Chapter 11

Exponential and Logarithmic Functions

11.1 EXPONENTIAL FUNCTIONS

Previous chapters dealt mainly with power functions, such as y = xa, in which a variable base x is raised
to a constant exponent a. In this chapter we introduce an important new function in which a constant base a
is raised to a variable exponent x. It is called an exponential function and is defined as

Commonly used to express rates of growth and decay, such as interest compounding and depreciation,
exponential functions have the following general properties. Given y = ax, a > 0, and a ≠ 1,
1. The domain of the function is the set of all real numbers; the range of the function is the set of all
positive real numbers, that is, for all x, even x ≤ 0, y > 0.
2. For a > 1, the function is increasing and convex; for 0 < a < 1, the function is decreasing and
convex.
3. At x = 0, y = 1, independently of the base.
See Example 1 and Problems 11.1 and 11.2; for a review of exponents, see Section 1.1 and Problem 1.1.

EXAMPLE 1. Given (a) y = 3x and (b) , the above properties of exponential

functions can readily be seen from the tables and graphs of the functions in Fig. 11-1. More complicated
exponential functions are estimated with the help of the key on pocket calculators.

11.2 LOGARITHMIC FUNCTIONS

Interchanging the variables of an exponential function f defined by y = ax gives rise to a new function g
defined by x = ay such that any ordered pair of numbers in f will also be found in g in reverse order. For
example, if f (2) = 9, then g(9) = 2; if f(3) = 27, then g(27) = 3. The new function g, the inverse of the
exponential function ,f, is called a logarithmic function with base a. Instead of x = ay, the logarithmic
function with base a is more commonly written
 Fig. 11-1

Logax is the exponent to which a must be raised to get x. Any positive number except 1 may serve as the
base for a logarithm. The common logarithm of x, written log10x or simply log x, is the exponent to which
10 must be raised to get x. Logarithms have the following properties. Given y = logax, a > 0, a ≠ 1,

1. The domain of the function is the set of all positive real numbers; the range is the set of all real
numbers—the exact opposite of its inverse function, the exponential function.
2. For base a > 1, g(x) is increasing and concave. For 0 < a < 1, g(x) is decreasing and convex.
3. At x = 1, y = 0, independently of the base.
See Examples 2 to 4 and Problems 11.5 and 11.6.

EXAMPLE 2. A graph of two functions f and g in which x and y are interchanged, such as
and in Fig. 11-2, shows that one function is a mirror image of the other along the 45° line y = x,
such that if f(x) = y, then g(y) = x. Recall that is equivalent to and generally expressed as y =
log1/2 x.

Fig. 11-2

EXAMPLE 3.. Knowing that the common logarithm of x is the power to which 10 must be raised to get x,
it follows that

EXAMPLE 4. For numbers that are exact powers of the base, logs are easily calculated without the aid of
calculators.
For numbers that are not exact powers of the base, log tables or calculators are needed. See Section 1.7.9.

11.3 PROPERTIES OF EXPONENTS AND LOGARITHMS

Assuming a, b > 0; a, b ≠ 1, and x and y any real numbers,

For a, x and y positive real numbers, n a real number, and a ≠ 1,

Properties of exponents were treated in Section 1.1 and Problem 1.1. Properties of logarithms are treated
in Example 5 and Problems 11.12 to 11.16.
TABLE 11.1

EXAMPLE 5. The problems below are kept simple and solved by means of the logarithms given in Table
11.1 in order to illustrate the properties of logarithms.
11.4 NATURAL EXPONENTIAL AND LOGARITHMIC FUNCTIONS
The most frequently used base for exponential and logarithmic functions is the irrational number e.
Expressed mathematically,

Exponential functions to base e are called natural exponential functions and are written y = ex; logarithmic
functions to base e are termed natural logarithmic functions and are expressed as y = logex or, more
frequently, lnx. The ln x is simply the exponent or power to which e must be raised to get x.
As with other exponential and logarithmic functions to a common base, one function is the inverse of
the other, such that the ordered pair (a, b) will belong to the set of ex if and only if (h, a) belongs to the set
of In x. Natural exponential and logarithmic functions follow the same rules as other exponential and
logarithmic functions and are estimated with the help of tables or the and keys on pocket
calculators. See Sections 1.7.10 and 1.7.12 and Problems 11.3, 11.4, and 11.6.

