Business mathematics (AcFn2131)

Module I
Course Writer:
Ashu Girma (MSc in Accounting and Finance)
Dawit Amaha (MSc in Accounting and Finance)

Content Editor:
Temesgen Kebede (PhD)
Language Editor: Andualem Tolesaa (PhD)
Pedagogical Editor: Teshome Tesfaye (MA)

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PUBLISHED BY HARAMAYA UNIVERSITY, DISTANCE EDUCATION PROGRAM

All right reserved, no part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form by any means, electronic, mechanical, photocopying,
recording or otherwise without the prior written permission of Haramaya University.

First Published, 2022

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 Introduction to Module one

Dear students, We would like to welcome you to this first module of the course business
mathematics. This module presents to you the basic issues related to linear equation and matrix
with their interpretive application. It will equip you with the basic mathematical tools to solve
different problems of business environment.
This module contains the first two part of the course. The first chapter deals with linear equation
with their interpretive application. The second chapter presents about matrix algebra and its
application in solving different business problems. These two mathematical techniques will
enable you to tackle different managerial and finance problems.
Dear Learners, To help adjust your approach while going through this module, knowledge of the
following points are important. Each unit contains check progress exercise on which you can
evaluate your understanding of the concepts in the unit. In addition, there are exercises and
activity questions at the end of the relevant topics, which are believed to be very important.

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 Dear learner, have a nice self- study!

Chapter One: Linear Equations and Their Interpretative Applications

Chapter objectives
This chapter basically aims at discussing the basic characteristics of linear equation and its
interpretive application. After completing this unit, you will be able to:
 Understand basic concepts of linear equations and functions.
 Develop acquaintance of graphic representation of linear equations.
 Compute and formulate slope and equation of a line.
 Systematically apply the linear equation algebra and geometry in solving real world
situations.
 Develop acquaintance of developing cost, revenue and profit function of both
manufacturing and merchandise enterprises
 Conduct the break-even analysis for both manufacturing and merchandising business

1.1. Introduction

In our everyday life, there are various types of decisions that need mathematical supported
knowledge. Managers will make many managerial decisions that need much investigation and
analyses which need the skill and knowledge of mathematics. So, this chapter has a general
purpose of familiarizing managers with the algebra and geometry of linear equations and
functions in two variables. These are, equations and functions whose graphs in a coordinate
plane are straight lines; their importance and applications in business area and management.
Mathematicians, economists, statisticians and other academicians have applied their skills to
management related problems for many years; but the first concentrated effort in this area
occurred during WWII when these specialists were formed in to operations Analysis group to
assist in the planning of military operations. The analysts used mathematics and statistics
extensively in their studies, and the resulting recommendations were an important contribution to
the war effort. Following the war, some analysts, soon joined by others and turned their attention
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 to problems of management operations. They further accomplished major improvements in
inventory control, quality control, warehouse location, oil industry operations, agriculture,
purchasing decisions, scheduling of complex tasks such as building a shopping center, and a
variety of other areas. Mathematics, old and newly created, coupled with innovative applications
of the rapidly evolving electronic computer directed toward management problems resulted in a
new field of study called Quantitative Methods (or Management science or operations Research).
It has become part of the curriculum of colleges of business. The importance of quantitative
approaches to management problems is now widely accepted. A course in mathematics with
management applications is included in the core subjects studied by almost all management
students.

This material develops mathematics in the applied context required for an understanding of the
quantitative approach to management problems.

In this module, one major area of study is that of linear Mathematics. This chapter is the first of
five chapters which focuses up on linear mathematics and its applications. Linear Mathematics is
significant for a number of reasons:

1. Many of the real world phenomena in which we might be interested in representing

mathematically either in linear or can be approximated reasonably well using linear
relationships. As a result, linear mathematics is widely applied.
2. The analysis of linear relationships is generally easier than that of non-linear relationships.
3. Some methods used in non-linear mathematics are similar to or extensions of those used in linear
mathematics. Consequently having a good understanding of linear mathematics is prerequisite to
the study of non-linear mathematics

1.1 Definitions and Characteristics of Linear Equations

Linear equations are equations whose terms (parts separated by plus, minus, and equal signs) are
a constant or a constant times one variable to the first degree. Linear equations are mathematical
statements that indicate two algebraic equations which are equal. Algebraic equations are those

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that are linked by mathematical operations (+, -, x, or ÷). Linear equation is an equation with one
degree and whose graph is straight line and whose slope is constant through the line.

General Form of Linear Equations

Linear equation with two variables
A linear equation involving two variables X and Y has the standard form:
ax + by = c - - - - - - - - - - - - - - - (1.1)
Where a, b and c are real numbers and a and b cannot both equal zero

Notice that linear equations are first degree equations. Each variable in the equation is raised
(implicitly) to the first power. The presence of terms having exponents other than 1(for example,
x2) would exclude an equation from being considered linear. The presence of terms involving a
product of the two variables (for example, 2xy), would also exclude an equation from being
considered linear.

The following are all examples of linear Equations involving two variables:
1. 2x + 5y = -5

2. –x + ½ y = 0

x
=25 y +30
3. 3

1
4. 2s – 4t = - 2

5. √ 2 k +2= √5 n

6. 3 √ 5m−2 √7 p=−5
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The following are examples of equations which are not linear:
1. 2x + 3xy = 7 2. X2 + Y + 3x = 16
3. X1/2+ 2y=8 4. 2x + 3xy – 4y = 10

In attempting to identify the form of an equation (linear versus nonlinear), an equation is linear if
5 x−24
2 x= + 10
it can be written in the form of eq. (1.1). A quick glance at the equation 4 might
lead to the false conclusion that it is not linear. However, multiplying both sides of the equation

by 4 and moving all variables to the left-hand side yields:3 x+2 y =40 , which is in the form of
eq. (1.1).

Form of Linear Equation with n variables

Linear equation involving n variables X1, X2, X3 … Xn has the general form:
a1X1 + a2X2 + a3 x3 + . . . + an xn = b . . . ……………………. (1.2)
Where a1, a2, a3 . . . an and b are real numbers and not all a1, a2, a3 . . . an equal Zero.
And this is called standard form of a line.

Each of the following is an example of a linear equation involving more than two variables:
1. 3x1 – 2x1 + 5x3 = 0
2. –x1 + 3x2 – 4x3 + 5x4 – x5 + 2x6 = -80
3. 5x1 – x2 + 4x3 + x4 – 3x5 + x6 – 3x7 + 10x8 – 12x9 = 1250

Characteristics of linear equations

Some of the peculiar characteristics of linear equation are listed below:
1. Linear equations have variables with only one degree (power).
2. The product of two variables should not avail in the linear equation.

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3. The graphs of linear equations are straight linear
4. The coefficients of the linear equations all should be different from zero.

Linear Functions
Linear functions are the relationship between dependent and independent variables. Functional
relationship refers to the case where there is one and only one corresponding value of the
dependent variable for each value of the independent variable.
The relationship between x and y as expressed by y = 0.25x + 20,000. These is called a
functional relationship since for each value of x (independent variable), there is a single
corresponding value for y (dependent). Thus if we write y as expression involving x and
constants x is called the independent variable, then the value of y depends upon what value we
may assign to x and as a result it is called the dependent variable. Therefore, a linear function
refers to a linear equation, which does have one corresponding value of dependent variable for
each value of the independent variable.

Remark: A linear equation involving only two variables can also be denoted in general as:

Y = m x + b………………………………………………. (1_3)

And this is called slope intercept form of a line.

Where,
y- Is the dependent variable
x- Is the independent variable
b- Is the Y intercept (the value of y when the value of x is 0)
m- Is the slope which is computed by dividing change in the dependent variable over
change in the dependent variable
Vertical Change(rise ) Y 2−Y 1 ΔY
m= = =
Horizontal Change (run) X 2−X 1 ΔX

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Dependent and Independent variable
As we discussed in the previous topics, the relationship between y and x expressed by y = mx +
b is called a functional relationship, because for each value of x, there is one and only one
corresponding value for y. Notice that the expression states that y is in terms of x and we connote
this by saying y is a function of x. If we say y is equal to an expression involving x and
constants, then x is called the independent variable and is plotted on the horizontal axis. It means
that the value of y depends upon what value we assign to x. In other way of saying the movement
of y depends on the movement of x, and for that reason y is called the dependent variable, which
is plotted on the vertical axis. Thus, when we plot points, the values of x can be chosen
independently, but the corresponding values of y depend on the values chosen for x.

For example, XYZ manufacturing Company produces shoes using inputs such as leathers,
labors, etc. The firm incurs costs, which are varying with the level of shoes produced. The
dependent variable in this case is total production cost because it increases with number of
Shoes produced whereas the independent variable in this example is the number of shoes
produced.

Example two, Anbessa Shoes manufacturing Company produces shoes using inputs such as
leathers, labors, etc. The firm incurs costs, which are varying with the level of shoes produced.
Dependent variable: Total production cost. Because it increases with number of produced
shoes.
Independent variable: number of produced shoes.

