Mathematics for Economics

third edition

Michael Hoy
John Livernois
Chris McKenna
Ray Rees
Thanasis Stengos

The MIT Press

Cambridge, Massachusetts
London, England
c 2011 Massachusetts Institute of Technology
All rights reserved. No part of this book may be reproduced in any form by any
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Library of Congress Cataloging-in-Publication Data

Mathematics for economics / Michael Hoy . . . [et al.]. — 3rd ed.

p. cm.
Includes index.
ISBN 978-0-262-01507-3 (hbk. : alk. paper) — ISBN 978-0-262-51622-8
(pbk. : alk. paper) 1. Economics, Mathematical. I. Hoy, Michael, 1953 Sept. 22–

HB135 . M3698 2011

511 . 8—dc22 2010022679

10 9 8 7 6 5 4 3 2
Index

Added-worker effect, 286 Closed economy model, 314–15

Additively separable function, 399 Closed interval, 37
Adjoint matrix, 320, 326 Closed set, 37
Antidifferentiation, 585 Closure, 26
Arc elasticity, 168 Cobb-Douglas production function, 53, 413–14
of demand, 168 Cobweb model, 643, 652–54, 696–701
Arrows of motion, 741 Codomain, 41
Associative laws, 26 Cofactor, 319
Asymptote, 108 Cofactor expansion, 319, 325
Autonomous dynamic optimization problem, Cofactor matrix, 325
887 Column matrix, 270
Autonomous optimization problem, 861 Column vector, 270, 347
Average-cost curve, 159, 186 Commutative laws, 26
Average propensity to consume, 183 Compact interval, 33
Average value function, 158 Comparative statics, general method, 551
Compensated-demand functions, 513
Bang-bang control, 901–905 Compensated-price effect, 514
Base of a function, 49 Complement of a set, 17
Basic variables, 248 Completeness, 28
Basis, 356 Completeness property, 11
Bernoulli’s equation, 748 Composite mapping, 43
Bertrand model, 118 Concave function, 51, 175, 178
“Best reply” function, 482 Concave programming, 567
“Best response” function, 482 Concavity, 51
Better set, 54 Conformable matrices, 273, 277, 280
Bordered Hessian, 454 Constant elasticity, 195
Boundary conditions of maximum principle, demand function, 168
851 of substitution production function, 403, 461
Boundary point, 33, 36 Constant function, derivative of, 147
Bounded intervals, 33 Constant multiple of a function, derivative of,
Bounded sequence, 65, 82 147
Bounded set, 37 Constant of integration, 585–96
Budget set, 14 Constrained problem, 196
Butterfly effect, 676 Constraint qualification, 571
Consumer behavior, 430
Cardinality, 23 Consumer’s surplus, 612
Cartesian product, 32 Consumption function, 244, 464
Center, 815 Consumption set of a good, 14
Chain rule, 148, 160, 165, 404 Continuity, 103
Chaos, 676 Continuity of a function, 103
954 INDEX