11.5 SOLVING NATURAL EXPONENTIAL AND LOGARITHMIC

FUNCTIONS
Since natural exponential functions and natural logarithmic functions are inverses of each other, one is
generally helpful in solving the other. Mindful that the In x signifies the power to which e must be raised to
get x, it follows that
1. e raised to the natural log of a constant (a > 0), a variable (x > 0), or a function of a variable [f(x) >
0], must equal that constant, variable, or function of the variable:

2. Conversely, taking the natural log of e raised to the power of a constant, variable, or function of a
variable must also equal that constant, variable, or function of the variable:

See Example 6 and Problems 11.18 and 11.19.

EXAMPLE 6. The principles set forth in (11.2) and (11.3) are used below to solve the given equations for
x.
 Note: On many calculators the key is the inverse (shift, or second function) of the key and
to activate the key one must first press the key followed by the
key.

11.6 LOGARITHMIC TRANSFORMATION OF NONLINEAR

FUNCTIONS
Linear algebra and regression analysis using ordinary or two-stage least squares, common tools in
economic analysis, assume linear functions or equations. Some important nonlinear functions, such as
Cobb-Douglas production functions, are easily converted to linear functions by logarithmic transformation.
Given a generalized Cobb-Douglas production function

it is clear from the properties of logarithms that

which is log linear. A linear transformation of a Cobb-Douglas production function, such as in (11.4),
furthermore has the nice added feature that estimates for a and /3 provide direct measures of the output
elasticity of K and L, respectively.

11.7 DERIVATIVES OF NATURAL EXPONENTIAL AND

LOGARITHMIC FUNCTIONS
The rules of differentiation for natural exponential and logarithmic functions are presented below,
illustrated in Examples 7 and 8, and treated in Problems 11.20 to 11.23. For proof of the rules and more
detailed treatment of the topic, see Dowling, Schaum’ s Outline of Introduction to Mathematical
Economics, Chapter 9.
1) Given f(x) = eg(x), where g(x) is a differentiable function of x, the derivative is

In brief, the derivative of a natural exponential function is equal to the original natural exponential
function times the derivative of the exponent.
2) Given f(x) = ln[g(x)], where g(x) is positive and differentiable, the derivative is

EXAMPLE 7. The derivatives of each of the natural exponential functions below are found as follows:

See also Problems 11.20 and 11.21.

EXAMPLE 8. Finding the derivative of a natural logarithmic function is demonstrated below:

See also Problems 11.22 and 11.23.

11.8 INTEREST COMPOUNDING

Interest compounding is generally expressed in terms of exponential functions. A person lending out a
principal P at interest rate r under terms of annual compounding, for example, will have a value A at the
end of one year equal to

At the end of 2 years, this person will have A1 plus interest on A1,
Factoring out P(1 + r),

At the end of t years, following the same procedure,

If interest is compounded m times a year with the person receiving (r/m) interest m times during the
course of the year, at the end of t years,

And if interest is compounded continuously so that m → ∞,

Moving P and multiplying the exponent by r/r,

Letting m/r = n,

But from Section 11.4, limn → ∞ [1 (1/n)]n = e Substituting,

EXAMPLE 9. The value A of a principal P = $1000 set out at an interest rate r = 6 percent for time t = 5
years when compounded (a) annually, (b) quarterly, (c) monthly, and (d) continuously is found below.
11.9 ESTIMATING GROWTH RATES FROM DATA POINTS
Given two sets of data for a function-profits, sales, or assets-growing consistently over time, annual
growth rates can be measured and a natural exponential function estimated through a system of
simultaneous equations. For example, if a mutual fund’s assets equal $48 million in 1983 and $98 6 million
in 1993, let t = 0 for the base year 1983, then t = 10 for 1993. Express each of the two sets of data points in
terms of a natural exponential function S = P ert, recalling that e(0) = 1.