Slope
The other important term in linear function is Slope. Slope is defined as the rate of change in the
dependent variable for a unit change in the independent variable. Any straight line, with the
exception of vertical lines, can be characterized by its slope. Numerically, the slope of a straight
line is the ratio of the rise (or fall) to the run between two points on the line, where rise or fall is
the vertical separation and the run is the horizontal separation of the two points. The slope of a

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line is quantified by a real number and can be computed by dividing the change in the dependent
variable (Y) by the change on the independent variable (X). The sign of the slope (number)
indicates whether the line is rising or falling. The magnitude (absolute value) of the slope
indicates the relative steepness of the line. The slope tells us the rate at which the value of y
changes relative to changes in the value of X. The larger the absolute value of the slope, the
steeper the angle at which the line rises or falls.

Difference of Y ' s change ∈Y

Slope = m = =
Difference of X ' s change∈ X

Δy y 2− y 1
m= = ………………………………………… (1_4)
Δx x 2−x 1

Where Δ (delta) means, “Change in”. Thus Δ y denotes “the change in the value of y” and Δ x
“the change in the value of x.”
Example:
Compute the slope of a line connecting points located at (2, 4) and (5, 12).
Solution
Arbitrarily identify one point as (x 1, y1) and the other as (x 2, y2). Given the location of the two
points (5, 12) as (x1, y1) and (2, 4) as (x2, y2), in moving from (5, 12) to (2, 4)
Δ y = y2 – y1 = 4 – 12 = -8 and
Δ x = x2 – x1 = 2 – 5 = -3

Δy −8 8
Hence, M = = =
Δx −3 3

Example:
Compute the slope of a line segment connecting two points: (5, 8) and (10, -12).

Solution

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 Assume, (x1, y1) as (5, 8) and (10, -12) be (x2, y2)

Δy y 2− y 1 −12−8 −20
M= = = = =−4
Δx x 2−x 1 10−5 5

The slope of a line is quantified by a real number. The sign of the slope (number) indicates
whether the line is rising or falling. The magnitude (absolute value) of the slope indicates the
relative steepness of the line. The slope tells us the rate at which the value of y changes relative
to changes in the value of x. The larger the absolute value of the slope, the steeper the angle at
which the line rises or falls. For example, observe the following line segments.

Exercises:

1. Discuss the difference between linear equations and nonlinear equations.

2. Define slope of a line and discuss the four natures of slope of a line
3. What is the difference between horizontal lines and vertical lines and lines passing through
the origin?
4. Determine the slope, x intercept and y intercept of the following linear equations.
1
x+ y=20
a. 2

b. 5 y=8 x +16

c. −2 x+8 y=0

5. Which of the following pair lines are parallel or perpendicular

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 1
x+ y=20
1 2
x+ y=20
A. 2 B. x +2Y =−20
−2 x+ y=40

5 x−24
2 x= +10
4
C. x +2 y=−30 D. 5 y=8 x +16
x +3 y=−20
6. Which of the following line is horizontal, vertical or neither of the two?

a. y=2 x
−1
b. y= 20
c. x−200=200

7. Which of the following line is negatively sloped, positively sloped, or line with undefined
slope or with zero slope?

A. y−2 x=0

B. x +2 y=40−2 x

C. x=400

D. y=−20

E. y +2 x=0

Y intercepts and X intercept

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Y – Intercept is the value of y when x = 0. Whereas
X- Intercept is the value of x when y = 0
Determine the slope, x intercept and y intercept of the following linear equations.
a. 5y =8x +16
Solution
To find the slope, first we have to put the linear equation in “y = mx+b” form. To do so, divide
both side of the equation by 5.
8
Y= 5 x + 16
8
Hence, the slope is and
5
Y intercept = 8/5(0) + 16/5 = 16/5
X intercept 0= 8/5x+16/5= -8/5x= 16/5↔multiply both side by -5/8
x= -2

Evaluating linear Equations

Introduction
1. Solution sets

Given a linear equation having the form Y = mx + b, the solution set for the equation is the set of
all ordered pairs (x, y), which satisfy the equation. Using set notation, the solution set S can be
specified as:

S = { ( x , y ) / y=mx+ b } ………………………………………… (1_5)

Verbally this notation states that the solution set S consists of elements (x, y) such that the
equation Y = mx + b is satisfied. For any linear equation, S consists of an infinite number of
pairs of values (x, y) which satisfy any linear equation involving two variables.

Example:
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Given the equation 4y = -2x + 16

a. Find any point of values which satisfies the equation.

b. Determine the pair of values which satisfies the equation when x = -2.
c. Determine the pair of values which satisfies the equation when y = 0.

Solution
(a) Arbitrary take x = 4, substituting x = 4 in to the equation we have

4y = -2(4) +16
4y = -8 + 16
4y = 8
y=2

Thus, (4, 2) is one of the points of values satisfying 4y = -2x +16.

Again assume x =5 and substituting in to the equation we have

4y = -2(5) + 16
4y = -10 + 16
4y = 6
3
y =2 .

Thus,
( ) is one of the solution sets.
5,
3
2

Therefore, S =
{ ( )
( 4 ,2 ) , 5 ,
3
2
.. .. ( x , y ) /4 y=−2 x +16
}.

(b) Substituting x = -2 in to the equation we have

4y = -2 (-2) + 16

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 4y = 4 + 16
4y = 20
y=5

Therefore, when x = -2, the pair of values satisfying the equation is x = -2 and y = 5 or (-2, 5).

(c) Substituting y = 0 in to the equation gives

4(0) = -2x + 16
0 = -2x + 16
x=8

Hence, when y = 0, the pair of values satisfying the equation is (8, 0).
Generalizing for n variable linear equations
Given a linear equation involving n variables, the solution set S can be specified as:

S = {( x1 , x2 , x3 ... x n) /a1 x 1 +a 2 x 2+ a3 x 3+...+ an xn =b } …………………. (1_6)

As with the two variable cases, there are an infinite number of elements in the solution set. An
element in S is represented by a collection of values (x 1, x2, x3 . . . xn), one for each of the n
variables in the equation. One way of identifying specific elements in S is to assume values for
n-1 of the variables, substitute these in to the equation, and solve for the value of the remaining
variable.
Example:
Given the equation 2x1 + 3x2 – x3 + x4 = 16, what values satisfy the equation when x 1 = 2, x2 = -1
and x3 = 0?
Solution:
Substituting the given values for x1, x2 and x3 in to the equation yields:
2(2) +3 (-1) – (0) + x4 =16
x4 = 15.
The corresponding element of the solution set is (2, -1, 0, 15).

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Graphing two variable Equations
A linear equation involving two variables has a graph which is a straight line in two dimensions.
In order to graph this type of linear equation, you only need to:
(1) Identify the coordinates of any two points which lie on the line,
(2) Connect the two points with a straight line, and
(3) Extend the straight line in both directions as far as necessary or desirable for your purposes.
The coordinates of the two points are found by identifying any two members of the solution set.
Example:
The graph of the equation 4y = -2x + 16 is found by first identifying any two pairs of values for x
and y which satisfy the equation.

Letting x = 0 the corresponding value for y is 4 and letting y = 0 results in

x = 8. Thus, (0, 4) and (8, 0) are two members of the solution set and their graphical
representation is indicate by the two points in Fig 1.1.

Graph of Linear Equation 4y = -2x + 16

Y
4y = -2x + 16
(0, 4)
(8, 0)
X

Example Two:

Graph the linear equation 4x – 7y = 0

Solution:

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This equation is an example of the situation where two points will not be found by setting each
variable equal to 0 and solving for the remaining variable. Watch what happens! If x = 0
4(0) – 74 = 0 or y = 0
4x – 7(0) = 0 or x = 0

Both cases have yielded the same point (0, 0). Therefore, another value must be assumed for one
of the variables.
If we let x = 7, then we have
4 (7) – 7y = 0
y=4

Fig 1.2: Graph of the linear equation 4x – 7y = 0.

10

(0, 0)
-10 5 5 10
5
10
Two members of the solution set are, then (0, 0) and (7, 4).

Note: Any two variable linear equation having the form y = mx graphs as a straight line which
passes through the origin.

Exercises:
1
−2 y=x−
1. Given the equation 2
a. Find any point of values which satisfies the equation

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 b. Determine the pair of values which satisfies the equation when x = -2
c. Determine the pair of values which satisfies the equation when y = 0
2. Given the equation 2x1 +5x2 + x3 + x4 = 20, what values satisfy the equation when x 1 = 2, x2 =
-1 and x3 = 0?
3. Graph the linear equation 4x – 2y = 20.
4. Graph the linear equation 2x +y = 0.

Determining the Equation of a straight line.

There are three conditions from which we can drive or develop linear equation.
1. Slope and intercept.
In this case, the slope and the y intercepts are known and you are required to develop the linear
equation from this two information. The easiest situations one in which you know the slope m
and y intercept (0, k) of the line representing an equation. To determine the linear equation in
this almost trivial case, simply substitute m and k into the slope intercept form. If you are
interested in stating the equation in the standard form, simply rearrange the terms in the slope
intercept equation.