Continuous compounding, 72–76 nonlinear, autonomous, first-order, 665

Continuous function, 105–11 global stability of, 670
Control variable, 849 locally stable equilibrium of, 668
Convergent sequence, 65 order of, 639
Convex combination, 34, 37, 46 phase diagram of, 666
Convex function, 52, 175–76 solution to, 637–38
Convex set, 38–39 stable limit cycle, 675–76
Convexity, 34, 51 steady-state equilibrium of, 666
Coordinate system, 31 unstable equilibrium of, 668
Cost function, 103, 181–82 Differential, 135
Cost minimization, 503, 567 Differential equation, 635
short-run, 558 autonomous, 639
Costate variable, 850 linear, 639–40
Cournot duopoly, 481–83 nonlinear, 639–40
Cournot model, 473 ordinary, 638
Cournot, Augustin, 481 order of, 639
Cramer’s rule, 329 partial, 641
Cross-partial derivative, 411, 437 solution, 640
Cubic cost function, 195 linear, autonomous, first-order 715–16
Current-valued Hamiltonian, 862–64 general solution, 720
general solution of homogeneous form, 717
Definite integral, 586, 593 homogeneous form, 715–16
Definitely divergent sequence, 65 particular solution, 719–20
Demand, theory, 473 stable equilibrium of, 727
Demand function, 549 steady-state value of, 719–20
Dependent variable, 45 unstable equilibrium of, 727
Derivative of a function, 134 linear, autonomous, second-order, 753
Determinant, geometric interpretation of, characteristic equation of, 755
315–16 characteristic roots of, 755
Determinant of a 2 × 2 matrix, 305 complete solution, 763
Determinant of a 3 × 3 matrix, 318–20 convergence of, 768
Diagonal matrix, 271 homogeneous form of, 754
Difference equation, 634–35 eigenvalues of, 755
autonomous, 636–37 particular solution, 762
linear, 637 linear, nonautonomous, first-order, 731
linear, autonomous, first-order, 643–44 general solution, 731
convergence of, 649 linear, second-order with a variable term,
general solution to, 647–48 772–77
linear, first-order, form of general, 656–57 nonlinear, autonomous, first-order, 739
stationary value, 649–51 initial-value problem, 740
steady state of, 649 qualitative analysis of, 740
steady-state equilibrium of, 654 stability analysis of, 742
steady-state value of, 649–51 steady-state equilibrium point of, 742
linear, autonomous, second-order, 681–84 nonlinear, nonautonomous, first-order, 748
characteristic equation of, 684 separable equations, 749–50
characteristic roots of, 684 nonlinear system of two autonomous
eigenvalues of, 684 differential equations, 820
homogeneous form of, 682–83 global behavior of, 823
linear, second-order with a variable term, phase diagram of, 823–24
708–11 Differentiation rules, 147–48
nonlinear, 637 Dimension of a space, 359
 INDEX 955

Dimensions of variables, 29 First derivative function, 175

Diminishing marginal productivity, 151 First-order condition, 197
of an input, law of, 400 First-order total differential, 417, 434
Discontinuous function, 106 Fixed-endpoint problem, 872–78, 899
Discount factor, 70 Flow variable, 591
Discount rate, 70 Free endpoint, 849
Discounting, 860 Free-endpoint problem, 851
Discrete compounding, 76 Free-terminal-time problems, 909–15
Discriminating monopoly, 473, 496–98 Free variable, 248
Disjoint set, 16 Function, 41
Disposable income, 245 Functional, 846
Distance between points, 34 Fundamental theorem of integral calculus,
Distributive law, 26 599
Divergent sequence, 65–66 Fundamental equation, 537
Domain, 41
Dornbusch overshooting model, 816–19 Gauss-Jordan elimination, 235, 301
Dual consumer problem, 513 General optimal control problem, 900
Dynamic optimization problem, general form, Geometric series, 86–87
849 Giffen good, 551
Global maximum, 197, 486
-neighborhood, 35 Gradient vector, 408
Economic dynamics, 633
Eigenvalue problem, 363 Half-open interval, 33
Eigenvalue of a matrix, 363 Hamiltonian function, 850
Eigenvector, 364 current-valued, 862–64
Elasticity, 127, 167–68 Harmonic series, 86
Elasticity of substitution, 460–61 Hessian matrix, 410
Elements of a set, 11 Homogeneous function, 456–57
Empty set, 15 Homogeneous system of equations, 260
Endogenous variables, 529 Hotelling’s location model, 103
Envelope theorem, 554–57
Equality, 28 Idempotent matrices, 294
Equilibrium Identity matrix, 272
in n-markets, 342–43 Image, 41
in three markets, 258 Image set, 42
in two markets, 241–43 Implicit function theorem, 420, 422, 552
Equilibrium price, 214–15 Implicit differentiation, 418–23
Euclidean distance, 34–35, 394 Implicit function, 45
Euclidean distance condition, 367 Improper integrals, 613–22
Euclidean norm, 349 Improper node, 811
Euler’s theorem, 459 Income effect, 550
Excess demand, 541 Inconsistent system of equations, 254
Exogenous variables, 529 Indefinite integral, 585–86
Expenditure function, 514, 529 Independent variable, 45
Exponent, 49 Indifference curves, 54, 430
Exponential function, 49, 165 Indirect utility function, 529
derivative of, 148 Industry of a good, 14
Exponential rule, 587 Inequality-constrained endpoint problem,
Extreme values, 196 878–81
Infinite time horizon, 886
Feasible set, 520 Inner product, 348
Finite-dimensional space, 359 Input-output matrix, 269
956 INDEX

