P2,…in turn. Setting t = 1
in the difference equation gives

P1 = 12 − P00.8
= 12 − 10.8
= 11

This number can now be substituted into the difference equation, with t = 2, to get

P2 = 12 − P10.8 = 12 − 110.8 = 5.190 52 and so on.

Excel provides an easy way to perform the calculations. We type in the values, 0, 1, 2, …, 10
for each time period down the first column, type in the value of the initial price, P0, in the
second column, and then copy the relevant formula down the second column to generate
successive values of Pt. Once this has been done, Chart Wizard can be used to draw the time
path.

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The most appropriate way of representing the results graphically is to use a bar chart. We
would like the numbers in the first column of the spreadsheet to act as labels for the bars on
the horizontal axis. Unfortunately, unless we tell Excel that we want to do this, it will actually
produce two sets of bars on the same diagram, using the numbers in column A as heights for
the first set of bars, and the numbers in column B as heights for the second set. This can be
avoided by entering the values down the first column as text. This is done by first highlighting
column A and then selecting Format: Cells from the menu bar. We choose the Number tab,
and click on Text and OK. We can now finally enter the values of 0, 1, 2,…, 10 in the first
column, together with the headings and numerical value of P0 in column 2 as shown in Figure
E.18.

Figure E.18

The remaining entries in column B are worked out using the difference equation

Pt = 12 − Pt0.8
−1

For example, the entry in cell B6 is P1 which is calculated from

P1 = 12 − P00.8

The value of P0 is located in cell B5, so we need to type the formula

= 12−B5^0.8

into B6. Subsequent values are worked out in the same way, so all we need to do is drag the
formula down to B15 to complete the table.

Chart Wizard can now be used to plot this time path. We first highlight both columns and then
click on Chart Wizard. The bar chart that we want is the one that is automatically displayed,
so we just press the Finish button. To close the gaps between the bars, click on any one bar. A
square dot will appear on each bar to indicate that all bars have been selected. We then choose
Format: Selected data series from the menu bar. Finally, click on the Options tab, reduce

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the Gap Width to zero and click OK. The final spreadsheet is shown in Figure E1.19. It
illustrates the oscillatory convergence and shows that the price eventually settles down to a
value just greater than 7.

Figure E.19

Practice Problems

1. Consider the two-sector model

Ct = 100 + 0.6Yt0.8
−1
Yt = Ct + 60

(a) Write down a difference equation for Yt.

(b) Given that Y0 = 10, calculate the values of Yt for t = 1, 2,….8 and plot these values on a
diagram. Is this system stable or unstable?

(c) Does the qualitative behaviour of the system depend on the initial value of Y0?

2. An economic growth model is based on three assumptions:

1. Aggregate output, yt, in time period t depends on capital stock, kt, according to
yt = k t0.6

2. Capital stock in time period t + 1 is given by

kt+1 = 0.99kt + st
where the first term reflects the fact that capital stock has depreciated by 1%, and the
second term denotes the output that is saved during period t.

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3. Savings during period t are one-fifth of income so that

st = 0.2yt

(a) Use these assumptions to write down a difference equation for kt.

(b) Given that k0 = 7000, find the equilibrium level of capital stock and state whether kt
displays uniform or oscillatory convergence. Do you get the same behaviour for
other initial values of capital stock?

Solutions

Getting Started with Excel

1. (a) This is shown in Figure SE.1.

Figure SE.1

(b) Type the heading Total Mark in cell D3.

Type = B4+C4 into cell D4. Click and drag down to D9.

(c) Type the heading Average: in cell C10.

Type = (SUM 4:D9))/6 in cell D10 and press Enter.
[Note: Excel has lots of built-in functions for performing standard calculations such as
this. To find the average you could just type =AVERAGE (D4:D9) in cell D10.]

(d) This is shown in Figure SE.2.

Figure SE.2

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(e) Just put the cursor over cell C5 and type in the new mark of 42. Pressing the Enter key
causes cells D5 and D10 to be automatically updated. The new spreadsheet is shown in
Figure SE.3.

Figure SE.3

Section 1.5 Supply and demand analysis

1. Normal; graph of (b) lies above that of (a).

Substitutable; graph of (c) lies below that of (a).

1
2. $180, $200,
3
1 3 2 k
(a) (b) (c) ; fraction is
2 5 3 k +2

3
When k = 6, the fraction is so the consumer pays $45.
4

Section 1.7 National income determination

1. (a) C = 120 + 0.8Y

(b) C = 40 + 0.8Y

(c) C = 120 + 0.6Y

With a lump-sum tax, the graph has the same slope but has been shifted downwards.

With a proportional tax, the graph has the same intercept but is less steep.

(a) 600 (b) 200 (c) 300

2 0.9Y + 30; 300

(a) Slope decreases; 150 (b) Shifts up 5 units; 350

Section 2.2 Revenue, cost and profit

1. 1000, 1004.08,…, 1750; 22.8

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2. (a) 5, 30 (b) 18

Section 3.1 Percentages

1. 108.4, 119.5. These values reflect the rises given to the bulk of employees who fall into
categories B and C. The generous rises given to senior management have had little effect on
the index because there are only 7 (out of 390) employees in category D.