Example 1
Determine the equation of the straight line which has a slope of -5 and a y intercept of (0,15)
Solution
Substituting values of m = -5 and k =15 into Equation.
Y = -5x + 15
Restated in the form of Equation, an equivalent form of this equation is
5x + y = 15
Example2
Determine the equation of the straight line which has a slope of 0.5 and a y Intercept of (0,0)
Solution
Substituting m = 0.5 and k = 0 in to Eq. gives:
Y = 0.5 x +0
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1. Slope and one point
The second condition is that the slope and one point, the value of x and y, are known. Another
possibility for a line is that you may know the slope and also one member of the solution set (i.e.,
the coordinates of one point on the line). In the last case we said that knowing the slope and the y
intercept of an equation allows you to write out the slope-intercept form directly. In this section,
we talk of knowing the slope and one point-but not the y intercept. Any point which lies on a line
should satisfy the slope intercept equation. If we substitute the known slope m and the
coordinates of the point into equation. we can solve for k. At this stage, we would have m, the
slope, and k, the y coordinate of the y intercept; the equation of the line would follow directly.
Let’s illustrate this with a few examples.
Example1
Given that the slope of a straight line is -2 and one point lying on the line is (2, 8), we can
substitute these values into the Eq., yielding
8 = (-2) (2) + k
12 = k
Knowing that m = -2 and k = 12 leads directly to the slope intercept equation

Y = -2x + 12
And, as before, we can rewrite this equation in the equivalent form
2x + y = 12

Example 2
If the slope a straight line is zero and one point lying on the line is (5, -30), the equation of the
line can be found by first substituting the zero slope and coordinates
(5, -30) into Equation
-30 = (0) (5) + k
-30 = k
Since we know that m = 0 and k = -30 the slope intercept equation is
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y = 0x + (-30)

y = -30

Example

Considering the linear equation 3x – 6y = 24,

(a) What is the slope of the line represented by the given equation?
(b) What is the slope of any line parallel to the given line?
(c) What is the slope of any line perpendicular to the given line?
(d) How many different lines are perpendicular to this line?
(e) Fined the equation of the line which is perpendicular to the given line and which passes
through the point (2, 5).

Solution

(a) The given equation can be restated in slop-intercept form as

-6y = 24 – 3x
1
y = -4 + 2 x

From the equation, the slope can be seen to equal + ½

To lines are parallel if they have the same slope

1 1
(b) Since the slope of the given line equals + 2 , any parallel line will have a slope of + 2 .

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 If a line has a slope m1 (m1 ¿ 0) the slope of any line which is perpendicular to the given line
has a slope equal to the negative reciprocal of the given line, or m2 = -1/m1.

1
(c) since m1 = 2 the slope of any line perpendicular to the line 3x – 6y = 24 is
1
m2 =
1
2

= -2

(d) Because there is an infinite set of lines with m = -2 an infinite number of lines are
perpendicular to this line.
(e) The line we are interested in has a slope equal to -2 and one point on the line is (2, 5).
Substituting these three values into Eq. (1.3) yields
5 = (-2) (2) + k
9=k
Therefore the equation of the line is
y = -2x + 9.
Or alternatively
2x + y = 9.
3. Two points
A more likely situation is that some data points have been gathered which lie on a line and we
wish to determine the equation of the line. Assume that we are given the coordinates of two
points which lie on a straight line.
We can determine the slope of the line by using the two point formula. As soon as we know the
slope, the y intercept can be determined by using either of the two data points. And then, we
proceed as we did in the last section.
Example

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To determine the equation of the straight line which passes through (3, 2) and (4, 4), we
substitute the coordinates in to the two-point formula, resulting in:
M= y2– y1 = 4-2 = 2
x2 - x1 4-3
Substituting m = 2 and the coordinated (3, 2) into Eq. yields:
2= 2(3) + k
2= 6+k
K=-4
Thus, the slope-intercept form of the equation is:
Y = 2x -4

Example :( Depreciation)

The value of a machine is expected to decrease at a linear rate over time. Figure 1.10 shows two
data points on the line which represents the value V of the machine as a function of its age t,
where v is measured in dollars and t is measured in years from the time of purchase.

V
Value in dollars

20,000
(0, 18000)
15,000 (1, 14500)

10,000

5,000
1 2 3 4 5 6 7 t

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 Age of machine in years

The two data points indicate that the value of the machine at t = 0 (time of purchase) is $ 18,000
and its value in one yare will equal $14,500. Determine the slope intercept equation which
relates the value V of the machine to its age t.
Solution

The slope can be determined using the two point formula (Eq. 1_4), resulting in

14 ,500−18 , 000
m=
1−0
−3 , 500
= =−3 , 500
1

Substituting m = -3,500 and (0, 18,000) into Eq. (1.12) - with v and t replacing y and x,
respectively, we get
18,000 = (-3,500) (0) + k
18,000 = k
Consequently, the slope intercept equation is
v = -3,500t + 18,000

Example

For the last example,

a) Interpret the meaning of the slope.
b) At what time t is the value of the machine expected to equal zero?
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Solution
(a) The slope of -3,500 implies that with each additional year of ownership the value of
the machine decreases by $ 3,500. (The term depreciation is often used by accountants
to describe the rate at which an asset declines in value over time.)
(b) V will equal zero when the line crosses the t axis (equivalent to the x intercept);
algebraically, we are searching for the value of t when v = 0. By setting v equal to 0 in
the equation developed in Example 18 and solving for t, we find the machine will have
a value of zero when
0 = -3,500t + 18,000
3,500t = 18,000

18 , 00
t=
3 ,500
t = 5.142 years
Exercises

1. Develop equation of a line with a slope of -2 and y intercept of (0,200).

2. If slope m=0 and one point lying one line is (5,-5) determine the equation of the line.
3. Develop equation of a line with a slope of -2 and passing through point (5,200).
4. A sales man earns a weekly base salary plus a sales commission of 14% of his total sales.
When his total weekly sales equal Birr 2000 his total weekly salary is Birr 630.Derive the
formula describing the relationship between total salary and weekly sales volume. Plot the
graph of the situation.

5. Develop equation of a line passing through two points (2,100) and (2, 200).
6. Let F denotes degree faraniet and C denotes degree Celsius and assume that the relationship
between these two temperatures scales is linear. Two data points on the line relating C and F
are (5, 41) and 25, 77). Using these points determine the slope intercept equation that allows
you to transform C0 to F0 .

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7. Addis Ababa Chamber of Commerce is trying to forecast the number of tourist who will
visit city Dire Dawa in the coming years. Some of the students from the local University
have examined the problem as part of a class project. They estimated this current volume at
60000 tourists. They have also projected that the volume next will be 67500 people and the
volume in the future will continue to grow at the same rate. Determine the slope intercept
equation, which relates the number of tourists (P) to years (t) as measured from this current
year.

The Distance between Two Points

The distance between two points is the length of a straight-line segment that joins the points. To
determine the length of a given segment in coordinate geometry, algebraic procedures are
applied to the x and y coordinates of the end points of the segment. Distance on horizontal and
vertical line segments are used in the computation of the distance. Distance on a vertical segment
(also called vertical separation) is found by computing the positive difference of the y-
coordinates of the end points of the segment. Distance on the horizontal segment (also called
horizontal separation) is found by computing the positive difference of the x-coordinate of the
end points of the segment.

Thus, given two points (x1, y1) and (x2, y2), the quantity / x2 – x1 /, is called the horizontal
separation of the two points. Further, the quantity / y2 – y1 / is the vertical separation of the two
points.
1) Vertical distance
Distance on a vertical segment is found by computing the positive difference of the y coordinates
of the end points of the segment. If x- coordinates of the points at the end of a segment are equal,
the segment is vertical.
Example: (X1,Y1) and (X1,Y2) shows vertical line since the value of x is the same along the
line. The distance between these points would be:
Vertical distance = |Y2 - Y1|
Example: -Find the distance between the coordinates of (6, 8) and (6, 4).

25 | P a g e Business Mathematics
Solution: vertical distance=|Y2-Y1|=|4-8|=|-4|(Distance is 4,since distance is always +ve
2) Horizontal distance

Distance on a horizontal segment is found by computing the positive difference of the x-

coordinates of the end points of the segment. If y coordinates of the points at the end of asegment
are equal, the segment is horizontal.
Example: (X1,Y1) and (X2,Y1) shows a horizontal line since the value of y is the samealong the
line.
Horizontal distance = | X2-X1|
Example: A City that has avenues running east and west, and streets running north to south,
dividing the city into square blocks. To get from (4th street, 3rd avenue) to (10th street, 3rd
avenue).we would walk a distance of 10-4=6 blocks

3 ) Slanting line (The distance formula)

The distance between any two points can be calculated by using the Pythagoras theorem for a
right angle triangle. here we are required to recall Pythagoras theorem, which states that the sum
of the squares of the sides of aright angled triangle equals the square of the slant side
(hypotenuse).
Let a and b are the sides of a right-angle triangle and c is its hypotenuse, then:

a2+b2=c2

c=√a2+b2 b c

Distance of b =|Y2-Y1|

a=|X2-X1| a

Thus, the general formula for finding the distance between any two points that are
in a line segment is given by:
Distance between two points (D)= √ ((X2-X1)2+(Y2-Y1)2)

26 | P a g e Business Mathematics
Example 1:-Find the distance between point “a” and “b” i.e. a(2, 3) and(5, 2)

D= √ ((X2-X1)2+(Y2-Y1)2) = ((5-2)2+ (2-3)2) =√10=3.162

Example 2:-Find the distance between points A (1, 2) and B (4, 6).