Input-output model, 269–70 Leading principal submatrix, 380

Input-requirements matrix, 269, 311 Left-hand derivative, 141
Instantaneous rate of change, 139 Left-hand limit of a function, 104
Integers, 24 Leontief model, “closed,” 339–41
Integrable function, 598 Leontief model, “open,” 335–38
Integral of a constant multiple, 587 Level curve, 423–24
Integral of a sum, 586 Level set, 423
Integrand, 586 Level set of a function, 53
Integrating factor, 731–34 Limit of a sequence, 62, 65–68
Integration, 585 Linear dependence, 253
by parts, 624–26 Linear differential equation system, 781
Intercept term, 45 homogeneous form of, 782
Interior point, 33, 39 steady-state solution to, 789
Interior solution, 225 Linear function, 44
Intermediate-value theorem, 103 derivative of, 147
Internal rate of return, 93 Linear independence, 352
Intersection of sets, 15 Linear indifference curves, 239
Intervals, 33 Linear production technology, 311–12
Inverse function rule, 162 Linear programming, 567
Inverse matrix, 302 Linear system of equations, 236–37
Inverse of a 2 × 2 matrix, 303–305 Linear system of n autonomous differential
Inverse of a 3 × 3 matrix, 320–22, 324–28 equations, 796
Inverse of a function, derivative of, 148 Linear system of n-variables, 250–63
Inverse of an n × n matrix, 326 Linearly dependent equations, 253
Investment, theory of, 845 Linearly dependent vectors, 352
Investment function, 244 Linearly independent equations, 253
Irrational numbers, 25 Linearly independent vectors, 353
IS curve, 237, 246, 247, 544–46 LM curve, 237, 246, 247, 544–45
IS-LM model, 237, 243, 314–15, 332–35, 529, Local maximum, 197, 485
543–46 Logarithmic function, 50, 166
linear, 237–40 derivative of, 148
IS-LM-BP model, 235 Logarithmic rule, 587
Isocline, 808 Long-run cost curves, 557
Isoquant, 54, 426 Lower sum, 596
Isosectors, 808
Malthusian growth model, 665
Keynesian consumption function, 183 Mapping, 42
Keynesian model of income determination, Marginal analysis, 127
530 Marginal-cost curve, 159
Keynesian multiplier, 61 Marginal cost of production, 137
Kronecker delta, 370 Marginal product, 116–17
Kuhn-Tucker (K-T) conditions, 568 curve, 151–52
Kuhn-Tucker theorem, 569, 575 function, 117, 393, 399–406, 590
Marginal propensity to consume, 183, 244, 530
Lagrange function, 505–508 Marginal rate of substitution, 432
Lagrange method, 507–508 Marginal rate of technical substitution, 393, 426
Lagrange multiplier, 506–507, 515 Marginal revenue
Lagrangean, 506–507 function, 149, 155
Latent root, 364 product of labor, 127
Latent vector, 364 Market equilibrium, 214
Leading principal minors, 380 Markov model, 781
 INDEX 957

Matrix, 270 Partial derivative, 394–96

addition, 273 Partial differentiation, 393–406
arrays, 254 Partition of a closed interval, 593–94
characteristic equation of, 364, 797 Partition of the universal set, 19
characteristic polynomial, 364 Partitioned matrices, 295
characteristic root of, 364 Phase plane, 808
characteristic vector of, 364 Point elasticity of demand, 168
eigenvalues, 797 Point sets, 32
eigenvector, 797 Points of inflection, 199, 401
equality, 271 Points rationing, 503
equation, 275 Pointwise continuity, 103
multiplication, 276 Positive monotonic transformation, 431
of minors, 325 Power function, 49,150
operations, 273–77 derivative of, 150
reduced row-echelon form, 255–57 Power rule, 586
subtraction, 273 Power set, 11, 21
Maximum of a function, 197 Present value, 69
Maximum principle, 848–58 Present-value calculations, 87–93
Mean-value theorem, 190 Price-adjustment model, 764–66
Method of undetermined coefficients, 708 Price competition, 118
Minor, 318, 325, 380 Price-regulated monopoly, 227–28
Monotonic sequence, 82 Principal submatrix, 314–15
Monotonically decreasing sequence, 82 Producer surplus, 609
Monotonically increasing sequence, 82 Product matrix, 280
Multimarket equilibrium, 241 Production function, 113, 426–30
Multiproduct monopoly, 473, 479 Production possibility set, 14
Production set, 14
National debt accumulation, 715 Profit function, 103, 119
Natural logarithm, 50 Profit maximization, 209, 481
Natural numbers, 23 Profit-maximizing input choice, 490
Neoclassical model of economic growth, Proper subset, 13
745–47 Proportional consumption function, 183
Nonnegative real numbers, 28 Pure number, 30
Nonbinding constraint, 226
“Nonsatiation” assumption, 572–73 Quadratic form, 378
Nonsingular matrix, 302, 360 indefinite, 380
Normalization, 367 negative definite, 380
nth derivative test, 217 negative semidefinite, 380
Null matrix, 272 positive definite, 380
Null set, 15 positive semidefinite, 380
statistical distribution of, 347
Oligopoly, 118 Quadratic function, 48
One-to-one correspondence, 42 Quasiconcave function, 54, 55
Open interval, 33 Quasiconcavity, 51, 53–54, 451–56
Open set, 36 Quasiconvex function, 56
Optimization, 473 Quasiconvexity, 51, 55, 451–56
Ordered pair, 31
Orthogonal matrix, 368 Range, 41
Orthogonal vectors, 358 Rank of a matrix, 360
Orthonormal basis, 358 Rational numbers, 25
Overdetermined system of equations, 246, 254 Reaction function, 482
958 INDEX