Substituting P = 48.0 from (11.10) in (11.11) and simplifying algebraically,

Using (11.3) and taking the natural log of both sides,

Substituting,
With r = 0.072, the rate of continuous growth per year is 7.2 percent. See Example 10 and Problems 11.35
to 11.39.
EXAMPLE 10. Given the original information above, an ordinary exponential function for growth in
terms of S = P + r)t can also be estimated directly from the data.
Setting the data in ordinary exponential form,

Substituting P = 48.0 from (11.12) in (11.13) and simplifying,

Taking the common log of both sides,

Setting both sides as exponents of 10, analogously to (11.2),

Substituting,
In terms of annual compounding, assets grow by 7.46 percent a year.

Solved Problems

GRAPHS
11.1. Make a schedule for each of the following exponential functions with base a > 1 and then graph
them on the same grid to convince yourself that (1) the functions never equal zero, (2) they all pass
through (0, 1), and (3) they are all positively sloped and convex:
 Fig. 11-3

11.2. Make a schedule for each of the following exponential functions with 0 < a < 1 and then sketch
them on the same graph to convince yourself that (1) the functions never equal zero, (2) they all pass
through (0, 1), and (3) they are all negatively sloped and convex:

Fig. 11-4

11.3. Using a calculator or tables, set up a schedule for each of the following natural exponential functions
-y = ekx where k > 0, noting (1) the functions never equal zero, (2) they all pass through (0, 1), and
(3) they are all positively sloped and convex:
 Fig. 11-5

11.4. Set up a schedule, rounding to two decimal places, for the following natural exponential functions y
= ekx where k < 0, noting (1) the functions never equal zero, (2) they all pass through (0, 1), and (3)
they are all negatively sloped and convex:

Fig. 11-6

11.5. Construct a schedule and draw a graph for the following functions to show that one is the mirror
image and hence the inverse of the other, noting that (1) the domain of (a) is the range of (b) and the
range of (a) is the domain of (b), and (2) a logarithmic function with a > 1 is increasing and
concave:
 Fig. 11-7

11.6. Given (a) y = ex and (b) y = ln x, and using a calculator or tables, construct a schedule and draw a
graph for each of the functions to show that one function is the mirror image or inverse of the other,
noting that (1) the domain of (a) is the range of (b) while the range of (a) is the domain of (b), (2)
the In x is negative for 0 < x < 1 and positive for x > 1, and (3) the In x is an increasing function and
concave downward.

Fig. 11-8

EXPONENTIAL-LOGARITHMIC CONVERSION
11.7. Change the following logarithms to their equivalent exponential forms:
11.8. Convert the following natural logarithms into natural exponential functions:

11.9. Change the following exponential forms to logarithmic forms.

11.10 Convert the following natural exponential expressions into equivalent natural logarithmic forms:
11.11. Solve the following for x, y, or a by finding the equivalent expression:

PROPERTIES OF LOGARITHMS AND EXPONENTS

11.12. Use the properties of logarithms to write the following expressions as sums, differences, or products:
11.13. Use the properties of logarithms to write the following natural logarithmic forms as sums,
differences, or products:

11.14. Use the properties of exponents to simplify the following exponential expressions, assuming a, b > 0
and a ≠ b:

11.15. Simplify the following natural exponential expressions.

11.16. Simplify the following natural logarithmic expressions:

11.17. Simplify each of the following exponential expressions:
11.18. Use the techniques from Section 11.5 to solve the following natural exponential functions for x:

11.19. Using the techniques of Section 11.5, solve the following natural logarithmic functions for x:
DERIVATIVES OF NATURAL EXPONENTIAL AND LOGARITHMIC
FUNCTIONS
11.20. Differentiate the following natural exponential functions, using the rule found in (11.5):
11.21. Combine rules to differentiate the following functions.
11.22. Differentiate the following natural logarithmic functions, using the rule found in (11.6):

Note how a multiplicative constant within the log expression drops out in differentiation as in
multiplicative constant outside the log expression as in (f) remains.
11.23. Combine rules to differentiate the following functions.
INTEREST COMPOUNDING
11.24. Find the value A of a principal P = $100 set out at an interest rate r = 12 percent for time t = 1 year
when compounded (a) annually, (b) semiannually, (c) quarterly, and (d) continuously; (e)
distinguish between the nominal and the effective rate of interest. Use a calculator for exponential
expressions, as explained in Section 1.7.11 and Problems 1.23 to 1.26.