2. 111.7, 173.6. These indices are higher than before. Although the total number of employees
has remained almost unchanged, many of these have been promoted to the senior
management team, thereby increasing the total wage bill.

Paasche index uses up-to-date information whereas Laspeyre uses only quantities relating to
the base year, which become more irrelevant over time.

Laspeyre index is easier to calculate and interpret. Also we can compare two or more
Laspeyre indices. The Paasche index may be impossible to calculate since data about
current performance may not be readily available at the time.

Section 3.2 Compound interest

1. 6.17%, 7.44%,…, 42.58%.

2. (a) 112, 125.44,…, 964.63.

(b) 112.55, 126.68,…, 1064.09.

(c) 112.68, 126.97,…, 1089.26.

(d) 112.75, 127.12,…, 1102.32.

All four graphs have the same basic shape, and pass through (0, 100). As expected, as the
frequency of compounding increases, the values approach that of continuous compounding
in (d).

Almost a straight line, but with a slight upward curvature.

Section 3.4 Investment appraisal

1. 12% to the nearest whole number and 11.6% to 1 decimal place.

2. $22 177 and $16 659, so choose A.

$21 702 and $16 002, so very little difference in NPVs and no difference in choice.

Section 9.1 Difference equations

1. (a) Yt = 0.6Yt0.8
−1 + 160

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(b) 163.8, 195.4, 200.8, 201.7, 201.9, 201.9, 201.9, 201.9; stable.

(c) No.

2. (a) kt +1 = 0.99kt + + 0.2kt0.6

(b) 1789; uniform; same behaviour.

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Differentiation from first principles

We hinted in Chapter 4 that there was a formal way of actually proving the formulae for
derivatives. This is known as ‘differentiation from first principles’ and we begin by illustrating
the basic idea using a simple example. Figure AT1.1 shows the graph of the square function
2
f(x) = x near x = 3.

Figure AT.1

The slope of the chord joining points A and B is

Δy (3 + Δx)2 − 32
=
Δx Δx
9 + 6Δx + (Δx) 2 − 9
=
Δx
6Δx + (Δx) 2
=
Δx
= 6 + Δx

Now, as we pointed out in Chapter 4, the slope of the tangent at x = 3 is the limit of the slope of
the chords as the width, Δx, gets smaller and smaller. In this case,

slope of tangent = lim (6 + Δx ) = 6

Δx → 0

2
In other words, the derivative of f(x) = x at x = 3 is 6 (which agrees with f ′ (x) = 2x evaluated at
x = 3). Notice that this proof is not restricted to positive values of Δx. The chords in Figure
AT1.1 could equally well have been drawn to the left of x = 3. In both cases, the slope of the
chords approach that of the tangent at x = 3 as the width of the interval shrinks.

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Practice Problem
2
1. Use differentiation from first principles to find the derivative of f(x) = x at x = 5.

The argument given above for the particular point, x = 3, can be extended quite easily to a
general point, x. The details are as follows:

Δy ( x + Δx)2 − x 2
=
Δx Δx
x 2 + 2 xΔx + (Δx) 2 − x 2
=
Δx
2 xΔx + (Δx)2
= = 2 x + Δx
Δx

Hence
f ′( x) = lim (2 x + Δx) = 2 x
Δx → 0

2
In other words, we have proved that x differentiates to 2x.

For a general function, f(x), Figure AT1.2 shows that we first find the slope of the chord joining
A and B, i.e.

f ( x + Δx) − f ( x)
Δx

Figure AT1.2
and then investigate what happens to this expression as Δx → 0.

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Example

Differentiate the following functions from first principles:

1
(a) f(x) = 3x2 + 5x − 6 (b) f ( x ) =
x

Solution

(a) The slope of the chord is

f ( x + Δx) − f ( x) [3( x + Δx) 2 + 5( x + Δx) − 6] − [3 x 2 + 5 x − 6]

=
Δx Δx
3 x 2 + 6 xΔx + 3(Δx) 2 + 5 x + 5Δx − 6 − 3 x 2 − 5 x + 6
=
Δx
6 xΔx + 5Δx + 3(Δx) 2
=
Δx
= 6 x + 5 + 3Δx
Hence the slope of the tangent is

f ′( x ) = lim (6 x + 5 + 3Δx ) = 6 x + 5
Δx → 0

(b) The algebra is a little more complicated this time as we need to manipulate fractions. We
begin by simplifying the numerator in the fraction
f ( x + Δx) − f ( x)
Δx
1
Given that f ( x) = , we see that
x
1 1
f ( x + Δx ) − f ( x ) = −
x + Δx x
x − ( x + Δx )
=
( x + Δx) x
−Δx
=
( x + Δx) x

Hence
f ( x + Δx) − f ( x) −1
=
Δx ( x + Δx) x
Finally, letting Δx → 0 gives
−1 −1
f ′( x) = = 2
( x + 0) x x

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Practice Problems

1. Use first principles to differentiate each of the following functions

1
(a) y = 4x2 − 9x + 1 (b) y =
x2
3 2
2. (a) By writing (a + b) = (a + b)(a + b) show that

( a + b)3 = a 3 + 3a 2 b + 3ab 2 + b3

3
(b) Use the result of part (a) to prove that the cube function, x , differentiates to 3x2

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 ADVANCED TOPIC 2

Implicit differentiation

The idea of implicit differentiation was first introduced in Section 5.1 in the context of partial
differentiation. It is possible to approach this topic via ordinary differentiation. Indeed, it can be
regarded as nothing more than a simple application of the chain rule.

