Quantitative Methods for Business and Economics

Jakub Kielbasa

This book is written for students for free, so feel free to use, cite, steal example etc. It is a learning tool, but please cite it when you do use it. If you come across any mistakes, please contact jakub.kielbasa.au@gmail.com. The wording of all theory, as well as all the content of all examples and exercises were the sole work of the author.

ISBN: 5555000008952

A huge thanks to my editor Alex Tharby, for helping me edit and publish this textbook.

Contents
Chapter 1: Vital Mathematical Knowledge
1.1 Revision of Negative Numbers 1.2 Multiplying and Dividing Fractions 1.3 Adding and Subtracting Fractions 1.4 Notes on Fractions 1.5 Defining a Variable 1.6 Indices 1.7 BIMDAS 1.8 Equations 1.9 Factorisation 1.10 Inequalities and Absolute Values 1.11 The Number Zero Chapter One Summary Chapter One Questions

p. 4
p. 6 p. 7 p. 8 p. 12 p. 13 p. 14 p. 18 p. 21 p. 25 p. 26 p. 28 p. 28 p. 29

Chapter 2: Linear Algebra

2.1 Linear Equations 2.2 Main Features of Linear Equations 2.3 Negative Gradients 2.4 Graphing Lines from Equations 2.5 Obtaining the Equation of a Line 2.6 Intersecting Lines 2.7 Microeconomic Applications 2.8 Elasticity 2.9 Interpreting Elasticity Chapter Two Summary Chapter Two Questions

p. 30
p. 31 p. 32 p. 33 p. 34 p. 36 p. 38 p. 40 p. 42 p. 44 p. 46 p. 47

Chapter 3: Simultaneous Equations and Matrices

3.1 Simultaneous Equations 3.2 Two Simultaneous Equations 3.3 Three Simultaneous Equations 3.4 The Matrix 3.5 Solving Two Equation Matrices 3.6 Solving Three Equation Matrices 3.7 Notes on Solutions to Matrices 3.8 Applications 3.9 The Determinant of a 2 2 Matrix 3.10 The Determinant of a 3 3 Matrix 3.11 Using the Jacobian Determinant Chapter Three Summary Chapter Three Questions

p.49
p. 50 p. 50 p. 52 p. 54 p. 55 p. 59 p. 61 p. 62 p. 65 p. 65 p. 68 p. 70 p. 71

Chapter 4: Non-Linear Functions

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 2 Defining Non-Linear Functions Defining a Quadratic Function Quadratic Graphs Sketching a Quadratic Function The Cubic Function The Exponential Function The Logarithmic Function Logarithmic Graphs

p. 73
p. 74 p. 75 p. 76 p. 77 p. 80 p. 82 p. 84 p. 88

4.9 The Natural Number 4.10 The Hyperbolic Function 4.11 Economic Applications Chapter Four Summary Chapter Four Questions

p. 89 p. 90 p. 91 p. 93 p. 94

Chapter 5: Single Variable Differentiation

5.1 What is Differentiation? 5.2 Differentiation by First Principles 5.3 Differentiation Rules: Power Rule 5.4 Differentiation Rules: Chain Rule 5.5 Differentiation Rules: Product Rule 5.6 Differentiation Rules: Quotient Rule 5.7 Differentiation Rules: Rule 5.8 Differentiation Rules: ln Rule 5.9 The Second Derivative 5.10 The Gradient Function 5.11 Simple Applications Chapter Five Summary Chapter Five Questions

p. 96
p. 97 p. 99 p. 103 p. 104 p. 105 p. 108 p. 109 p. 110 p. 111 p. 112 p. 113 p. 114 p. 115

Chapter 6: Applications of Differentiation

6.1 Graphical Optimisation 6.2 Mathematical Optimisation 6.3 The Nature of an Optimal Point 6.4 Inflection Points 6.5 Combining all Theory 6.6 Applications Profit 6.7 Applications Break-Even 6.8 Applications: Marginal and Average Values 6.9 Differentiation and Elasticity 6.10 Elasticity and Total Revenue Chapter Six Summary Chapter Six Questions

p. 117
p. 118 p. 118 p. 120 p. 123 p. 124 p. 126 p. 129 p. 130 p. 133 p. 135 p. 137 p. 138