D=√ ((X2-X1)2-(Y2-Y1)2)= √ ((4-1)2+(6-2)2) =√ (9+16) =5

Applications of Linear Equations

At the very beginning, we aimed at developing our understanding on the interpretative

application of linear equations in business. Consequently, our interest and purpose in this section
is to learn how we can approximate and relate the mathematical terminology and technique of
linear equations in addressing real world business issues. In dealing with it, we are going to
consider four application areas of linear equations. These are the
(1) Linear cost – output relations analysis
(2) Linear revenue – output relation analysis
(3) Linear profit - output relation analysis and
(4) Break –even analysis
In this particular section, we will consider these application areas to some detail for
manufacturing and merchandising businesses.

1. Manufacturing businesses
Manufacturing firms are those businesses engaged in production of goods and services from the
available raw materials and resources. To produce goods and services, these firms incur cost in
the form of variable and fixed costs. As a result, the summation of variable and fixed costs make
up total manufacturing (production costs). The manufacturing firms incur the costs to make
profit which is the result of the difference between total revenue (the money collected form sell
of goods and services) and total cost (total money flowing out for the acquisition of resources).

27 | P a g e Business Mathematics
A. Linear cost Functions
Organizations are concerned with costs because they reflect money flowing out of the
organization. These out flows usually pay for salaries, raw materials, suppliers, rent, heat,
utilities, and so forth. Accountants and economists often define total cost in terms of two
components: total variable cost and total fixed cost.
Fixed costs are costs that have to be met no matter how much or how little of the commodity are
produced; that is they do not depend on the level of production.
Examples of fixed costs are rents, interest on loans and bonds and management salaries. These
costs are expenditure that the company should incur irrespective of the production level.
Variable costs are costs that depend on the level of production (that is on the amount of
commodity produced). Material costs and labor costs are also good examples of variable costs.
The movement of these costs is determined by the movement of output produced by the
organization. If the output level is high, these costs are expected to be high and if the output level
is low, these costs are expected to be low. In another expression, there is a direct relationship
between variable cost and output level.
These two components must be added to determine total cost.

TOTAL COSTS = VARIABLE COSTS + FIXED COSTS

Assumption of linear cost function

 Constant unit variable cost – the variable cost for each unit is the same regardless of the
number of units produced (implies constant returns to scale or no economies or
diseconomies of scale). This assumption ignores the possibility that the elements of the
production process, laborers or machines, may become more efficient as the number of
units produced increases or that buying raw materials in large quantities may result in
quantity discounts which in turn may lower the variable cost per unit produced.
 All cost involved in the production of goods and services is known
 Fixed cost remains constant over a relevant range

28 | P a g e Business Mathematics
Based on the above assumptions, case the total variable costs are proportional to the amount of
commodity produced. If V denotes the variable cost per unit, then the total variable costs of
producing Q units of commodity is VQ. If fixed costs are Fc, then the total cost, C (Q), of
producing Q units is given by
Total cost equation
Total cost = Total variable cost + Total fixed cost
TC or C (Q) = TVC + TFC
TC or C (Q) = V Q + TFC
Where V = Is variable cost per unit – unit variable cost.
Q = Is the amount of production
TC or C(Q) = Is the total cost

Example 1:
The variable cost of processing 1kg of coffee beans is $ 0.50 and the fixed costs per day are
$300.
a. Give the linear cost equation.
b. Draw its graph.
c. Find the cost of processing 100 kg of coffee beans in one day.

Solution
a) If C(Q) represents the cost in (in dollars) of processing Q kg of coffee beans per day, then
according to the linear function model we have
C (Q) = VQ + FC
Where v is variable cost per unit and Fc is fixed costs per day
V = $0.5 per unit and FC = $300.
Therefore TC = 0.5Q + 300
b) To sketch the graph of C (Q) = 0.5Q + 300, let us first find two points on it.
Letting Q = 0, we have TC = 300; letting Q =200 we have TC = 0.5 (200) + 300 = 400.
Thus two points satisfying cost equation, TC = 0.5Q + 300 are (0, 300) and (200, 400).

29 | P a g e Business Mathematics
Plotting these two points and joining them by a straight line, we obtain the graph.Note that the
relevant portion of the graph lies totally in the first quadrant because x and y are both
nonnegative quantities.
C
Total Cost Line T.C= 0.5 Q + 300

Fixed Cost Line = 300

Q
c) Substituting Q = 100 in the equation C (Q) = 0.5Q + 300 we get
TC = 0.5 (100) + 300
TC = 350. Thus the cost of processing 100kgs of coffee beans per day will be $ 350.
EXAMPLE 2
If the total factory cost (y) of making X units of a product is given by y = 3x + 20, and if 50 units
are made,
A) What is the variable cost (VC)?
B) What is the total cost (TC)?
C) What is the variable cost per unit (VC/unit)?
D) What is the average cost per unit (AC/ unit)?
E) What is the marginal cost of the 50th unit?
Solution
Given, total cost = y = 3x + 20
x = Units produced
x = 50 Units
A) Variable cost is the cost that varies with the level of production and it can be obtained by
multiplying the slope or the marginal cost with the number units produced (x).
That is, VC = m x
= 3x 50 = Birr 150
B) TC is the sum of fixed cost and variable cost. In the equation given y =3x + 20, the term
3x represent the VC and the constant 20 is the fixed cost. Thus

30 | P a g e Business Mathematics
 TC = y = 3x+20
= 3(50) + 20 + 150 + 20
= Birr 170
C) Variable cost per unit = vc / unit = vc / x = 150 / 50 = Birr 3
D) AC is given by total cost divided by Number of units produced. Thus,
AC/ unit = TC/ x = (VC+FC)/ x = (150 + 20) / 50 = 170 / 50 = Birr 3.40
E) The slope of a linear equation is equal to the marginal cost of any given level of
production thus, MC = 3.

In alternative approach, MC is the extra (additional) cost of producing one more unit of output.
Thus, the marginal cost of producing the 50th unit is equal to the additional cost in producing the
50th unit.
Therefore, MC= ΔTC = TC of producing 50 units – TC of producing 49 units
50 – 49
= (3 (50)+20) – ( 3 (49) +20)
50 – 49
= 170 – 167 = Birr 3
1
Exercise 1

A firm which produces a single product is interested in determining the function that
expresses annual total cost (TC) as the function of units produced Q. Accountants indicate the
fixed expenditures each year are $ 50000. They also have estimated that raw materials costs
for each unit produced are $ 5-50 and labor costs per unit are $1.50 in the assembly
department $ 0.75 in the finishing room, and $1.25 in the packaging and shipping department.

a) Develop total cost function

b) Draw the graph

B. Linear Revenue Functions

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The money which flows into an organization from either selling products or providing services is
often referred to as revenue. The most fundamental way of computing total revenue from selling
a product (or service) is:

Total revenue = (price) (quantity sold)

An assumption in this relationship is that the selling price P is the same for all units sold Q. If a
firm sells a product, where Q equals the number of units sold of a product and P equals the price
of a product Q, then total revenue function is:

TR or R(Q)= PQ

A firm sells a single product for $ 65 per unit.

a. Construct the revenue function in terms of quantity sold, Q.
b. Plot the graph.
c. What is the total revenue of selling 200 units of output?
Solution
a. If the selling price equals $ 65 per unit, total revenue is computed by using the function
R (Q) = P Q
R (Q) = 65Q
b. To plot the graph of R (Q) = 65Q; let Q = 0 then R (Q) = 0 (0, 0) is the point on line
Y = 65x. And letting Q = 20 we get R (Q) =1300. This means (20, 1300) is also on the line y
= 65x. Therefore, show these points on Q plane and connect them by a straight line.
Total Revenue
Total Revenue Line R = 65 Q

Q
c. insert 200 in to the equation R(Q)= 65(200) = 13,000
C. Linear profit functions

32 | P a g e Business Mathematics
Profit for an organization is the difference between total revenue and total cost.
Stated in equation form,
Profit = Total revenue – Total cost
Π (Q) = R (Q) – C (Q)
When total revenue exceeds total cost, profit is positive. In such cases the profit may be referred
to as a net gain, or net profit. When total cost exceeds total revenue profit is negative and it may
be called a net loss or deficit. When both total revenue and total cost are linear functions of the
same variable, the profit function is also a linear function of the same variables. That is if Total
Revenue = R (Q) and Total cost = C (Q) profit is defined as
Π (Q) = R (Q) – TC
Π (Q) = P(Q)- VQ-TFC
Π (Q)= (P-V)Q-TFC
Example:A firm sells a single product at $65 per unit. Variable costs per unit are $20 for
materials and $27.50 for labor. Annual fixed costs are $ 100,000.
a. Construct revenue, cost & profit functions in terms of quantities produced and sold.
b. Show graphically the equations.

