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Problem Set 7

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12 views2 pages

Problem Set 7

.

Uploaded by

Puneet Chauhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ECON009: Advanced Mathematical Methods for Economics

Problem Set 7 (Second-order difference equations)

Instructor: Mr. Rohit

Question 1:(Fibonacci difference equation)


Consider the difference equation:
xt+2 − xt+1 − xt = 0 ; x0 = 0 and x1 = 1
(a) Find the characteristic equation for the given difference equation and determine its roots.
(b) Which one of the two roots is a golden ratio? What is the sum of the two roots? Also, find the
product of the two roots.
(c) Find the general solution to the given difference equation.
(d) What are the values of the variable x for the first 10 periods? Do you observe any event in
nature/economics which follows this sequence?

Question 2: (Cobb-web Model, Second order Difference Equation )


Suppose that the market for hogs is characterised by the demand and supply equations:-
Pt = a − bQtD and Qst = − c + d Et−1(Pt ) ; a, b, c, & d all are positive.
where Pt is market price in period t, QtD is the quantity demanded in period t , QtS is the quantity
supplied in period t. Et−1(Pt ) represents the expected price. The supply equation shows that farmers
must decide in the year t − 1 how many hogs to raise and bring to market in year t.
(a) Assuming Et−1( pt ) = pt−1 − ρ( pt−1 − pt−2 ) where −1 ≤ ρ ≤ 1, deduce a difference equation
determining the path of Pt , given P0 and solve it. What is the steady state price?
(b) Determine the solution of the difference equation in the above part and also determine whether
−15
the price converges to its steady state when the parameter values are as follows: a = ,
4
−1 −3
b= , c = − 2, d = 13, ρ =
16 13

Question 3: (Multiplier-Accelerator Model by P.A. Samuelson)


Consider the following economic model:
Let Yt denote the national income, Ct total consumption, and It total investment in a country at time
t. Assume that for t = 0,1,....
Yt = Ct + It + Gt
Ct = aYt−1 + C0 (multiplier part of the model)
It = c(Ct − Ct−1) + I0 (accelerator principle)
Where 0 < a < 1, c > 0, and Gt = G0.
ECON009: Advanced Mathematical Methods for Economics
Problem Set 7 (Second-order difference equations)

(a) Deduce the difference equation determining the path of national income Yt, given Y0.
(b) Find a special solution to the equation derived in part (a)
(c) Find the characteristic equation of the associated homogeneous equation and determine when it
has two distinct real roots, a double real root and two complex roots.
(d) Determine the general solution to the equation derived in part (a)
(e) Comment on the stability conditions of the model.

Question 4: (Cournot Duopoly)


Two firms share the market for a product. Firm 1’s output is x and Firm 2’s output is y. The two
reaction functions of the firms are:
1
xt+1 = 60 − yt
2
1
yt+1 = 60 − xt
2
Derive and solve the second-order difference equation for x implied by the model.

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