Chapter 7: Multiple Variable Differentiation

7.1 Additional Variables 7.2 Simple Partial Differentiation 7.3 Complex Partial Differentiation 7.4 Second Order Partial Derivatives 7.5 Application of Partial Differentiation 7.6 Total Differentiation 7.7 Optimisation with Many Variables 7.8 Economic Applications Chapter Seven Summary Chapter Seven Questions

p. 140
p. 141 p. 142 p. 144 p. 146 p. 147 p. 148 p. 151 p. 155 p. 158 p. 158

Chapter 8: Financial Mathematics

8.1 Index Numbers and Averages 8.2 Series and Sums 8.3 Simple Interest 8.4 Compound Interest 8.5 Annual Interest Rates 8.6 Net Present Value 8.7 Internal Rate of Return Chapter Eight Summary Chapter Eight Questions

p. 160
p. 161 p. 163 p. 164 p. 168 p. 170 p. 172 p. 174 p. 177 p. 177

Solutions

p. 180

Chapter 1

Vital Mathematical Knowledge

Things you must know
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 Revision of Negative Numbers Multiplying and Dividing Fractions Adding and Subtracting Fractions Notes on Fractions Defining a Variable Indices BIMDAS Equations Factorisation Inequalities and Absolute Values The Number Zero 6 7 8 12 13 14 18 21 25 26 27 28 29

Chapter One Summary Chapter One Questions

1.1 revision of negative numbers

Example 3: solve 3 4 + 2 Solution: the two negatives (one after the other) can be changed into a positive sign: =3+4+2 Then solve: =3+4+2=9 Example 4: solve 4 + 3 (5)

Adding and subtracting negative numbers is very similar to adding and subtracting positive numbers. Working on the number line (a line with all negative and positive numbers) will help you revise the methods of adding and subtracting negative numbers.

3 2

Solution: this is a bit more complex. Do one section at a time; the 4 remains as it is, because it cannot be changed using the rules, but the +(3) can be changed to 3. Then the (5) can be changed to +5 to get: = 4 3 + 5 = 2 Example 5: solve 5 6 + 8 9 Solution: simplify each part separately. (5) becomes +5, 6 remains as it is, +(8) becomes 8, and 9 becomes +9. = +5 6 8 + 9 = 0 A similar theory applies to multiplying negative numbers. Theory: The multiplication of two negative numbers equals a positive number. The multiplication of a positive and a negative number equals a negative number. This is best explained with examples. Example 6: solve 6 (5) Solution: multiplying two negative numbers equals a positive number. Since 6 5 = 30 then 6 5 = 30

For the problem 4 3, find the number 4 on the number-line, then go back three places to get 1. Similarly with negative numbers, for the problem 1 2, find the number 1 on the number-line, then go back two places to get 3. Example 1: solve 4 + 5 2 4 + 6 Solution: find the number 4 on the number-line, then add 5, take 2, take 4, then add 6. The answer is 1. After you get the hang of it, you will never need to use the number-line again. Example 2: solve: 5 6 7 2 + 15 Solution: do it without the number-line = 5 Theory: Adding a negative number is the same as subtracting the positive value of that same number. E.g. 5 + 3 = 5 3 Subtracting a negative number is the same as adding the positive value of that number. E.g. 4 6 = 4 + 6 The two rules above are very important.

Example 7: solve (6) 4 Solution: a negative number multiplied by a positive number equals a negative number. Since 6 4 = 24, then 6 4 = 24 Theory: mathematicians use the dot to mean multiplication, e.g. 6 4 is the same as 6 4 Similarly, if two terms are in brackets without anything between the brackets, this is taken as a multiplication. E.g. 6 4 = 6 4 Example 8: solve 5 (7) Solution: two negative numbers are multiplied together which must equal a positive number. 5 7 = 35 so 5 7 = 35. Dividing with negative numbers also follows the rule of two negatives equals a positive. Theory: The division of two negative numbers equals a positive number. The division of one negative and one positive number equals a negative number. Example 9: solve 15 3 Solution: dividing two negative numbers equals a positive number. 15 15 = 5 then =5 3 3 Example 10: solve 24 3 Solution: division with both a negative number and a positive number gives a negative number.

24 =8 3

so

24 = 8 3

Note: there is a reason brackets were used so often in this section. Later in this chapter, you will see the consequence of not using brackets appropriately.
Exercises: 1. Simplify the following: ) 2 + 3 4 ) 2 + 4 1 ) 4 4 4 ) 5 + 1 4 + (3) ) 6 7 3 21 + 1 2. Simplify the following: ) 3 2 ) 6 6 ) 36 4 ) 81/ 9 ) 20 3 1.2 multiplying and dividing fractions

Most students hate fractions, but they are part of the real world. For example, 50 is half a dollar, $100,000 is one tenth of a million dollars, $4million is 1000 of a billion dollars. Most things can have fractions, so you must be able to manipulate them. Theory: to multiply two fractions, multiply the two tops (numerators) to give a new top, then multiply the two bottoms (denominators) to give a new bottom. Example 1: solve 2 4 3 5 Solution: multiply the two tops: 2 4 = 8, then multiply the two bottoms: 3 5 = 15, and these form the new numerator and the new denominator: = 24 8 = 3 5 15
4

Example 2: solve 6 7 5 3 Solution: = 6 7 42 = 5 3 15

2.