Example

dy
Use implicit differentiation to find the value of on the curve
dx
(a) y2 − 2x3 = 25 at the point (−2, 3)
(b) ln(y) + 3y − x2 = 2 at the point (1, 1)

Solution
2 3
(a) The first thing to do is to differentiate both sides of y – 2x = 25 with respect to x.
2
To differentiate the term (y) with respect to x, you must first differentiate the outer
‘square’ function to get 2y and then multiply by the derivative of inner function, y, with
respect to x, which is dy/dx. Hence

d 2 dy
(y ) = 2y
dx dx

The remaining terms are more easily dealt with:

d d
(2 x3 ) = 6 x 2 and (25) = 0
dx dx

Collecting these results together gives

dy
2y − 6 x2 = 0
dx
so that

dy 3 x 2
=
dx y
Finally, substituting x = −2, y = 3, gives
dy 3(−2)2
= =4
dx 3

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(b) To differentiate the term ln(y) with respect to x we use the chain rule. The outer log
1 dy
function goes to and the inner ‘y’ function differentiates to Hence
y dx

d 1 dy
(ln( y )) = ×
dx y dx

Again the other terms are more straightforward:

d dy d d
(3 y ) = 3 , ( x 2 ) = 2 x and (2) = 0
dx dx dx dx
2
Differentiating both sides of ln (y) + 3y – x = 2 with respect to x gives:

1 dy dy
+ 3 − 2x = 0
y dx dx

To make dy/dx the subject of this equation, first multiply both sides by y to get

dy dy
+ 3 y − 2 xy = 0
dx dx
dy
(1 + 3 y ) = 2 xy (add 2 xy to both sides and then factorise the left-hand side)
dx
dy 2 xy
= (divide both sides by 1 + 3 y )
dx 1 + 3 y

Practice Problem
2 2
1. (a) Verify that the point (1,2) lies on the curve 2x + 3y = 14.
2 2
(b) By differentiating both sides of 2x + 3y = 14 with respect to x, show that
dy 2x
=−
dx 3y
and hence find the gradient of the curve at (1,2). In the previous example, each of the terms
involves just one of the letters x or y. It is possible to handle more complicated terms that
involve both letters. For example, to differentiate the term ‘xy’ with respect to x, we use the
product rule, which gives
d d y dx dy
( xy ) = x + × y = x + y
dx dx d x dx

This is illustrated in the following example.

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Example

dy
Find an expression for in terms of x and y for
dx

x 2 + 3 y 2 − xy = 11

Solution

Differentiating both sides with respect to x gives

d y  dy 
2x + 6 y −  x + y  = 0 (chain and product rules)
dx  d x 
dy dy
2 x + 6 y − x − y = 0 (multiply out brackets)
dx dx
dy
2 x − y + (6 y − x) = 0 (collect terms)
dx
dy y − 2 x dy
= (make the subject)
dx 6 y − x dx

Practice Problem
dy
2. By differentiating both sides of the following with respect to x, find expressions for in
dx
terms of x and y.

(a) x 2 + y 2 = 16

(b) 3 y 2 + 4 x 3 + 2 x = 2

(c) e x + 2e y = 1

(d) ye x = xy + y 2

(e) x 2 + 2 xy 2 − 3 y = 10
(f) ln (x + y ) = − x

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Hessians

In this topic, we describe what a Hessian is, and how it can be used to classify the stationary
points of an unconstrained optimisation problem. In Section 5.4, the conditions for a function
f(x, y) to have a minimum were stated as:

f xx > 0, f yy > 0 and f xx − f x2y > 0

where all of the partial derivatives are evaluated at a stationary point, (a, b).

It turns out that the second condition, fyy > 0, is actually redundant. If the first and third
conditions are met then the second one is automatically true. To see this notice that

f xx f yy − f x2y > 0

is the same as f xx f yy > f xy2 . The right-hand side is non-negative (being a square term) and so
fxxfyy > 0

The only way that the product of two numbers is positive is when they are either both positive
or both negative. Consequently, when f xx > 0 , say, the other factor f yy will also be positive.

Similarly, for a maximum point f xx < 0 , which forces the condition f yy < 0 .

The two conditions for a minimum point, f xx > 0 and f xx f yy − f xy2 > 0 can be expressed more
succinctly in matrix notation.

 f xx f xy 
The 2 × 2 matrix, H =   (where f xy = f yx ) made from second-order partial
 f yx f yy 
derivatives is called a Hessian matrix and has determinant,

f xx f xy
= f xy f yy − f xy2 so the conditions for a minimum are:
f yx f yy
,

(1) the number in the top left-hand corner of H (called the first principal minor) is positive

(2) the determinant of H (called the second principal minor) is positive.

For a maximum, the first principal minor is negative and the second principal minor is
positive.