(e) In all four instances the stated or nominal interest rate is the same, namely, 12 percent; the
actual interest earned, however, varies according to the type of compounding. The effective
interest rate on multiple compoundings is the comparable rate the bank would have to pay if
interest were paid only once a year, specifically, 12.36 percent to equal semiannual
compounding, 12.55 percent to equal quarterly compounding, and 12.75 percent to equal
continuous compounding.
11.25. Find the value A of a principal P = $3000 set out at an interest rate r = 8 percent for time t = 6 years
when compounded (a) annually, (b) semiannually, (c) quarterly, and (d) continuously.

11.26. Redo Problem 11.25, given P = $10, 000, r = 9 percent, and t = 3.

11.27. Find the formula for finding the effective rate of interest re for multiple compoundings when t > 1.
11.28. Given a nominal rate of interest r = 8 percent, as in Problem 11.25, find the effective rate of interest
under (a) semiannual, (b) quarterly, and (c) continuous compounding. Note that in (11.14) and
(11.15) time t and principal P do not matter.

11.29. Find the effective rate of interest under (a) semiannual, (b) quarterly, and (c) continuous
compounding for Problem 11.26 where r was 9 percent.

11.30. How many years t will it take a sum of money P to double at 6 percent interest compounded
annually?
11.31. How long will it take money to treble at 12 percent interest compounded quarterly?

DISCOUNTING
11.32. Discounting is the process of determining the present value P of a sum of money A to be received in
the future. Find the formula for discounting under (a) annual compounding, (b) multiple
compounding, and (c) continuous compounding.

11.33. Find the present value of $1000 to be paid 4 years from now when the current interest rate is 6
percent if interest is compounded (a) annually, (b) quarterly, and (c) continuously.
11.34. Redo Problem 11.33 for a present value of $1500 to be paid in 8 years when the current interest rate
is 5 percent.

ESTIMATING GROWTH RATES FROM DATA POINTS

11.35. Given two sets of points from data growing consistently over time, such as subscriptions to a
magazine numbering 6.25 million in 1988 and 11.1 million in 1993, (a) express subscriptions as a
natural exponential function of time S = soert and (b) find the annual rate of growth G in
subscriptions.
(a) Letting t = 0 for the base year 1988, then t = 5 for 1993. Expressing the two sets of data points
in terms of S = S0ert, and recalling that e0 = 1,

Substituting S0 from (11.19) in (11.20) and simplifying algebraically,

Taking the natural logarithm of each side and using (11.3),

 Setting the values of S0 and r in the proper form S0ert,

(b) The growth rate G of a function is given by the derivative of the natural log of the function:
d/dx[ln f(x)] = f’(x)/f(x). Taking the natural log of S, therefore, and again using (1.13),

Then taking the derivative, recalling that ln 6.25 is a constant,

The growth rate of a natural exponential function will always be the coefficient of the variable
in the exponent.
11.36. A firm’s profits i’ have been growing consistently over time from $3.40 million in 1985 to $6.71
million in 1993. (a) Express profits as a natural exponential function of time π = π0ert and (b) find
the annual rate of growth.
(a) Let 1985 be the base year with t = 0, then t = 8 for 1993, and

11.37. A country’s population P goes from 54 million in 1987 to 63.9 million in 1993. At what rate r is the
population growing?
Letting t = 0 for 1987 and t = 6 for 1993, and noting from the previous problems that the value of the
function at t = 0 is the base of the function in subsequent years,
 and the population growth rate is 2.8 percent.
11.38. A country’s timberland T is being cut back at a rate of 3.2 percent a year. How much will be left in 8
years?

Using a calculator,

11.39. A village’s arable land L is eroding at a rate of 1.8 percent a year. If conditions continue, how much
will be left in 15 years?