7 3 / 2 10

Dividing fractions is very similar except it has one difference. Theory: when dividing fractions, invert the second fraction then proceed just like multiplication. Inverting a fraction is flipping the fraction; making the bottom the new top, and making the top the new bottom.
Inverting it .

Simplify the fractions into a single fraction 14 5 ) 3 12 14 5 ) / 3 12 3 23 ) / 3 17 5 3 ) / 9 7 17 1 ) 23 12

1.3 adding and subtracting fractions

The hardest aspect of fractions is adding and subtracting fractions. Multiplying and dividing fractions is easier. The concept used for adding/subtracting fractions

makes

Example 3: solve 2 3 5 4 Solution: invert the second fraction, and change the division sign to a multiplication sign: = 2 4 5 3 24 8 = 5 3 15

is the Common Denominator approach. The denominator is the bottom of a fraction. Before the theory is given, an intuition of the concept is needed. Apologies for the patronising subject, but it works well. You purchased a pie, and you take it home. You cut the pie into quarters, and since you are hungry, you eat half the pie. After two hours, you are hungry again and take a quarter of the original pie, so that only one quarter is left. The question is how much of the pie have you eaten? Write out the fractions: 1 1 + 2 4 That is, first you ate half the pie, then you ate a quarter. You might be tempted to simply add the top numbers and the bottom numbers. If we do that, we get: 1+1 2 1 = = 2+4 6 3 Have you really eaten only one third of the pie? No, you ate three quarters. The theory of common denominator helps find the true answer.

Proceed with the multiplication: =

Example 4: solve 2 1 / 3 16 Solution: invert the second fraction, then proceed as for multiplication. 2 16 32 2 = = 10 3 1 3 3 Exercises:
1. Simplify the following fractions: 3 2 ) 4 3 5 12 ) 7 5 3 3 ) 8 1 5 2 ) 4 3

Intro example 1: from the pie example, solve 1 1 + 2 4 The common denominator process is finding the same denominator for all fractions. In this example, the 1/2 must be changed to a fraction with a 4 on the bottom, however if the 2 is erased and replaced with a 4, the value will no longer be one half. What is wanted is to change the form of the fraction 2 so the bottom number is 4, while keeping the value of the fraction unchanged. Another way of writing 2 is 4 or 6 or 8 but since 4 needs to be on the bottom, 4 is used. The problem becomes: 2 1 + 4 4 The first part still has the value of a half, and the second part is still one quarter. The form of the first fraction has changed but the value is the same. Once all fractions have the same denominator, all the top numbers (numerators) can be written over the Common Denominator: 2 1 2+1 + = 4 4 4 Then simplify the top: 2+1 3 = 4 4 Exactly as is intuitive. Theory: the Common Denominator approach changes the form of all fractions so that the denominators are all the same, but leaves the values of all fractions unchanged. Sometimes it is not so obvious how the fractions need to be changed. For example, solving: 1 1 + 3 7
2 1 2 3 4 1

What is the common denominator here? How can

1 3

be changed into something with 7 as a

1

denominator? Or alternatively, how can 7 be changed to have 3 as a denominator? There is a simple solution. Theory: a Common Denominator is found by multiplying the denominators (bottoms) of all the fractions to be added or subtracted. Intro example 2: solve 1 1 + 3 7 A Common Denominator is the multiplication of the two denominators 3 and 7: 3 7 = 21 The form of 3 needs to be changed to have 21 on the bottom but the value must be left unchanged. Multiply the 3 by 7: 1 7 3 7 The number has value 1, so the value of is unchanged however the form is changed: 1 7 7 = 3 7 21 Similarly, 7 needs to be multiplied by some number to get 21 on the bottom, while leaving the value of the fraction unchanged. That number is 3: 1 3 3 = 7 3 21 Rewrite the original problem with the equivalent fractions: 7 3 7 + 3 10 + = = 21 21 21 21 Theory: to add/subtract fractions, change the form of each fraction without changing its value, so that all the denominators are the same. Then add/subtract the numerators (top numbers), having this over the common denominator.
9
3 1 7 7 1 3 1 7 1

(where the 11 comes from the denominator of the Example 1: solve 1 1 + 9 5 Solution: a Common Denominator is 9 5 = 45. The first fraction needs to be multiplied by to have 45 on the bottom, but leaving the value of the fraction unchanged. The 5 in 5 comes from the denominator of the other fraction. 1 5 5 = 9 5 45 Similarly for 5, to change the form of this fraction to get 45 on the bottom, it needs to be multiplied by 9 where the 9 comes from the denominator of the other fraction: 1 9 9 = 5 9 45 Rewrite the original problem and solving: 5 9 5 + 9 14 + = = 45 45 45 45 Notice that the 5 was multiplied by 9 where the 9 came from the denominator of the other fraction. Similarly for 9 which was multiplied by 5 where the 5 came from the denominator of the other fraction. Example 2: solve 3 4 + 11 5 Solution: a common denominator is 11 5 = 55. Then, change the 11 to have 55 as a denominator without changing its value, by multiplying it by
5 5 3 1 5 1 9 9 1 5 1 9 5 5