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Example

Use Hessians to classify the stationary point of the function

π = 50Q1 − 2Q12 + 95Q2 − 4Q22 − 3Q1Q2

Solution

This profit function, considered in Practice Problem 2 in Section 5.4, has a stationary point at
Q1 = 5, Q2 = 10. The second-order partial derivatives are

∂ 2π ∂ 2π ∂ 2π
= −4, = −8 and = −3
∂Q12 ∂Q22 ∂Q1∂Q2

so the Hessian matrix is

 −4 −3
H= 
 −3 −8

The first principal minor −4 < 0.

The second principal minor (−4)(−8) − (−3)2 = 23 > 0.

Hence the stationary point is a maximum.

Practice Problems

1. The function

z = x2 + y2 – 2x – 4y + 15

has a stationary point at (1, 2). Write down the associated Hessian matrix and hence
determine the nature of this point.

2. The profit function

π = 1000Q1 + 800Q2 − 2Q12 − 2Q1Q2 − Q22 has a stationary point at Q1 = 100, Q2 = 300.

Use Hessians to show that this is a maximum.

3. The profit function

π = 16 L1 2 + 24 K 1 2 − 2 L − K has a stationary point at L = 16, K = 144.

Write down a general expression for the Hessian matrix in terms of L and K, and hence
show that the stationary point is a maximum.

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Matrices can also be used to classify the maximum and minimum points of constrained
optimisation problems. In Section 5.6, the Lagrangian function was defined as

g ( x, y, λ ) = f ( x, y ) + λ ( M − φ ( x, y ))

Optimum points are found by applying the three first-order conditions:

gx = 0, gy = 0 and gλ = 0

To classify as a maximum or minimum, we consider the determinant of the 3 × 3 matrix of

second-order derivatives:

 g xx g xy g xλ 
 
H =  g xy g yy g yλ 
 
 g xλ g yλ g λλ 

If | H |> 0 the optimum point is a maximum, whereas if | H |< 0 , the optimum point is a
minimum.

Note that

∂g
= M − φ ( x, y )
∂λ

so that

∂2 g ∂2 g ∂2 g
= −φ x , = −φ y and 2 = 0
∂x∂λ ∂y∂λ ∂λ

so H is given by

 g xx g xy −φ x 
 
 g xy g yy −φ y 
 
 −φ x −φ y 0 

This is called a bordered Hessian because it consists of the usual 2 × 2 Hessian

 g xx g xy 
 
 g xy g yy 

‘bordered’ by a row and column of first-order derivatives, −φx, − φy and 0.

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Example

Use the bordered Hessian to classify the optimal point when the objective function

U = x11/2 + x12/ 2

is subject to the budgetary constraint

P1x1 + P2x2 = M

Solution

The optimal point has already been found in Practice Problem 3 of Section 5.6. The first-order
conditions

∂g 1 −1/2 ∂g 1 −1/ 2 ∂g
= x1 − λ P1 = 0, = x2 − λ P2 = 0, = M − P1 x1 − P2 x2 = 0
∂x1 2 ∂x2 2 ∂λ

were seen to have solution

P2 M P1M
x1 = and x2 =
P1 ( P1 + P2 ) P2 ( P1 + P2 )

The bordered Hessian is

 1 −3/2 
 − 4 x1 0 − P1 
 
1
H = 0 − x2−3/2 − P2 
 4 
 
 − P1 − P2 0 
 

Expanding along the third row gives

0 − P1 1
− x −3/21 − P1
H = − P1 1 − ( − P2 ) 4
− x2−3/ 2 − P2
4 0 − P2
1 2 −3/2 1 2 −3/2
= P1 x2 + P2 x1
4 4

This is positive so the point is a maximum.

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Practice Problems

4. Use the bordered Hessian to show that the optimal value of the Lagrangian function
g (Q1 , Q2 , λ ) = 40Q1 − Q12 + 2Q1Q2 + 20Q2 − Q22 + λ (15 − Q1 − Q2 ) is a maximum.

5. Use the bordered Hessian to classify the optimal value of the Lagrangian function

g ( x, y , λ ) = 2 x 2 − xy + λ (12 − x − y )

Key Terms

Bordered Hessian matrix: A Hessian matrix is augmented by an extra row and column
containing partial derivatives formed from the constraint in the method of Lagrange multipliers.

First principal minor: The 1 × 1 determinant in the top left-hand corner of a matrix; the
element a11 of a matrix A.

Hessian matrix: A matrix whose elements are the second-order partial derivatives of a given
function.

Second principal minor: The 2 × 2 determinant in the top left-hand corner of a matrix.

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Input–output analysis

The simplest model of the macroeconomy assumes that there are only two sectors: households
and firms. The flow of money between these sectors is illustrated in Figure AT4.1.

The ‘black box’ labelled ‘firms’ belies a considerable amount of economic activity. Firms
exchange goods and services between themselves as well as providing them for external
consumption by households. For example, the steel industry uses raw materials such as iron ore
and coal to produce steel. This, in turn, it is bought by mechanical engineering firms to produce
machine tools. These tools are then used by other firms, including those in the steel industry. It
is even possible for some businesses to use as input some of their own output. For example, in
the agricultural sector, a farm might use arable land to produce grain, some of which is recycled
as animal foodstuffs. Output destined for households is called final (or external) demand.
Output that is used as input by another (or the same) firm is called intermediate output. The
problem of identifying individual firms and goods, and of tracking down the flow of money
between firms for these goods, is known as input–output analysis.

