AEC 3543 – Introduction to Mathematical Economics

Exponential and Logarithmic Functions

1. The Nature of Exponential Functions

2. Logarithms

3. Logarithmic Functions

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 1(a) Types of functions
function name specific form economic use
Polynomina ls (algebraic functions)
Constant y  a0 fixed costs, interest rates
Linear y  a0  a1 x equilibria
Quadratic y  a0  a1 x  a2 x 2 optima and/or equilibria
Cubic y  a0  a1 x  a2 x 2  a3 x 3 optima
Rational (algebraic) y  a/ x optima
Transcendental (non - algebraic, independent var. associated w/ exponent)
Exponential y  bx compounding & discounting
Logarithmic x  log b y (inverse) growth, production functions

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Rules of exponents
  
1) x m  n  x m x n
m
x
2) x m  n  n x0
x
n 1
3) x  n
x
4) x 0  1
1
5) x n
n x
6) x mn
   x m n

7)  xy   x  y 
m m m

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2. Inverse-function rule
• This property of one to one mapping is unique to the class
of functions known as monotonic functions:
• Definition of a function (p. 17)
– Function one y for each x and
– Monotonic function one x for each y
– One x for each y, aka inverse function
A monotonically increasing function, if
1) x1  x2 then f x1   f x2 
e.g., supply function (where b1  0)
2) Q s  b 0  b1P
and an inverse supply function
3) P  - b 0 /b1  (1/b1 )Q s
4) y  ex range 0,  , domain - , 
5) x  ln y range- , , domain 0,  
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 Rules of Differentiation
Involving Functions of Different Variables

Inverse - function rule

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Simple exponential function
y = f(x) = bx
where base b > 1, x is exponent, f(x) 
The term exponent (x) refers to the power to which a base
number (b) is raised.
Base exclusions:
• b  1 and b  0, because
f(x) = 1x = 1; f(x) = 0x = 0, i.e., constants
• 0 < b < 1 excluded since they can be expressed as negative
exponents
• b<0 excluded because many values of f(x) from the domain
would be imaginary, e.g., (-b)½
• popular bases: e and 10 6
Generalized exponential function
• Where
y = dependent variable
b = base
t = independent variable
a = vertical scale factor
y  ab ct

(directly related)
c = horizontal scale factor
(inversely related)

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Graphic for f(x)=ex
f(x)  e x where b  e
domain of x : (-,  )
range of y : (0 ,  )
y - intercept : 1
x - intercepts : none
horizontal asymptote :
x - axis as x  -
At (0,1) the slope of the
tangent f / ( 0 )  1
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3 Logarithms
• a) The meaning of logarithm

• b) Common log and natural log

• c) Rules of logarithms

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(a) The meaning of logarithm
• Exponents Common logs
• (solve for y given t) (solve for t given y)
t y=10t Log 10 1000  3
3 1000 Log 10 10  1
2 100
1 10 Log 10 1  0
0 1 Log 10 0.1  1
-1 0.1
-2 0.01 Log 10 0.01  2
-3 0.001 Log 10 0.001  3
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(b) Common log and natural log

• Exponent Natural log

Y e t
t  log e Y  ln Y
• Exponent Common log

Y b t
t  log b Y
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(c) Rules of logarithms in the land of
exponents
• Product ln uv   ln u  ln v
• Quotient
lnu / v   lnu  lnv
• Power
• Base lnu  alnu
a

inversion 1 1
log b e  
log e b ln b
• Base
ln(u )
conversion log b u  log b e log e u  
ln(b)
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Logarithmic Functions

• (a) Log functions and exponential functions

• (b) Base conversion

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(a) Log functions and exponential functions

• Exponential function Log function

Y e t t  log e Y  ln Y
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(b) Base conversion
• Let er = bc
• Then ln er = ln bc
r = ln bc = c ln b
• Therefore
er = e c ln b
• And
y = Abct = Ae(c ln b)t =Aert

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 Find th e continuous - compounding nominal interest
rate per annum (r) that is equivalent to a
discrete - compounding rate (i) of 5% per annum,
compou nded semiannually.
y  ab ct  ae rt
i
where a  1, i  .05, c  2, t  1, b  1   1.025
c
let e r  b c
r ln e  c ln b
r  c ln b  2 ln 1.025  4.94%
y  e c ln b t   e 2 ln1.0251  1.050625

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