other fraction): 4 11 44 = 5 11 55 Rewrite the original problem: 15 44 15 + 44 59 + = = 55 55 55 55 Subtracting fractions uses the same process, except it has a negative sign in between. Example 3: solve 7 1 11 4 Solution: a Common Denominator is 11 4 = 44. To change the 11 to a 44, multiply by 4 (as this does not change the value of the fraction): 7 4 28 = 11 4 44 Then change the form (but not the value) of the second fraction: 1 11 11 = 4 11 44 Rewrite the original problem: 28 11 28 11 17 = = 44 44 44 44 So far, we have only been using two fractions at a time, but a very similar theory applies for adding and subtracting more than two fractions. Theory: when adding or subtracting many fractions, to change the form of each fraction without changing its value, it is multiplied by / where is the multiplication of all the other denominators. Example 4: solve 3 3 1 + 11 4 5 Solution: a Common Denominator is the
4 4

(where the 5 comes from the denominator of the other fraction): 3 5 15 = 11 5 55 Similarly for the other fraction, to change 5 to have a 55 on the bottom, it needs to be multiplied by
11 11

multiplication of all the denominators, which is 11 4 5 = 220. The fraction

3 11

needs to be

10

multiplied by some number to get 220 as a denominator (bottom). This number is

20 20

The third fraction must be multiplied by 39 which comes from 3 13 = 39: 1 39 39 = 10 39 390 Do not use the negative signs yet, as so far, we are just changing the form of the fraction. The problem is rewritten with all the relevant signs added in after the form of each fraction has been changed to have a Common Denominator. 130 210 39 130 210 39 = 390 390 390 390 Simplify the numerator (top): = 119 390

39

which is

obtained by the multiplication of all the other denominators (i.e. 4 5 = 20): 3 20 60 = 11 20 220 Similar theory applies for the other two fractions. The 4 needs to be multiplied by 55 . The number 55 is obtained by multiplying the denominators of all the other fractions (i.e. 5 11 = 55): 3 55 165 = 4 55 220 Lastly: 1 44 44 = 5 44 220 Rewrite the original fraction: 60 165 44 60 + 165 44 + = 220 220 220 220 181 = 220 Go over this last example to make sure you know how the form of each fraction was changed without changing its value. Example 5: Solve 1 7 1 3 13 10 Solution: a Common Denominator is 3 13 10 = 390. To change the form of the first fraction without changing its value, it must be multiplied by
130 , 130 3 55

where the 130 comes from the multiplication

of the other denominators (i.e. 13 10 = 130): 1 130 130 = 3 130 390 The second fraction must be multiplied by 30 where the 30 is from the multiplication of all the other denominators (i.e. 3 10 = 30): 7 30 210 = 13 30 390
30

Exercises: 1. Simplify the following fractions: 1 1 ) + 4 3 2 1 ) 5 8 7 12 1 ) + + 3 2 6 21 1 ) 13 11 9 15 2 ) + 13 39 1 2. Simplify the fractions into a single fraction: 1 1 1 1 ) + + + 2 3 4 5 1 1 1 1 ) + 2 3 4 5 21 3 2 ) + 11 17 23 99 3 12 7 ) + + 12 2 9 8 10 15 17 12 ) + + 3 4 9 7 3. If a shareholder owns 3/11 of a company, and his brother owns 9/83 of that same company, what proportion of the company do the brothers own combined? 4. Jane, the CEO of a company, owns 9/11 of the company. She is ready to retire, so to have cash, she sells 5/12 of the shares she owns. What proportion of the company does she still own after the sale. What if Jane had sold 5/12 of the total company stock from her portfolio; how much would she have left then?

11

1.4 notes on fractions

Example 1: change the following to a single fraction 4 1 3

Fractions can be written in many different ways, so you must be familiar with all of them. Theory: for a negative fraction, the negative sign can be in three different places without changing the value of the fraction: = = For example: 2 2 2 = = 5 5 5 All three are the same. Applying this to a larger context: 2 5 2 5 2 5 = + = + 3 3 3 3 3 3 All three coloured parts are equal. It may be convenient to write it one of these three ways when you are doing a question with fractions. Now, a more common kind of fraction is one with a number out front, such as: 2 1 3

Solution: multiply the whole number with the denominator (4 3 = 12), then adding this to the numerator 12 + 1 = 13 giving: 1 12 + 1 13 4 = = 3 3 3 Example 2: find the single fraction equivalent of 4 6 11

Solution: multiply the whole number out front with the denominator (4 11 = 44), then add the result to the numerator (top): (44 + 6 = 50) 4 6 50 = 11 11

The reverse theory is the same, but the process is slightly different. Theory: to find how many whole numbers there are in a fraction, work out how many denominators will fit into the numerator without exceeding the numerator. Then remove that number from the numerator, and any remaining numbers are written over the original