Suppose that there are just two industries, I1 and I2, and that $1 worth of output of I1 requires
as input 10 cents worth of I1 and 30 cents worth of I2. The corresponding figures for I2 are 50
cents and 20 cents respectively. This information can be displayed in tabular form as shown in
Table 1.

Figure AT4.1

Table 1
Output
I1 I2
Input I1 0.1 0.5
I2 0.3 0.2

The matrix obtained by stripping away the headings in Table 1 is

 0.1 0.5 
A= 
 0.3 0.2 

and is called the matrix of technical coefficients (sometimes called the technology matrix).
The columns of A give the inputs needed to produce $1 worth of output. In general, if there are
n industries then the matrix of technical coefficients has order n × n. Element aij gives the input
needed from the ith industry to produces $1 worth of output for the jth industry.

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We shall make the important assumption that the production functions for each industry in the
model exhibit constant returns to scale. This means that the technical coefficients can be thought
of as proportions that are independent of the level of output. For example, suppose that we wish
to produce 500 monetary units of output of I1 instead of just 1 unit. The first column of A shows
that the input requirements are

0.1× 500 = 50 units of I1

0.3 × 500 = 150 units of I2

Similarly, if we produce 400 units of I2 then the second column of A shows that we use

0.5 × 400 = 200 units of I1

0.2 × 400 = 80 units of I2

In this situation, of the 500 units of I1 that are produced, 50 go back into I1 and 200 are used in
I2. This means that there are 250 units left which are available for external demand. Similarly,
of the 400 units of I2 that are produced, 230 are used as intermediate output, leaving 170 units
to satisfy external demand. The flow of money for this simple input–output model is illustrated
in Figure AT4.2.

Figure AT4.2

For the general case of n industries, we would like to be able to use the matrix of technical
coefficients to provide answers to the following questions.

Question 1

How much output is available for final demand given the total output level?

Question 2

How much total output is required to satisfy a given level of final demand?

Question 3

What changes need to be made to total output when final demand changes by a given amount?

It turns out that all three questions can be answered using one basic matrix equation, which we
now derive. We begin by returning to the simple two-industry model with matrix of technical
coefficients

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 0.1 0.5 
A= 
 0.3 0.2 

Let us denote the final demand for I1 and I2 by d1 and d2, respectively, and denote the total
outputs by x1 and x2. Total output from I1 gets used up in three different ways. Firstly, some of
the output from I1 gets used up as input to I1. The precise proportion is given by the element

aI1 = 0.1

so I1 uses 0.1x1 units of its own output. Secondly, some of the output from I1 gets used as input
to I2. The element

aI2 = 0.5

gives the amount of I1 that is used to make 1 unit of I2. We make a total of x2 units of I2, so we
use up 0.5x2 units of I1 in this way. Finally, some of the output of I1 satisfies final demand,
which we denote by d1. The total amount of I1 that is used is therefore,

0.1x1 + 0.5x2 + d1

If we assume that the total output from I1 is just sufficient to meet these requirements, then

x1 = 0.1x1 + 0.5x2 + d1

Similarly, if I2 produces output to satisfy the input requirements of the two industries as well as
final demand, then

x2 = 0.3x1 + 0.2 x2 + d2

In matrix notation these two equations can be written as

 x1   0.1 0.5   x1   d1 
 x  =  0.3 0.2   x  +  d 
 2   2  2

that is, x = Ax + d, where x is the total output vector

 x1 
x 
 2
and d is the final demand vector

 d1 
d 
 2

For the general case of n industries, we write xi and di for the total output and final demand for
the ith industry. Of the xi units of output of industry i that are produced,

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ai1 x1 is used as input for industry 1

ai 2 x1 is used as input for industry 2
.
.
.
ain xn is used as input for industryn

and
di is used for external demand

Hence
xi = ai1x1 + ai 2 x2 +…+ ain xn + di

In matrix form, the totality of equations obtained by setting i = 1, 2, . . . , n, in turn, can be

written as
 x1   a11 a12  a1n   x1   d1 
 x  a    
 2  =  21 a22  a2 n   x2  =  d 2 
           
      
 xn   an1 an 2  ann   xn   d n 

that is, as

x = Ax + d

where A is the n × n matrix of technical coefficients, x is the n × 1 total output vector and d is
the n × 1 final demand vector.

The three questions posed can now be answered.

Question 1

How much output is available for final demand given the total output level?

Answer 1

In this case, the vector x is assumed to be known and we need to calculate the unknown vector
d. The matrix equation
x = Ax + d

immediately gives d = x – Ax, and the right-hand side is easily evaluated to get d.

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Example

The output levels of machinery, electricity and oil of a small country are 3000, 5000 and
2000, respectively.

• Each unit of machinery requires inputs of 0.3 units of electricity and 0.3 units of oil.

• Each unit of electricity requires inputs of 0.1 units of machinery and 0.2 units of oil.

• Each unit of oil requires inputs of 0.2 units of machinery and 0.1 units of electricity.

Determine the machinery, electricity and oil available for export.