Supplementary Problems

EXPONENTIAL-LOGARITHMIC CONVERSIONS
11.40. Convert the following logarithms into their equivalent exponential forms:

11.41. Change the following natural logarithms to their equivalent natural exponential forms:

11.42. Convert the following exponential expressions to their equivalent logarithmic forms:

11.43. Change the following natural exponential expressions to their equivalent natural logarithmic forms:

11.44. Solve each of the following for the unknown variable or parameter:

PROPERTIES OF LOGARITHMS AND EXPONENTS

11.45. Convert the following logarithmic expressions to sums, differences, or products:
11.46. Convert the following natural logarithmic expressions to sums, differences, or products:

11.47. Simplify the following exponential expressions:

11.48. Simplify the following natural exponential expressions:

DERIVATIVES
11.49. Differentiate each of the following natural exponential functions:

11.50. Differentiate each of the following natural logarithmic functions:

11.51. Combine rules to differentiate the following functions:

INTEREST COMPOUNDING
For each of the following questions, determine the future value of the given principals when
compounded (a) annually, (b) semiannually, (c) quarterly, and (d) continuously.
11.52. $1000 at 8 percent for 5 years.
11.53. $2500 at 6 percent for 4 years.
11.54. $500 at 12 percent for 6 years.
11.55. $10,000 at 9 percent for 8 years.
11.56. How long will it take money to double at 8 percent interest when compounded semiannually?
11.57. How long will it take money to treble at 9 percent interest when compounded annually?

DISCOUNTING
11.58. Determine the present value of $5000 to be paid in 8 years time if current interest of 10 percent is
compounded (a) annually, (b) semiannually, (c) quarterly, and (d) continuously.
11.59. Repeat Problem 11.58 for $8000 to be paid in 4 years when the current interest rate is 5 percent.
11.60. Given the current interest rate of 6 percent compounded annually, find the present value of $10,000
to be paid in (a) 1 year, (b) 3 years, (c) 5 years, and (d) 10 years.
11.61. Given the current interest rate of 7 percent compounded semiannually, find the present value of
$10,000 to be paid in (a) I year, (b) 3 years, (c) 5 years, and (d) 10 years.

GROWTH RATES
11.62. A company’s sales have been growing consistently over time from $23.2 million in 1987 to $32.27
million in 1993. (a) Express sales 5 as a natural exponential function of time t. (b) Indicate the
annual rate of growth G of sales.
11.63. A firm’s total revenue TR, growing consistently over time, has increased from $345 million in 1985
to $616.18 million in 1993. (a) Find the exponential function and (b) indicate the growth rate of
revenue.
11.64. A company with 1993 sales of $8.9 million estimates sales of $13.82 million in 1997. (a) Determine
the exponential function used for the estimate and (b) indicate the projected growth rate.
11.65. A country’s population of 44.35 million is growing at a rate of 2.65 percent a year. Find the
expected population in 5 years.
11.66. What is the projected level of revenue in 3 years for a company with current revenues of $48.25
million if estimated growth under continuous compounding is 8.6 percent?
11.67. Using an exponential function a consultant suggests that a newspaper’s circulation will increase
from 1.25 million at present to 1.73 million in 5 years. What growth rate is the consultant assuming?
11.68. What will a machine worth $3.8 million today be worth in 3 years if it depreciates at a continuous
rate of 15 percent a year?

Answers to Supplementary Problems

11.40.

11.41.

11.42.

11.43.

11.44.

11.45.

11.46.

11.47.
(a) y = a5x + 8y
(b) y = a2x − 7y
(c) y = a6xy
 (d) y = a(7/3)x

11.48.

11.49.

11.50.

11.51.

11.52.
11.53.
11.54.
11.55.
11.56. 8.836 years
11.57. 12.748 years
11.58.
(a) $2332.54
(b) $2290.56
(c) $2268.85
(d) $2246.64
11.59.
11.60.
11.61.

11.62.

11.63.

11.64.

11.65. 50.63 million

11.66. $62.45 million
11.67. G = 6.5 percent
11.68. $2.42 million