This means two wholes plus one third. This can also be rewritten as: 1 2+ 3 Write the 2 as 1: 2 1 + 1 3 Then find a Common Denominator: 6 1 6+1 7 + = = 3 3 3 3 This is the long way which shows the theory. The short-cut is shown below. Theory: to simplify a fraction involving whole numbers, multiply the number out front with the denominator (bottom), then add that result to the top.
2

denominator. Example 3: find how many wholes and a remaining fraction results from 43 6 Solution: 6 goes into 43 seven times (to give 42) as any more would exceed 43, so the number out front in 7, and the remainder is 1 (as 43 42 = 1), so this is written as a fraction: 43 1 =7 6 6

12

Example 4: change the following fraction into whole numbers and a remaining fraction: 97 10 Solution: 10 can go into 97 nine times as if we had ten times, then it would exceed the numerator (97). This gives 7 as a remainder, written over the original denominator: 97 7 =9 10 10
Exercises: 1. Give the following fractions as a single fraction: 1 1 ) 2 ) 3 2 3 2 3 ) 12 ) 9 3 9 7 13 ) 9 ) 11 8 27 2. Change the following into whole numbers and a remaining fraction: 12 27 ) ) 3 13 15 91 ) ) 4 12 21 103 ) ) 4 13 3. Simplify the following into a single fraction: 12 3 1 ) 5 7 3 13 1 2 3 ) 2 1 2 12 3 7 12 2 3 ) + 3 7 10 1.5 defining a variable

profit will be made if units are sold where is a variable number of computers. However, it is not always that simple. Profit is also a variable but the amount of profit depends on how many computers are sold. So profit is called a dependent variable because it is a variable (i.e. it can change), but the extent to which it changes depends on another variable (i.e. the number of computers sold). Also, the number of computers the company sells is called an independent variable because it is not determined by other variables. For now, we need to learn the basics of manipulating variables and constants. Theory: collecting like terms is the process of bring together things that are the same. Things that are different cannot be grouped together. Intro example 1: There are two boxes of fruit: Box 1: 7 bananas, 5 apples and 8 peaches. Box 2: 3 bananas, 6 apples and 12 peaches.

To find out the total number of each fruit, the bananas can be added to each other, but they cannot be added to the apples or the peaches (this is logical). To simplify the variables, the two boxes can be rewritten as: Box 1: 7 + 5 + 8 Box 2: 3 + 6 + 12

Theory: A variable is something that can change. Temperature is a variable, because it can change. The Woolworths share price can change, therefore it is a variable. Variables are found everywhere in life. Different letters are used to distinguish different variables. In business, a variable is often something like quantity sold (usually ). Companies do not know how many of a certain product they are going to sell (say computers), so variables are used that allow those companies to forecast how much

Where =bananas, = apples and = peaches. Add Box 1 to Box 2: = 7 + 5 + 8 + 3 + 6 + 12 Since only apples can be added to apples, then 5 + 6 = 11. This is the same for bananas and peaches. That is, only like terms can be added. = 10 + 11 + 20

13

Example 1: collect all like terms in the following 3 + 5 + + 5 + Solution: collect all the s together, all the s together and all the s together: 7 + 6 + The s cannot be added to the s or s as they are not like terms. Example 2: collect the like terms in 5 + 4 + 3 7 9 Solution: collect all the s together, all the s together, and all the lone numbers together. 9 8 6 Note: lone numbers are only like other lone numbers, and are not like anything with a variable in it. Example 3: collect all like terms 5 + 3 4 + 7 13 Solution: get rid of the brackets: 5 + 3 + 4 + 7 13 Collect like terms: 9 + 10 13 Applying variables to fractions; finding a Common Denominator of fractions with variables is easiest when you think of them as numbers. That is, work with them as if they were numbers. Example 4: find the Common Denominator and put the following two fractions under a single denominator: 1 2 + Solution: a Common Denominator is the multiplication of all the denominators, so in this case will be . Then, the first fraction needs to be multiplied
by

1 = It is easiest to ignore the fact that they are letters, and just do what you would do if they were numbers. The other fractions also needs on the bottom, so must be multiplied by : 2 2 = Rewrite the original problem and solve: 2 + 2 + = The terms on top cannot be added as they are not like terms.
Exercises: 1. Collect the like terms in the following ) 5 + 4 3 9 + 4 3 ) 13 12 11 10 9 ) 8 4 3 4 1 ) 8 + 8 + 8 + 8 8 + 12 13 2. Collect like terms using all the theory learnt so far: 1 1 2 2 ) + ) + 2 3 5 2 3 5 12 13 12 2 2 13 ) + ) + 5 6 3 4 3 12 3 4 5 5 ) + ) 2+ + 3. Simplify the following fractions into a single fraction: 12 2 2 4 ) + + 5 3 30 10 5 5 3 ) +2 3 3 3 ) + 2 5 1.6 indices