Solution

Let us denote the total output for machinery, electricity and oil by x1, x2 and x3, respectively,
so that
x1 = 3000, x2 = 5000, x3 = 2000

The first bullet point of the problem stated provides details of the input requirements for
machinery. To produce 1 unit of machinery we use 0 units of machinery, 0.3 units of
electricity and 0.3 units of oil. The first column of the matrix of technical coefficients is
therefore
0 
0.3
 
0.3

Likewise for electricity and oil, so the complete matrix is

 0 0.1 0.2 
A = 0.3 0 0.1
0.3 0.2 0 

From the equation

d = x − Ax

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we see that the final demand vector is

 d1   3000   0 0.1 0.2   3000 

 d  =  5000  − 0.3 0 0.1  5000 
 2     
 d 3   2000  0.3 0.2 0   2000 
3000  900 
= 5000  − 1100 
 2000  l900 
 2100 
=  3900 
 l00 

The country, therefore, has 2100, 3900 and 100 units of machinery, electricity and oil,
respectively, available for export.

Practice Problem

1. Determine the final demand vector for three firms given the matrix of technical coefficients
0.2 0.4 0.2 
A = 0.1 0.2 0.1 
0.l 0.1 0 

and the total output vector

 l000 
x =  300 
 700 

Question 2

How much total output is required to satisfy a given level of final demand?

Answer 2

In this case the vector d is assumed to be known and we need to calculate the unknown vector x.
The matrix equation
x = Ax + d

rearranges to give
x − Ax = d
or equivalently

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(I − A ) x = d
because
(I − A)x = Ix − Ax = x − Ax
This represents a system of linear equations in which the coefficient matrix is I − A and the
right-hand-side vector is d. From Section 7.2, we know that we can solve this by multiplying the
inverse of the coefficient matrix by the right-hand-side vector to get

x = ( I − A ) −1 d
In the context of input–output analysis the matrix (I − A)−1 is called the Leontief inverse.

Example

Given the matrix of technical coefficients

 0.3 0.1 0.1
A = 0.2 0.2 0.2 
0.4 0.2 0.3

for three industries, I1, I2 and I3, determine the total outputs required to satisfy final demands
of 49, 106 and 17, respectively.

Solution

To solve this problem, we need to find the inverse of I − A and then to multiply by the final
demand vector. The matrix I − A is

1 0 0   0.3 0.1 0.1  0.7 −0.1 −0.1

 0 1 0  − 0.2 0.2 0.2  =  −0.2 0.8 −0.2 
     
 0 0 l  0.4 0.2 0.3  −0.4 −0.2 0.7 

The inverse of this matrix is then found by calculating its cofactors. If we call this matrix B,
then the cofactors, Bij, corresponding to elements bij are given by

B11 = 0.52, B12 = 0.22, B13 = 0.36

B21 = 0.09, B22 = 0.45, B23 = 0.18
B31 = 0.10, B32 = 0.16, B33 = 0.54
By expanding along the first row we see that

B = 0.7(0.52) + (−0.1)(0.22) + (−0.1)(0.36) = 0.306

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Hence

0.52 0.09 0.10 

1 
B −1
= (I - A ) −1
= 0.22 0.45 0.16 
0.306 
0.36 0.l8 0.54 

We are given that

 49 
d = 106 
 l7 

so the equation

x = ( I − A ) −1 d

gives

 x1  0.52 0.09 0.l0   49   l20 

 x  = 1 0.22 0.45 0.16  106  =  200 
 2  0.306     
 x3  0.36 0.18 0.54   17  150 

Practice Problem

2. Each unit of engineering output requires as input 0.2 units of engineering and 0.4 units of
transport. Each unit of transport output requires as input 0.2 units of engineering and 0.1
units of transport. Determine the level of total output needed to satisfy a final demand of
760 units of engineering and 420 units of transport.

Question 3

What changes need to be made to total output when final demand changes by a given amount?

Answer 3

In this case, we assume that the current total output vector, x, is chosen to satisfy some existing
final demand vector, d, so that

x = Ax + d

or equivalently

x = ( I − A ) −1 d (1)

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Suppose that the final demand vector changes by an amount Δd, so that the new final demand
vector is d + Δd. In order to satisfy the new requirements, the total output vector, x + Δx, is then
given by

x + Δx = (I − A) −1 (d + Δd)
(2)
= (I − A) −1 + (I − A)−1 Δd

where we have used the distributive law to multiply out the brackets. However, from equation
(1) we know that

( I − A ) −1 d = x

so equation (2) becomes

x + Δx = x + ( I − A ) −1 Δd

and if x is subtracted from both sides then

Δx = (I − A ) −1 Δd

Notice that this equation does not have d or x in it. This shows that the change in output, Δx,
does not depend on the existing final demand or existing total output. It depends only on the
change, Δd. It is also interesting to observe that the mathematics needed to solve this is the same
as that for Question 2. Both require the calculation of the Leontief inverse followed by a simple
matrix multiplication.

Example

Consider the following inter-industrial flow table for two industries, I1 and I2.

Output
I1 I2 Final demand
Input I1 200 300 500
I2 100 100 300

Assuming that the total output is just sufficient to meet the input and final demand
requirements, write down

(a) the total output vector

(b) the matrix of technical coefficients.

Hence, calculate the new total output vector needed when the final demand for I1 rises by
100 units.