Real line, 26 Stable node, 810

Real numbers, 26 State variable, 849
Real-valued functions, 42 Stationary value, 200, 474
Rectangular hyperbola, 48 Step function, 112
Reduced form, 243 Stock variable, 591
Reduced-form equation, 334 Strictly concave function, 51, 178
Reflexivity, 28 Strictly convex function, 52, 177
Relative difference, 18 Strictly convex set, 39
Remainder formula, 464–67 Strictly quasiconcave function, 55
Remainder term, 186 Strictly quasiconvex function, 56
Returns to scale, 139, 459 Structural equations, 242, 244
Revenue function, 103, 119 Subset, 13
Riemann integral, 593 Substitution effect, 550
Riemann sum, 594 Substitution rule of integration, 623
Right-hand derivative, 141 Supply, theory of, 473
Right-hand limit of a function, 105 Supply function, 195
Row matrix, 270 Symmetric matrix, 289
Row operations, 250 System of two linear difference equations,
Row vector, 270, 347 general form of, 825

Saddle path, 805 Tangent, 127

Saddle point, 474, 568 Tangent hyperplane, 469
conditions, 571 Tangent line, 130
equilibrium, 805 Taylor series (expansion) formula, 185–93, 217,
Savings, theory of, 845 464–65
Scalar, 275 Theory of demand, 473
Scalar multiplication, 275, 350–51 Theory of investment, 845
Secant, 129 Theory of savings, 845
Secant line, 129 Theory of supply, 473
Second derivative function, 175 Third derivative function, 175
Second-order conditions, 211 Time constraint, 576–78
for constrained optimization, 516–19 Time-derivative of a variable, 635
Second-order total differential, 437–38 Total differential, 135
Sequence, 61–62 Total-product function, 151, 192
Series, 84–85 Total revenue, 155
Set, 11 Total revenue function, 155–57
Shadow price, 227, 498, 858 Trace of a matrix, 295–96
Shadow wage rate, 559–61 Trajectory, 809
Short-run cost curves, 557 Transitivity, 28
Short-run production function, 179 Transpose matrix, 288
Singular matrix, 302 Transpose of a matrix, 288
Slater’s condition, 569–71 Transversality condition, 851
Slope, 45, 150 Triangular matrix, 310
Slope coefficient, 45 Twice differentiable function, 175
Slutsky equation, 529, 549–51
Solow model, 745–47 Unbounded intervals, 33
Solow, Robert, 745 Unbounded sequence, 65
Spectral decomposition, 366 Uncompensated-demand functions, 513
Square matrix, 271 Uncompensated-price effect, 514
St. Petersburg Paradox, 61 Unconstrained problem, 196
Stable focus, 814 Underdetermined system of equations, 247, 254
 INDEX 959

Union of sets, 16
Universal set, 14
Unstable focus, 815
Unstable node, 810
Upper sum, 596–97
Utility function, 430

Value function, 555

Vector, 271
addition, 349
diagonalization, 371–72
length, 348–49
space, 355
subtraction, 350
Venn diagram, 15
Vertical asymptote, 108

Walrusian price adjustment model, 727–29, 753

Walrusian price adjustment model with entry,
781
Weierstrass’s theorem, 520
Worse set, 55

Young’s theorem, 411–12, 429