When mathematicians talk about an index, they are talking about numbers or variables to the power of other numbers or variables. Theory: an index (plural indices) is when a number (called a base) is put to the power of another number (called an index).

to get on the bottom (the in comes from the denominator of the other fraction):

14

Examples of indices include 22 , 53 , 2 , 1 + 9 , 2+ . An index means that the base number is multiplied by itself the number of times of the index. For the index 36 The 3 is multiplied by itself 6 times: 3 3 3 3 3 3 = 36 For 3 , it is: = 3 There are seven rules you need to learn before you can successfully manipulate indices: Theory: RULE 1: when two numbers with the same base are multiplied together, the indices can be added to one another. =
+

Three of the s on top cancel with three s on the bottom. Theory: RULE 3: any number with an index of zero equals one. 0 = 1 This is something you simply have to know. Theory: RULE 4: the root of a number is the same as having the number to the power of 1/. This is a bit complex in words, but simple in practice.

= 1/

Example 3: rewrite the following as an index

2

Solution: the square root of is simply to the power of half.

2

Example 1: simplify the indices in 3 5 = 3+5 = 8 Solution: write this out in extended form: = 8 The brackets do not matter as everything is multiplied. Theory: RULE 2: when two numbers are divided and have the same base, the index on the bottom of the fraction is subtracted from the index on the top of the fraction. = Example 2: simplify the indices in: 3 Solution: use the above theory 7 = 73 = 4 3 Rewrite in extended form: =
7

= 1/2
2

Note: the square root sign

is often written .

with the number 2 omitted:

4

Example 4: write the following as an index = 1/4 Solution: it is to the power of one on four:
4

Theory: RULE 5: when a number to the power of one index is put to the power of another index, the two indices are multiplied together.

Example 5: simplify the following to a single index 3 3

2

Solution: multiply the indices together:

2

= 32 = 6

This can also be written out in extended form so you see where it comes from: 3 3 = = 6

15

As the two brackets represent 3 squared. Theory: RULE 6: a number with a negative index can be made to have a positive index by inverting the fraction. 1 =

Example 9: expand 2
3

Solution: since all terms in the brackets are multiplied together, every term is raised to the index: 23 3 3 Simplify the 23 : 8 3 3 Example 10: expand
4

Example 6: rearrange the following to have a positive index: 3 Solution: invert the fraction, and change the sign on the index: 3 1 = 3 1 The 3 is really a fraction with 3 on one, so to have a positive power, the fraction is inverted and the sign of the index is changed. Example 7: change the following to have a negative index 4 Solution: invert the fraction, and change the sign of the index: 4 1 = 4 1 Example 8: change the following to have a positive index 1 5 Solution: invert the fraction, then change the sign of the index: 1 = 5 5 Theory: RULE 7: when the product of two or more bracketed terms are put to an index, that index applies to each term within the brackets.

Solution: despite the negative sign inside the brackets, all the terms are still multiplied together. The brackets can be rewritten as: 1
4

Then it can be seen that every term in the brackets is put to the index: 1 4 4 4 Simplifying 1 4 4 All these rules can work forwards and backwards. The following examples involve the use of multiple rules. Example 11: simplify the following to only have positive indices 0.5 3 2 4 Solution: only the like terms can be simplified, so using RULE 1 on the s and s respectively: = 0.5+2 34 = 2.5 1 To have all indices positive, the 1 must be brought to the bottom using RULE 6, then the sign of the index is changed: = 2.5 2.5 = 1
4

= 1 gives:

Example 12: simplify the following leaving all indices positive

16

8 5 3 2 2

Use RULE 3 to change anything to the power of zero to 1, which can then be removed from the bottom: = 20.5 3 0.5 20.5 30.5

Solution: get rid of the root signs first (remember that if there is no number outside the root sign, it is assumed to be a square root): = 8 5 1/2 2
1/3 3 2 1/3

Doing this the long way to begin with, use RULE 2 to bring everything on the bottom up top while changing the sign of each of the indices: = 20.5 3 0.5 20.5 1 30.5 Then use RULE 1 to bring the like terms together. Remember, the bases must be the same! = 21 3 0.5 30.5 Now, to make all the indices positive, bring any bases with negative indices to the bottom while changing the sign of the index: = 3 2 0.5 30.5

Get rid of the brackets using RULE 5 with RULE 7: = 81/3 5/3 3 2 1/3 1/2 2

Then use RULE 1 on the top for the s (as well as simplifying the addition of fractions): = 81/3 5/3 10/3 2 1/2 2

And again use RULE 1 for the s on the top (a Common Denominator needs to be used): = 8
1/3 10/3 11/3