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Solution

(a) To calculate the current total outputs for I1 and I2, all we have to do is to add together the
numbers along each row of the table. The first row shows that I1 uses 200 units of I1 as
input, I2 uses 300 units of I1 as input and 500 units of I1 are used in final demand. The
total number of units of I1 is then

200 + 300 + 500 = 1000

Assuming that the total output of I1 exactly matches these requirements, we can deduce that

x1 = 1000

Similarly, from the second row of the table,

x2 = 100 + 100 + 300 = 500

Hence the total output vector is

1000 
x= 
 500 

(b) The first column of the matrix of technical coefficients represents the inputs needed to
produce 1 unit of I1. The first column of the inter-industrial flow table gives the inputs
needed to produce the current total output of I1, which we found in part (a) to be 1000. In
all input–output models, we assume that production is subject to constant returns to scale,
so we divide the first column of the inter-industrial flow table by 1000 to find the inputs
needed to produce just 1 unit of output. In part (a), the total output for I2 was found to be
500, so the second column of the matrix of technical coefficients is calculated by dividing
the second column of the inter-industrial flow table by 500. Hence
 200 300 
1000 500 
A= 
 100 l00 
 l000 500 
 0.2 0.6 
= 
 0.1 0.2 

If the demand for I1 rises by 100 units and the demand for I2 remains constant, the vector
giving the change in final demand is
 l00 
Δd =  
 0 

To determine the corresponding change in output we use the equation

Δx = (I − A ) −1 Δd
Subtracting A from the identity matrix gives

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 l 0   0.2 0.6   0.8 −0.6 

I−A= − = 
 0 l   0.1 0.2   −0.1 0.8 
which has determinant
I − A = (0.8)(0.8) − (−0.6)(−0.1) = 0.58
The inverse of I − A is then
1  0.8 0.6 
(I − A )−1 =
0.58  0.1 0.8 
so
1  0.8 0.6  100  138
Δx = = =
0.58  0.1 0.8   0   17 
to the nearest unit. There is an increase in total output of I2 despite the fact that the final
demand for I2 remains unchanged. This is to be expected because in order to meet the
increase in final demand for I1, it is necessary to raise output of I1, which in turn requires
more inputs of both I1 and I2. Any change to just one industry has a knock-on effect
throughout all of the industries in the model.
From part (a), the current total output vector is
1000 
x= 
 500 
so the new total output vector is
 l000  138 1138
x + Δx =  + = 
 500   l7   517 

Practice Problems

3. Write down the 4 × 4 matrix of technical coefficients using the information provided in the
following inter-industrial flow table. You may assume that the total outputs are just
sufficient to satisfy the input requirements and final demands.

Output
I1 I2 I3 I4 Final
demand
Input I1 0 300 100 100 500
I2 100 0 200 100 100
I3 200 100 0 400 1300
I4 300 0 100 0 600

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0.1 0.2 0.2 

4. Given the matrix of technical coefficients A =  0.l 0.l 0.1 determine the changes in
0.1 0.3 0.1
total output for the three industries when the final demand for I1 rises by 1000 units and the
final demand for I3 falls by 800 units simultaneously.

We conclude this section with a postscript highlighting again the connection between the
multiplier concept and the matrix inverse. Suppose that we have a three-industry model and
that the Leontief inverse, (I − A)–1, is given by

 b11 b12 b13 

b b23 
 21 b22
 b3l b32 b33 

The equation

x = ( I − A ) −1 d

is then

 x1   b11 bl2 b13   d1 

 x  = b b23   d 2 
 2   21 b22
 x3   b3l b32 b33   d3 

so that

x1 = b11d1 + b12 d 2 + b13 d3

x2 = b21d1 + b22 d 2 + b23 d3
x3 = b31d1 + b32 d 2 + b33 d3

The first equation shows that x1 is a function of the three variables d1, d2 and d3. Consequently,
we can write down three partial derivatives

∂x1 ∂x1 ∂x1

= b11 , = b12 , = b13
∂d1 ∂d 2 ∂d3

In the same way, the second and third equations give

∂x2 ∂x2 ∂x2

= b21 , = b22 , = b23
∂d1 ∂d 2 ∂d3
∂x3 ∂x3 ∂x3
= b31 , = b32 , = b33
∂d1 ∂d 2 ∂d3

Recall from Chapter 5 that partial derivatives determine the multipliers in economic models.
These nine partial derivatives show that if we regard the final demands as exogenous variables
and the total outputs as endogenous variables then the multipliers are the elements in the matrix

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(I – A)–1. More precisely, the multiplier of the variable xi due to changes in dj is the element bij,
which lies in the ith row and jth column of (I – A) −1. This result can also be seen more directly
from the equation

Δx = (I − A ) −1 Δd

If we put Δx = [Δx1 Δx2 Δx3]T and Δd = [Δd1 Δd2 Δd3]T then this matrix equation leads to

Δx1 = b11Δd1 + b12 Δd 2 + b13 Δd3

Δx2 = b21Δd1 + b22 Δd 2 + b23 Δd3
Δx3 = b31Δd1 + b32 Δd 2 + b33 Δd3

We see from the ith equation that the contribution to the change Δxi due to the change Δdj is
bijΔdj. In other words, if dj changes by Δdj and all other final demands are fixed, then we can
calculate the corresponding change in xi by multiplying Δdj by bij.