Solution
a) If the product sells for $65 per unit, total revenue is computed by using the function
R (Q) = 65Q
Similarly, total annual cost is made up of material costs, labor costs and fixed costs:
C (Q) = 20Q + 27.5 Q + 100,000
C (Q) = 47.5Q + 100,000
Thus the profit function is computed as
Π (Q) = R (Q) – TC
Π (Q) = 65Q – (47.5Q + 100,000)
Π (Q) = 17.5 Q – 100,000
B) Graph of Revenue and Cost Functions
TC and TR
Profit Area Total Revenue Line T.R= 65 Q

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 Loss Area BEP Total Cost Line T.C = 47.5 Q +
100,000

Fixed Cost = 100,000

R (Q) = 65Q
C (Q)
R (Q) TC = 47.5Q + 100000
P (Q)
($ 000)

(2,195) P (Q) = 17.5Q-100,000

(0, 100) (2, 130)

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 100 FC = 100,000

(0, 0) (5.714, 0)

2 5.714 Q (000, units)

-100 (0, -100)

Fig 1.9: linear cost, revenue, and profit functions

D. Break Even Model

In this sub section, we will discuss about break-even models, a set of planning tools which can
be, and has been, very useful in managing organizations. One significant indication of the
performance of the companies is reflected by the so-called “bottom line” of the income statement
for the firm that is how much profit is earned. Break even analysis focuses on the profitability of
a firm. In dealing with break-even analysis, we identify the level of operation or level of output
that would result in a zero profit. This level of operation or output is called the break-even point.
The break-even point is a useful reference point in the sense that it represents the level of
operation at which total revenue equals total cost. Any changes from this level of operation will
result in either a profit or a loss. Break-even analysis is valuable particularly as a short-term
planning tool when firms are contemplating expansions such as offering new products or service.

35 | P a g e Business Mathematics
Similarly, it is useful in evaluating the pros and cons of beginning a new business venture. In
each instance, the analysis allows for a projection of profitability.
Assumptions
 The selling price per unit of output is constant.
 The variable cost for producing one unit is known and constant.
 The periodic fixed cost is constant in relevant range
 Price per unit of output is greater than the variable cost per unit of out put.
The break-even point may be expressed in terms of
 Volume of output (or level of Activity)
 Total dollar sales
 Percentage of production capacity.
Let us now drive a formula for breakeven point or Q*.
TR = TC. Sine TR =PQ and TC =VQ +FC ,
PQ = VQ + FC
PQ* = VQ* + FC
PQ* – VQ* = FC
Q* (P - V) = FC
FC
Q∗¿
(P−V )
Example 1: A group of engineers is interested in forming a company to produce smoke
detectors. They have developed a design and estimate that variable costs per unit, including
materials, labor, and marketing costs, are Br.22.50. Fixed costs associated with the formation,
operation, and management of the company and the purchase of equipment and machinery total
Br.250,000. They estimate that the selling price will be Br.30 per detector.
A. Determine the number of smoke detectors, which must be sold in order for the firm to break
even on the venture.
B. Preliminary marketing data indicate that the firm can expect to sell approximately 30,000
smoke detectors over the life of the project if the detectors are sold for Br.30 per unit.
Determine expected profits at this level of output.
Solution
a. The total revenue function is represented by the equations
36 | P a g e Business Mathematics
 R (Q) = 30Q
The total cost function is represented by the equation
C (Q) = 22.50Q + 250,000
The break-even condition occurs when total revenue equals total cost, or when
R (Q) =C (Q)
For this problem the break-even point is computed as
30Q* = 22.50Q* + 250,000
7.50Q* = 250,000
Q* = 33,333.33 units
The alternative approach is to first write the profit function and set it equal to zero as follows:
P (Q) = R (Q) – C (Q)
= 30 – (22.50Q + 250,000)
= 7.50Q – 250,000
Setting the profit function P (Q) equal to 0, we have
7.50Q*– 25,000 =0
7.50Q* = 250,000
Q* = 33,333.33 units
Our conclusion is that given the assumed cost and price parameters (values), the firm must sell
33,333.33 units in order to breakeven.
b. With sales projected at 30,000 smoke detectors,
π= 7.5(30,000) – 25,000 = 225,000 – 250,000 = -25,000
This suggests that if all estimates hold true-price, cost and demand- the firm can expect to lose
Br.25, 000 on the venture.
To further our understanding of break-even analysis, let us consider the following break-even
chart.

Re Profit (R > C)
ve
Revenue
nu
e/
co BEP
st

Variable cost
37 | P a g e Business Mathematics
FC

Loss Fixed cost (FC)

(R < C)
 Total
Cost

Break Even Point (BEP) and other points

Observations: From the above break – even chart, we observe certain important points.
i. As such, the total revenue line passes through the origin and hence has a y-intercept of 0 while
the total cost line has a y intercept which is equal to the amount of the fixed cost
ii. The fixed cost line which is parallel to the quantity axis (x – axis) is constant at all levels of
output.
iii.To the left of the break – even point the revenue line is found below the cost line and hence
any vertical separation indicates a loss while to the right the opposite is true.
iv.The total variable cost, which is the gap between the total cost and the fixed cost line
increases as more units are produced.
v. Important linear cost – output expressions (equations):
 C = v q + FC
 R=pq
 Average Revenue (AR) = R ÷ q = p q ÷ q = p
 Average Variable Cost (AVC) = v q ÷ q = v = Slope (m)
 Average Fixed Cost (AFC) = FC ÷ q
 Average Cost = C ÷ q = AVC + AFC
 Profit ( π ) = R – C

2. Merchandising (retail) businesses

Retailers are businesses owners that are engaged in buying and reselling of goods and services.
These firms purchase products and resell them at a price, that is, presumably above the cost.
A. Cost functions of Retailers
Suppose that an item that cost (purchased at) $ 130 is priced to sell at $200. TheMark up the
difference between selling price (retail price) and purchasing cost is $ 70. That is

38 | P a g e Business Mathematics
 Mark up = purchasing Costs – retail (selling prices)
Purchasing Cost = $130
Retail price = $200
Mark up= Retail price –purchasing cost
= 200 – 130
= $70
From manager’s view point, the dollar (Birr) amounts of mark up on numerous individual items,
which will vary widely, are not very useful in planning and controlling operations. What is
useful is the overall mark up percentage on all items.

For comparability in different items, Markup is viewed in one of two ways:

1 As a function of the cost, and
2 As a function of retail price
In the current example the mark up as the function of cost is
Mark Up 70
= =0.54=54 %
Cost 130
On the other hand, in financial statements accountants use the concept of margin, which is the
markup percentage on retail price. Margin is the percentage of mark up as of retail price
In our example, this is:
Mark Up 70
Margin= = =0.35=35 %
Retail Price 200
This means that 35 percent of the retail price of $200 is margin and the other 65 percent of $200
which 0.65(200) = $130 is the purchasing cost (cost of goods sold).

We now suppose that the company in our illustration uses a margin of 35 percent on all items it
purchases, so that if the firm sells $x worth of merchandise (goods and services), 35 percent of
this amount is margin and 65 percent is cost. Thus,
Purchasing cost (cost of goods sold) = 0.65 x
Total variable cost is the sum of purchasing cost which is the significant cost of merchandising
firms and additional variable costs which is variable costs incurred by retailers except purchasing
cost. That is:

39 | P a g e Business Mathematics
 Total variable costs = Purchasing Costs + Additional Variable costs

Continuing our example, if the company incurs selling expenses, which it budgets at 10 percent
of the volume of sales (x), that is selling expense (additional variable costs) = 0.1x if the
company budgets fixed expense at $12,000:

Thus for example at a sales volume (total revenue) of $60,000 cost will be:
Y (TC) = 0.75 (60,000) +12,000
Y (TC) = 57,000

And profit before taxes will be:

∏ = TR -TC
60,000 – 57,000
∏= $3000

Driving the Break-Even Level of Sales

Let us symbolize some important components of the formula. Thus, consider the equation
y = m x + b, where y = represent the total cost
m = represent the variable cost per dollar of sales
x = represent the sales volume (Revenue)
m x = total variable cost
b = the fixed cost
As we have considered in the former case, at break even revenue is equal to cost. That is, y = x.
Further, at break – even, the amount of dollar sale is equal to the cost, thus the break – even level
of sales (xe) is equal to y and x.
Therefore, y = x = xe