1/2 2

This is as far as simplification can go, as all the bases are different. In many questions, numbers may need to be simplified to contain indices. For example, the number 81 may need to be simplified to either 92 which you should be familiar with, or maybe even 34 . Theory: be aware that each of the following numbers can be written as the indicated base, to the power of a whole number: BASE 2: 2, 4, 8, 16, 32, 64, 128 ,256 BASE 3: 3, 9, 27, 81, 243 BASE 4: 4, 16, 64, 256 BASE 5: 5, 25, 125, 625 Example 14: simplify the following as much as possible 3 272
3

The 11/3 comes from 5/3 + 2. Then using RULE 2 for both and : = 81/3 4/3 19/6 Where the 19/6 comes from 11/3 1/2; and the 4/3 comes from 10/3 2. Finally, change the 8 value: = 2
4/3 19/6 1/3

into 2, as it is of the same

Go over this last example, as the fractions were difficult. Example 13: collect all like terms and make all indices positive for 2
1 3 0.5

20.5 0

Solution: use RULE 4 to change all the root signs: = 20.5 1 3 0.5 20.5 0 30.5 2 0.5 0 30.5 2
0.5 3 0.5

Get rid of the brackets using RULE 5: =

9 2

17

Solution: get rid of the root sign using RULE 4: 3 272 6 9 2 3 27 9 2

2 2 1/3

) ) ) )

3 5 2
3 2

) ) )

4 2 3 1 2 1.5 3.5 6 0.25 2 3

3 3

2 3 8 2 4
4 1 3

Then use RULE 5 to get rid of the brackets:

5
4

10 2 4 2 2 2 3
3

27 3 5 3 0.2 81 3 1/2 1/6 0.1 0.4 0.2

Change the 27 to 33 and 9 to 32 : 3 33 2 2 32 2 Use RULE 5 again to get rid of the brackets: 3 36 2 32 2 Then use RULES 1 and 2 to collect all the indices with base 3: 3+62 2 2 Simplify the index with base 3 and using RULE 6 to get the index: 3
+6 2

25 4 625 2 5 625 2 1

1.7 BIMDAS

Theory: the order in which you conduct mathematical operation (such as addition, multiplication etc.) is very important. BIMDAS is a method that gives the order in which operations must be done. BIMDAS stands for: Brackets Indices Multiplication Division Addition

to the bottom and with a positive

4 Theory: the square root of a positive number will always have two solutions: one positive and one negative. In the first section in this chapter, one of the exercises was 6 6 which you should have worked out to be 36. Similarly, 6 6 = 36. Example 15: simplify 36 Solution: 36 = 6 The sign means that there are two solutions, one positive and one negative. It is pronounced plus or minus. Example 16: simplify 144 Solution: 144 = 12
Exercises: 1. Simplify the following to have all positive indices and fraction answers. ) 2 3 6 15 ) 2 3 4 5 6 7

Subtraction The multiplication/division have no precedence over one another, and neither does the pair of addition/subtraction. Because of this, it is sometimes called BIDMAS. Intro example: for a number to an index, which is then added to another number, the index takes precedence (as Index takes precedence over Addition in BIMDAS). When solving: 24 + 5 to be able to add the 5, the index must be simplified first: 16 + 5 = 2 If you were thinking that the 2 and 5 can be added to one another, and then put that to the power of 4 you would be incorrect, as that does not follow the order of BIMDAS.

18

Example 1: using BIMDAS, simplify the following 5 34 7 (2) Solution: following BIMDAS, get rid of the Brackets first by multiplying the 7 into the 2 : = 5 34 14 Since two negative signs equals a positive sign: = 5 34 + 14 Expand the Indices: = 5 81 + 14 Multiplication/Division: = 405 + 14 Addition/Subtraction: = 419 BIMDAS must be followed to simplify correctly. Example 2: using BIMDAS, simplify the following 8 4 + 32 4 2 + 7/2 Solution: since there are no brackets, simplify the Index: = 8 4 + 9 4 2 + 7/2 Get rid of the Multiplication/Division: = 2 + 18 + 3.5 Finally, Add/Subtract the numbers: = 19.5 Example 3: using BIMDAS, simplify the following to a single fraction 3 5 + 3 2 /3 1 Solution: before using BIMDAS, it is easiest to rewrite the problem with the changed: = 3 32 + 1 5 32
2 2 2

3 12 = + 1 5 9 This is now a Common Denominator problem: = 3 9 12 5 1 45 + 5 9 9 5 1 45 27 60 45 = + 45 45 45 27 + 60 45 12 = = 45 45