Key Terms

External demand Output that is used by households.

Final demand An alternative to ‘external demand’.

Input–output analysis Examination of how inputs and outputs from various sectors of the
economy are matched to the total resources available.

Intermediate output Output from one sector which is used as input by another (or the same)
sector.

Leontief inverse The inverse of I − A, where A is the matrix of technical coefficients.

Matrix of technical coefficients (or technology matrix) A square matrix in which element aij
is the input required from the ith sector to produce 1 unit of output for the jth sector.

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 Solutions

Advanced Topic 1 Differentiation from first principles

(5 + Δx)2 − 52
1. Slope of chord =
Δx
25 + 10Δx + (Δx)2 − 25
=
Δx
= 10 + Δx

Slope of tangent = lim (10 + Δx) = 10

Δx → 0

2. (a) Slope of chord

4( x + Δx) 2 − 9( x + Δx) + 1] − (4 x 2 − 9 x + 1)
=
Δx
= 8 x + 4Δx − 9
Slope of tangent = lim (8 x + 4Δx − 9) = 8 x − 9
Δx →0

1 1
(b) f ( x + Δx) − f ( x) = 2
−
( x + Δx) x2

x 2 − ( x + Δx ) 2
=
( x + Δx ) 2 x 2
− 2 x Δx − ( Δ x ) 2
=
( x + Δx ) 2 x 2

−2 x − Δx
Slope of chord =
( x + Δx)2 x 2
 −2 x − Δx  −2
Slope of tangent = lim  = 3
Δx →0 ( x + Δx ) 2 x 2 
  x
3. (a) (a + b)(a + b)2 = (a + b)(a2 + 2ab + b2)
= a3 + 3a2b + 3ab2 + b3

( x + Δx)3 − x3
(b) Slope of chord =
Δx
= 3x2 + 3x ( Δ x ) + ( Δ x)2
Slope of tangent
= lim (3x 2 + 3 xΔx + ( Δx) 2 )
Δx →0
2
= 3x

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Advanced Topic 2 Implicit differentiation

1. (a) 2 × 12 + 3 × 22 = 2 + 12 = 14

(b) dy
4x + 6 y =0
dx
dy
6y = −4 x
dx
d y −4 x 2x
= =−
dx 6 y 3y

so when x = 1, y = 2,
dy 1
=−
dx 3

x 1 + 6 x2 e x− y
2. (a) − (b) − (c) −
y 3y 2

(1 − e x ) y 2x + 2 y2
(d) (e) (f) −(1 + x + y).
ex − x − 2 y 3 − 4 xy

Advanced Topic 3 Hessians

2 0
1. H= 
0 2

The first principal minor is 2 > 0.

The second principal minor is 2 × 2 − 0 × 0 = 4 > 0.
Hence the stationary point is a minimum.

 −4 −2 
2. H= 
 −2 −2 

Principal minors are −4 < 0 and 4 > 0, respectively, so maximum.

 −4 L−3/2 0 
3. H= 
 0 −6 K −3/2 

assuming that L is chosen as the first variable.

At the stationary point,

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 −1 / 16 0 
H=
 0 −1 / 288

Principal minors are –1/16 < 0 and 1/4608 > 0, respectively, so maximum.

 −2 2 −1
4. H =  2 −2 −1 has determinant 8 > 0, so maximum.
 −1 −1 0 

 4 −1 −1
5. H =  −1 0 −1 has determinant −6 < 0, so minimum.
 −1 −1 0 

Advanced Topic 4 Input–output analysis

1000  0.2 0.4 0.2  1000  540 

1. d =  300  −  0.1 0.2 0.1  300  =  70 
 700   0.1 0.1 0   700  570 

2. The matrix of technical coefficients is

 0.2 0.2 
A= 
 0.4 0.1

so
 0.8 −0.2 
I−A= 
 −0.4 0.9 

which has inverse

1  0.9 0.2 
( I − A ) −1 =
0.64  0.4 0.8 

Hence
1  0.9 0.2   760  1200 
x= =
0.64  0.4 0.8   420  1000 

so total output is 1200 units for engineering and 1000 units for transport.

3. Total outputs for I1, I2, I3 and I4 are found by summing along each row to get 1000, 500,
2000 and 1000, respectively. Matrix of technical coefficients is obtained by dividing the
columns of the inter-industrial flow table for these numbers to get

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 0 0.6 0.05 0.1

 0.1 0 0.1 0.1
A=
0.2 0.2 0 0.4
 
 0.3 0 0.05 0 

 0.9 −0.2 −0.2 

4. I − A =  −0.1 0.9 −0.1
 −0.1 −0.3 0.9 

so
 0.78 0.24 0.20 
1 
(I − A ) −1
= 0.10 0.79 0.11
0.658 
 0.12 0.29 0.79 

We are given that ∆x

1000 
Δd =  0 
 −800 

so
 0.78 0.24 0.20  1000   942 
1 
Δx =  0.10 0.79 0.11 ×  0  =  18 
0.658
0.12 0.29 0.79   −800   −778

Hence, total outputs for I1 and I2 rise by 942 and 18, respectively, and total output for I3
falls by 778 (to the nearest whole number).

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