40 | P a g e Business Mathematics
Then at the break-even point, y and x can be substituted by xe in the equation of
y = mx + b.
Accordingly, xe – m (xe) = b. Now let us solve for xe.
xe = m(xe) + b
xe – m (xe) = b
xe (1 – m) = b
xe(1−m) b
=
(1−m) (1−m)
b
Thus, Xe= is the expression for Break Even level of sales
(1−m)
¿ Cost
Or, Xe=
(1−Variable Cost per Dollar of sales)
Example
Suppose that in making a budget for next year’s operations, top management of Hirmata
Business Group has set a sales goal of Birr 200,000 per week. Margin is to be 45% of retail price
and other variable cost is estimated at Birr 0.05 per birr of sales. Fixed cost is projected at Birr
56,000.
a. What is the linear sales-cost equation?
b. What is the breakeven volume of sales in birr per week?
c. What is the company’s profit if sales goal is attained?
d. What is the company’s profit if it sells merchandise that worth Birr 100,000?
e. Plot the company’s cost-sales model.
Solution
Given values, Margin = 45% = 0.45
Other variable cost = 0.05 per birr of sales
Fixed cost (b) = birr 56,000
Sales goal (Revenue R) = Birr 200,000
x = the monetary (dollar) amount of sales (sales volume)
In addition, if margin is given as 45% the remaining 55% or 0.55 represent the cost. Thus, the
variable cost per birr of sales is equal to
m = (100 % - margin percentage) + other variable cost

41 | P a g e Business Mathematics
= (100% - 45%) + 0.05
Taking these values, we can solve out the problem
a. The equation y = m x + b
y = 0.6 x + 56.000 = 0.55 + 0.05 = 0.60
b. Break-even volume of sales

For any amount of sales volume (Revenue) greater than birr 140,000 profit will be attained. At
the targeted level of sale, the profit will be obtained as follows.
Profit = Revenue – Cost – R-C
= 200,000 – (0.06x200,000 + 56,000)
= Birr 24,000
D. Profit if the sales volume (revenue) is birr 100,000.
Profit (A) = R – C
= 100,000 – (m x + b), since cost (c) or y = mx + b
= 100,000 – (0.6 (100,000) + 56,000)
= 100,000 – (60,000 + 56,000)
= 100,000 – 116,000
= (Birr 16,000)
Hence, at sales volume of birr 100,000 the company incurs a loss of Birr 16,000.
E. Graph of cost – sales model or break – even chart

42 | P a g e Business Mathematics
 Exercises

1. A firm sells a product for $60 per unit. Raw material costs are $12.50 per unit, labor costs
are $17.50 per unit, and annual fixed costs are $120,000.

a. Determine the profit function P (Q) where Q equals the number of units
sold.
b. How many units would have to be sold to earn an annual profit $150,000?

2. A city has purchased a new asphalt paving machine for $120,000. The city comptroller
states that the machine will be depreciated using a straight-line method. At the end of 8
years, the machine will be sold with an expected salvage value of $24,000.
a. Determine the function V = f (t) which expresses the book value of the
machine V as function of its age t.
b. What is the book value expected to be when the machine is 6 years old?
3. Since 1970, there has been a seemingly linear increase in the percentage of the population
of one European city which is alcoholics. In 1970, the percentage was 10.5 percent. In
1976, the percentage had risen to 12.9 percent. If P equals the percentage of the population

43 | P a g e Business Mathematics
 that are alcoholics and represents time in years since 1970 (Hint, t = 0 for 1970).
a. Determine the linear growth function P = f (t).
b. Interpret the meaning of the slope.
c. If the pattern of growth continues, forecast the percentage of alcoholics
expected in 1985. What is the forecast for 1995?
4. A publisher has a fixed cost of $150,000 associated with the production of a college
mathematics book. The contribution to profit and fixed cost from the sale of each book is
$3.75.
a. Determine the number of books which must be sold in order to break even.
b. What is the expected profit if 30,000 books are sold?
5. A local university football team has added a national power to next year’s schedule. The
other team has agreed to play the game for a guaranteed fee of $75,000 plus 25 percent of
the gate receipts. Assume ticket price are $8.

a. Determine the number of tickets which must be sold to recover the $75,000
guarantee.
b. If college officials hope to net a profit of $180,000 from the game, how many
tickets must be sold?
c. If a sellout of 50,000 fans is assured, what ticket price would allow the university
to earn the desired profit of $180,000?
d. Again, assuming sellout, what would total profit equal if the $8 price is charged?

6. A manufacturing of cassette tapes has affixed cost of $60,000 and variable cost it $ 4 per
cassette produced. Selling price is $ 7 per cassette.

a. Write the revenue and cost equations

b. At what number of units will break even occur?
c. At what sales (revenue) volume will break even occur

7. If fixed costs are $5000 per week variable costs are $21 per unit and the selling price is $
44 | P a g e Business Mathematics
 46 per units, find the break-even point.
8. A company expects fixed cost of $ 36,000 Margin is to be 52 percent of retail and
variable cost in addition to cost of goods sold (purchasing cost) is estimated at $ 0.07 per
dollar of sales.
a. write the equation relating cost and sales
b. find the break-even point
c. What will net profit before taxes be on sales of $75, 000?
d. Make break-even chart
9. If total cost Y is related to sales volume, x by the equation y = 0.47x + 29 786, find.
a. variable cost per dollar of sales
b. Fixed costs.
c. Total cost on sales of $ 72,000
d. The break-even point
e. Net profit before taxes on sales of $ 30,000

45 | P a g e Business Mathematics
 Chapter 2
Matrix Algebra and Its Application
Chapter Contents

1.1. Matrix Concepts

1.2. Dimensions and Types of Matrix
1.3. Matrix Operations and Techniques
1.4. Inverse of a Matrix
1.5. Matrix Applications
1.6. Solving Systems of Linear Equations
1.7. Markov Chains: Concepts, Models and Solutions

Chapter Objectives
After studying this Chapter, Students will able to understand and be acquainted with the
following:
 Be able to define and meaning of a matrix
 Be able to understand what dimension of a matrix is and the main categories of matrix
 Develop an insight towards basic operations in matrix (transposition, addition,
subtraction and multiplication) and the techniques
 Ba able to have the know-how to inverse of a matrix and ways of inverting a matrix
46 | P a g e Business Mathematics
  Ba able to have the know-how an insight how to apply areas of matrix algebra
 Be able to handle large linear system using matrix algebra and
 Be able to undertake Markov chain analysis with the help of matrix algebra

2.1 Introduction
It is evident that managerial problems are amenable to quantification thereby calling up for the
application of mathematical models. Of the various quantitative technique. This chapter tries to
introduce student of business stream about major topics is matrix algebra. The chapter deals with
basic concepts of matrix algebra, dimension and types of matrices, matrix operation and
techniques, inverse of a matrix and major application including solving system of linear
equations and Markov chain analysis.
This part of the module introduces students of business stream about matrix algebra principles
and ways of applying them in handling real life business problems at individual or organizational
level scientifically. Thus, the major objective of this chapter is to enable students to have an
insight and exposure in matrix algebra manipulation and thereby enabling them to impart
knowledge of applying techniques in handling real life problems.

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Matrix Concepts
A matrix is a rectangular array of numbers, parameters, or variables each of which has a
carefully ordered place within the matrix. The numbers (parameters or variables) are referred to
as elements of the matrix. It is customary to enclose the elements of a matrix in parentheses,
brackets, or braces to signify that they must be considered as a whole and not individually. A
matrix is any rectangular form of numbers arranged in rows and columns. Rows of a matrix are
numbered from top to the bottom & Columns of a matrix are numbered from left to right. A
matrix is often denoted by a single letter in bold face type. The first subscript in a matrix refers to
the row and the second subscript refers to the column.
A general matrix of order m x n is written as Follows:
a11 a12 a1n
a 21
A= a22 a 2n

a m1

a m2………a mn

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If a matrix has m rows and n columns thus, m by n is called order (dimension) of
a matrix In matrix A, the subscript numbers represents the row and the column on
which an entry (member) is located. On the matrix A , from the above example;
a11 means, „a‟ is located on the first row and first column of matrix A,
a21 means „a‟ is located on the second row and first column of matrix A,
amn means ‟a‟ is located on the mth row and nth column.

( )
a11 a 12a 1 n
a 21 a 22 a 23
a 31 a 32 a33
3x3

The elements all have double subscripts which give the address or placement of
the element in the matrix; the first subscript identifies the row in which the
element appears and the second identifies the column. For instance, a23 is the
element which appears in the second row and the third column and a32 is the
element which appears in the third row and the second column.
Dimensions and Types of Matrices
Dimension of a matrix is defined as the number of rows and columns.

Based on their dimension (order), matrices are classified in to the following types:

Vector Matrix: - Matrices with only one row or one column. These matrices
can also be referred to as row and column matrices.
A row matrix: is a matrix that has only one row and can have many columns.

E .g. A= (2 5 7) is a row matrix of order 1x3.

A column matrix: is a matrix with only one column and can have many rows.

[]
1
E.G 2 is a column matrix of dimensions 3x1
6
1. Square matrix: is a matrix with equal number of rows and columns.
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 1 4 3
E.g. D = 2 6 E= 2 2 5
3 8 ; 8 6 9

2. Diagonal matrix: is a square matrix where it’s all non- diagonal elements are
zero.

( )
200
E.G. X= 060 is a diagonal matrix of order 3x3.
0 011

3. Unit matrix (Identity matrix): is a type of diagonal matrix where its main
diagonal elements are equal to one while the other elements equal to Zero.

( )
100
Example: B= 0 1 0
001

4. Scalar matrix: a square matrix is called a scalar matrix if all its non- diagonal
elements are zero and all diagonal elements are equal

( )
600
Example: ( )
Y = 2 0 Z= 0 6 0
02
006

5. Null matrix (zero matrix): a matrix is called a null matrix if all its elements
are zero.

( )
000
Example: B= 0 0 0
000

6. Equal Matrix: two matrices are equal, if and only if, they have the same order
and each entry in one matrix is identical with the corresponding entry of the other
matrix. For two matrices to be equal, they must be of the same size and have
all the same entries in the same places.
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 ( ) ( )
12 3 1 23
Example: Y = 3 4 5 Z= 3 4 5
678 678
7. Symmetric matrix: a matrix is said to be symmetric if A = At.

( )
82 1
B= 2 3 4
145

N.B: Every scalar matrix is a diagonal matrix; whereas a diagonal matrix

need not be a scalar matrix. Every unit matrix is a scalar matrix; whereas a
scalar matrix need not be a unit matrix.

MATRIX OPERATIONS AND PROPERTIES

1. Matrix equality: two matrices are said to be equal if and only if they have the
same dimension and corresponding elements of each matrix are equal.

Example: { } { } { }
A= 3 0 B= 3−4 C= 3 0
1−4 10 1−4

👉 A ≠ B; A = C; B ≠ C.

2. Transpose of a matrix: If the rows and columns of a matrix are interchanged

the new matrix is known as the transpose of the original matrix. If the original

matrix is denoted by A, the transpose is denoted by A or At. Transposition

means interchanging the rows or columns of a given matrix. That is, the rows
become columns and the columns become rows.

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 { }
3569
B = 0 1113 8
6834

The transpose of matrix B denoted by B’ or Bt as follows

{ }
306
5 118
B’ or Bt =
6 13 3
98 4

The dimension of B is changed from 3x4 to 4x3.

Properties of the transpose

The following properties are held for the transpose of a matrix:

👉 Property 1: (At)t =A

👉 Property 2: (aA)t = aAt, where (a) is a scalar (at = a)

👉 Property 3: (A+B)t = At + Bt

👉 Property 4: (AB)t = BtAt

3. Addison and subtraction of matrices: Two matrices A and B can be added

or subtracted if and only if they have the same order, which is the same
number of rows and columns. That is, the number of columns of matrix A is
equal to the number of columns of matrix B, and the number of rows of
matrix A is equal to the number of rows of matrix B. Two matrices of the same
order are said to be conformable for addition and subtraction. The sum and
subtraction of two matrices of the same order is obtained by adding together or
subtracting corresponding elements of the two matrices.
If A= (aij) and B= (bij), then C = A+B is the matrix having a general element
of the form; Cij = aij + bij. D = A-B → Cij = aij - bij .

A= {−52 06} B= {34 61}

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 A+B= {−5+4
2+3 0+6
6+1 } {−15 }
56

{}
12
If A= 35 and B=
16
24
31 { }
 A+B is not defined, since orders of A and B are not the same.
Properties of matrix addition

a. Commutative law: A+B = B+A

b. Associative law: (A + B) + C = A + (B + C)

c. Existence of identity: A+ 0 = 0 + A = A.

NB: The subtraction (difference) of two matrices of the same order is obtained by
subtracting corresponding elements.

👉 A-B ≠ B-A, thus matrix subtraction is not commutative.

👉 (A-B) –C ≠ A- (B-C) ; matrix subtraction is not Associative.

4. Matrix Multiplication

Two matrices A and B can be multiplied together to get AB if the number of

columns in A is equal to the number of rows in B.

A B
mxn
n x s

Inner dimension

Outer dimension
If two matrices have the same inner dimension, then we can get the product of the
matrices. The resulting matrix will have a dimension equal to the outer dimensions
of the two matrices. There are two types of matrix multiplication: multiplication
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 by a scalar and multiplication by a matrix.

I. Scalar multiplication: in this type of multiplication, we multiply the scalar by

each element of the given matrix

{}
12
A= 3 5
16

{ }
1∗4 2∗4
A∗4= 3∧¿ 4 5∗4
1∗4 6∗4

{ }
48
A∗4= 12 20
4 24
II. Multiplication by a matrix: multiplication by a matrix can be performed if the
number of columns in the first matrix is equal to the number of rows in the
second matrix. In this type of multiplication, we always multiply each row of the
first matrix by each column of the second matrix and sum the resulting outcome

Markov Chain Analysis

Markov analysis is a method of analyzing the current behavior of some variables in an effort to
predict the future behavior of that same behavior. This procedure was developed by the Russian
mathematician Andrei A. Markov early in this century. He first used it to describe and predict the
behavior of particles of gas in a closed container. As a management tool markov analysis can be
applied to a wide variety of decision situations. Perhaps its widest use is in examining and
predicting the behavior of consumers in terms of their brand loyalty and switch over from
one brand to another. A more recent application of this technique has been to the study of
accounts receivable behavior, that is, to the study of consumers as they change from " current
account" through "30 days overdue" to "30 to 60 days overdue" and then to " Bad debt". In each
of this applications management is interested in predicting what the future will bring (number of
bad debts, for example, in the account receivable application) by analyzing what the current
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behavior is (propensity of customers to move from one current account to various past due
categories).

Markov analysis operates under certain assumptions. In order for a system to be considered
Markov, it must satisfy the following assumptions:

 It will operate or exist for a number of periods.

 The states are both mutually exclusive and collectively exhaustive.
 System changes between states from period to period should be described by
transition probabilities, which remain constant.
 The probability of the system being in a given state in a particular period depends only
on its state in the preceding period and the transition probabilities
 The system is a closed one i.e. there will be no arrival or exits from the system.

The markov system is useful both for short-term decisions and long-term decisions. These
decisions are important to make effective resource allocation. There are three methods to deal
with the problem, decision tree and matrix for short-term behavior and algebraic method for
long-term behavior.
State of transition matrix
A system whose behavior can be described as a markov process can be summarized by a set of
conditional, or transition probabilities, which indicate the tendency of the system to change from
one period to another period to the next. Assume a small town, which has a population of 1000
all drinking either the Coca Cola brand or Pepsi Cola. The following table shows switch of
customers from one brand to another.
Brand Clients at the beginning Gains Losses Clients at the end
of the period of the period
Coca cola 400 120 40 480
Pepsi Cola 600 40 120 520
What Pepsi loses is what Coca gains and vice versa. Now to develop the transition probabilities, it
is important to calculate the probability of customer retention, gain and loses.

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Retention
Coca Cola customers retained, 400-40=360 the probability is then 360/400= 0.9
Pepsi Cola customers retained, 600-120=480 the probability is then 480/600= 0.8
Gain and Lose
Coca Cola loses 40 customers; the probability is then 40/400=0.1
Coca cola gains what Pepsi loses. The probability of lose for Pepsi is then 120/600= 0.2
The transition matrix can now be constructed. The loss probabilities are inserted across the row
and the gains across the column. The sum of the probabilities in each row must be one because it
contains both probabilities that are retention and lose. For the above example the state transition
probabilities are summarized in the following state transition matrix.

Transition matrix
To
From Coca Cola Pepsi Cola
Coca Cola 0.9 0.1
Pepsi Cola 0.2 0.8

The transition matrix shows that Coca cola will retain 90% of its customers and gain 20% of
Pepsi cola and Pepsi cola retains 80% of its customers and gains 10% of Coca cola customers.
No customer can drink both brands at a given period and there is no other brand in the market
that is the probabilities are mutually exclusive and collectively exhaustive. In addition to this the
switch occurs every month. With the given month the probability is assumed the same
Decision tree analysis
Assume the above example, to determine the market share of each brand in the coming two
months we can use the decision tree and calculate the probability as follows
Coca Cola 0.81
0.9
Coca cola
0.9 0.1 Pepsi Cola 0.09

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Coca Cola Coca Cola 0.02
0.2
0.1
Pepsi Cola

0.8 Pepsi Cola 0.08

Pepsi Cola 0.64

0.8
Pepsi cola
0.8 0.2 Coca Cola 0.16

Pepsi Cola Pepsi Cola 0.02

0.1
0.2
Coca Cola
0.9 Coca Cola 0.18
The decision tree shows that from customers of coca cola in period 0, 90% will remain there
while 10% shift to the other brand Pepsi Cola in period 1. Like wise, 80% of Pepsi Cola
customers remain loyal but 20% switch to Coca Cola. In period 2, the joint probability should be
computed to determine the probability of the market share for each brand.

Joint probability
Coca Cola Pepsi Cola
Coca Cola 0.9x0.9+0.1x0.2=0.83 0.9x0.1+0.1x08=0.17
Pepsi Cola 0.8x0.2+0.2x0.9=0.34 0.8x0.8+0.2x0.1=0.66

As the table shows at the period 1 will have 90% of its customers and 20% of customers of Pepsi
Cola. 400x0.9+600x0.2, which is equal to 480 and Pepsi cola will have 80% of its customers at
period 0 plus 10% of customers of Coca Cola i.e. 0.8x600+0.1x400 which is equal to 520. In

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period 2 Coca Cola will have 83% of its customers and 34% of customers of Pepsi cola at period
0. Pepsi Cola will have 66% of its original customers and 17% of customers of Coca Cola.

Coca Cola's share of market is equal to 83%x400+34%x600 that is equal to 536.

Pepsi Cola's share of market is equal to 66%x600+17%x400 that is equal to 464.

The system will continue like this until it will reach an equilibrium condition at some point,
which will be discussed later.

Markov analysis offers such a tool for marketing analysis. The decision maker can able to draw
more accurate conclusions about the marketing position, both at present and in future.

The decision tree is helpful in that it portrays the system behavior visually. However, as the
number of periods increases, it will be difficult to compute through this method. When such is
the case, determining by the use of matrix algebra is an alternative.

Markov chain analysis through Matrix algebra

In the transition probabilities matrix the row represents the probability of retention and losses of
customers and the column represents the retention of customers and the gain of customers. Look
at the following example.
Example 1: Assume that only three Department stores exist in the city of Addis Ababa namely
Department store A hereinafter called simply A, Department store B hereinafter called simply B
and Department store C hereinafter simply called C. At the beginning of June 1 2001, lets
assume that 80% of A's customers are loyal and 10% goes to B and the remaining 10% to C.
Like wise 90% of B's customers are loyal and 7% will goes to A and 3% to C. 75 % of C's
customers are loyal and 15% will switch to A and 10% to B.

The probability of retention and loses are written across the row and the probability of retention
and gain down the column.

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 A B C
A 0.8 0.1 0.1
B 0.07 0.9 0.03
C 0.15 0.10 0.75

If we assume that all the customers have been shopping at one store at the start, then we develop
the current proportion, which is referred as a probability vector.

Starting from Current Matrix

A [ 1 0 0 ]

B [ 0 1 0 ]

C [ 0 0 1 ]

After finding the current probability vector we can easily compute the next by multiplying the
probability vector with the transition matrix. If all the customers were at A at the beginning of
the period, the next probability is computed as follows:
A B C
[1 0 0] 0.8 0.1 0.1
0.07 0.9 0.03
0.15 0.1 0.75
We have 1 by 3 and 3 by 3 therefore both are conformable for multiplication. And the resultant
matrix is a 1 by 3 matrix.
1x0.8+0x0.07+0x015, 1x0.1+0x0.9+0x0.1, 1x0.1+0x0.03+0x0.75
0.8 0.1 0.1
The next probability is determined by using the new probability vector it looks as the following
A B C
[0.8 0.1 0.1] 0.8 0.1 0.1

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 0.07 0.9 0.03
0.15 0.1 0.75
(0.8x0.8)+ (0.1x0.07)+ (0.1x015), (0.8x0.1)+ (0.1x0.9) + (0.1x0.1), (0.8x0.1)+ (0.1x0.03)+
(0.1x0.75)= 0.662 0.18 0.158
Now we have the probability vector [0.662 0.18 0.158]
It will continue like this up to some point and the shift will be stagnant. Such a point is called
point of equilibrium or long-term state. In general we do have the following formula to predict
the nth state of the system.
Markov Chain Formula
nth state of a Markov Chain.
Vij (n) = Vij (n-1) x p, or Vij (n) = Vij (0) x (P) n.
Or
Vij (n) = Vij (0) x (P) n. Where: P = transition matrix
Vij (n) = Vector for period n.
Vij (n-1) = vector for period n-1

Steady state or equilibrium situations

It is reasonable to assume that in the future a state of equilibrium might be approached regarding
market shares; i.e., the exchange of customers under equilibrium would be at a point where
exchange of customers is to freeze. Of course, equilibrium could result only if no action is taken
that alters the transition probabilities.
In our previous example, we have seen how customers switch from one Department store to
another from time to time. Taking the same example we can see that how equilibrium will be
reached.

A B C
A 0.8 0.1 0.1

B 0.07 0.9 0.03

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 C 0.15 0.1 0.75

The probability of A, B and C is calculated as

Eq-1 A=0.8A+0.07B+0.15C
Eq-2 B=0.1A+0.90B+0.10C
Eq-3 C=0.1A+0.03B+0.75C
Because the states are mutually exclusive and collectively exhaustive the sum is 1. Hence,
A+B+C=1
To calculate for the probabilities we have to ignore one of the equations as we have three
unknowns and four equations. For convenience it is better to eliminate one of the first three, as
the fourth equation will help us calculate the probabilities conveniently.
From equation four the value of C is equal to 1 minus the probability of A and B i.e.
C= 1-A-B
By inserting the value of C in to equation 1 and 2 we can solve for the probabilities

A= 0.8A+ 0.07B+0.15(1-A-B) which is equal to

A= 0.8A+0.07B+0.15-0.15A-0.15B and this is equivalent to
0.35A+0.08B=0.15 similarly we calculate for B and it comes
0.2B=0.1 which gives us 0.5 using the value of B the value of A is
0.35A+0.08x0.5=0.15 which is equal to 0.314, the value of C is, therefore,
1-0.5-0.314 = 0.186
Hence the steady state probability of A, B, and C is 0.314, 0.5 and 0.186 respectively.

Exercises
1. A division of the ministry of public health has conducted a sample survey on the public
attitudes towards the use of condoms. From the results of the survey the department
concluded that currently only 20% of the population uses condoms and every month 10% of
non-users become users, where as 5% of users discontinue using.
Required

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1. Write the current transition matrices.
2. What will be the percentage of users from total population just after two months?
3. What will be the proportion of the non users and users in the long run?

Answer:
Let. U - Stands for users, and N- stands for nonuser

1. Initial state VUN (0) = 0.2 0.8

To the next month
From one Users (U) Non Users (N)
month Users (U) .95 .05
Non Users (N) .10 .90

2. V (2) UN = (.3295 0.6705)

3. VU VN = 0.67 0.33

2. A city has two suburbs: suburb x and suburb y. Over the past several years, the city has
experienced a population shift from the city to the suburbs, as shown in the table below.
To the other place
From one City(C) Suburb X (X) Suburb Y (Y)
place City (C) .85 .07 .08
Suburb X (X) .01 .96 .03
Suburb Y (Y) .01 .02 .97

In 20X0, the city had a population of 120,000, suburb X had a population of 80,000, and suburb
Y had a population of 50,000. Assuming that the population in the metropolitan area remains
constant at 250,000 people,
a. How many people will live in each of the three areas in 20X 2? Answer: In 20X2 89,275,
91,200, and 69,525 people will live in the city, suburb X, and suburb Y respectively.

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b. How many people will live in each of the three areas in the long run? Answer: In the long
run 15,625, 96,350, and 138, 025 people will live in the city, suburb X, and suburb Y
respectively.
3. A population of 100,000 consumers makes the following purchases during a particular week:
20,000 consumers make the following purchases during a particular week: 20,000 purchases
Brand A, 35,000 Brand purchase B and 45,000 purchase neither brand. From a market study,
it in estimated that of those who purchase Brand A, 80% will purchase it again next week,
15% will purchase Brand B next week, and 5% will purchase neither brand. Of those who
purchase B, 85% will purchase it again next week, 12% will purchase brand A next week,
and 3% will purchase neither band. Of those who purchased neither brand, 20% will
purchase A next week, 15% will purchase Brand B next week, and 65% will purchase neither
band next week. If this purchasing pattern continues, will the market stabilize? What will the
stable distribution be? Yes YA VB VC= (.4 .5 .1)
4. In a certain college class, 70% of the students who receive an “A” on the current examination
will receive an “A” on the next examination. Moreover, 10% of the students who do not
receive an “A” on the current examination will receive an “A” on the next examination.
Assuming tat this pattern continues, what is the stable matrix?
VA VA1 = (.25 .75)

5. A vigorous television advertising campaign is conducted during the football season to

promote a well-known brand X sharing cream. For each of several weeks, a survey is made
and it is found that each week 80% of those using brand X continue to use it and 20% switch.
It is also found that those not using brand x, 20% switch to brand X while the other 80%
continue using another band.
a. Write the transition matrix, assuming the transition percentages continue hold for succeeding
weeks.

Answer:
X X1
X .8 .2

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 X1 .2 .8
b. If 20% of the people are using brand X at the start of the advertising campaign, what
percentage will be using brand X one week later? Two weeks later? Answer: V (1) XX1 =
(.32 .68), V (2) XX1 = (.392 .608)
c. What portion of the market will be using brand X area the end of the season, assuming the
transition matrix remains the same? (Find the Steady-state matrix) Answer: V X VX1 =
(.5 .5)

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