Moving on to a harder concept that is common throughout this book; informally, it is called the crab-claw method, and it is used to simplify the multiplication of two (or more) brackets. It is also called the FOIL rule (First, Outer, Inner, Last). It will make sense soon. For the multiplication of the following brackets: + 2 + 4 Draw in lines to match the letters of FOIL or to look like a crab-claw (the reason is explained below). = + 2 + 4 Theory: to expand the multiplication of two brackets, every term in one bracket must be multiplied with every term in the other bracket (i.e. First, Outer, Inner, Last FOIL) Looking back at the crab-claw that was drawn, each term in the first bracket is multiplying every term in the second bracket. That is, multiplies the (to give ), then that same also multiplies the 4 (to give 4). The 2 multiplies the to give 2 and the 2 also multiplies the 4 to give 8. Adding these together: + 2 + 4 = + 4 + 2 + 8 Example 4: expand the brackets for = 2 + 1 1 Solution: draw in the crab claw: = 2 + 1 ( 1)

Get rid of the brackets: 3 3 22 = + 1 5 32 Get rid of the indices: 3 34 = + 1 5 9 Then the multiplication:

19

Follow the lines: = 2 1 + 2 + 1 + 1 1 Simplify: = 2 2 2 1 Collect like terms: = 3 2 2 1 The following is where many students make mistakes, so dont be one of them! Theory: when a bracket containing two terms separated by an addition/subtraction sign is put to an index, write out the bracket that many times. If given: + 3 + 3
2

Example 6: expand the bracket 2 + 4

2

Solution: write out the two brackets: = 2 + 4 2 + 4 Draw in the crab-claw: = 2 + 4 (2 + 4) Follow the lines: = 4 2 8 8 + 16 Collect like terms: = 4 2 16 + 16 Example 7: using BIMDAS, expand and collect like terms for 3 + 1
2

Write the bracket out twice:

2

= + 3 + 3

+ 2 + 1

+ 52

This is index theory. However, many students think they can simply put the index into each of the two terms inside the bracket: + 3
2

Solution: This seems complex, but do it one small step at a time. To get rid of the Brackets, take the 3 + 1
2

and expand this first (ignoring

2

= 2 + 32

everything else): 3 + 1 = 3 + 1 3 + 1

This is incorrect as there is an addition (or subtraction) sign separating two terms inside the brackets. This is a VERY common mistake. The correct answer to this problem is + 6 + 9. Find it for yourself using the crab-claw method. Example 5: expand 7
2 2

Using the crab-claw: 3 + 1 3 + 1 Follow the lines gives: = 9 2 3 3 + 1 = 9 2 6 + 1 Replace this in the original statement (in brackets): 9 2 6 + 1 + 2 + 1 Move on to the other bracket: + 1
2 2

Solution: write out the brackets twice: = 7 7 Draw in the crab-claw: = 7 7 Follow the lines: = 2 7 7 + 49 Collect like terms: = 2 14 + 49

+ 52

= + 1 + 1

Use the crab-claw method again: + 1 + 1 Follow the lines: = 2 + + + 1 = 2 + 2 + 1

20

Substitute back into the original statement: 9 2 6 + 1 + 2 2 + 2 + 1 + 52 The brackets must still be there as that negative sign must go into every term in the brackets: 9 2 6 + 1 + 2 2 2 1 + 52 All the brackets have been removed, so move on to Indices: 9 2 6 + 1 + 2 2 2 1 + 25 The index of 2 cannot be simplified as is a variable so it is left alone. Move on to Multiplication/Division (of which there is none), and then onto Addition/Subtraction by collecting like terms: = 8 2 8 + 27 Example 8: show that the expanded forms of the two statements below are not the same: Statement 1: + 3 + 5 15 + 4 Statement 2: + 3 + 5 15 + 4
2.

= 2 + 3 + 5 + 15 (15 + 4) The other brackets need to have the negative sign introduced into each term: = 2 + 3 + 5 + 15 15 4 Since there are no Indices (that can be simplified), nor multiplication/division, the only thing left is to collect like terms: = 2 7 + 11 Despite the two statements having the same numbers, the placement of brackets is very important as obviously, the two statements are not the same. The more practice you have with BIMDAS, the easier it will become. Exercises:
1. Simplify the following using BIMDAS ) 2 5 + 7 12 23 ) 4 1 5 + 32 16 + 16 8 ) 12 4 + 3 3 2 + 1 ) 7 3 22 1 + 5 4 + 22 Simplify the following using the crab-claw ) + 1 + 1 ) + 3 4 ) + 2 2 + 1 ) 2 + 2 1 ) 3 1 + 2 Simplify the following using the crab-claw and BIMDAS ) 3 42 2 + + 13 2 ) + 1 2 5 + 22 2 3 + 1 ) 5 1 13 2 + + 1 2 2 + 1 ) 1 2 + 2 + 1 2 + 12 ) 2 1 2 + 3 22 4 3 Simplify the following using all the theory from this chapter. 3 2 3 + 4 2 ) 3 2 + 3 ) 5 + 2 9 1 ) 7 3 + 2 2 2 2 2 ) 3 +1 0.5

Solution: For statement 1: use BIMDAS to get rid of the Brackets: + 3 + 5 15 + 4 The only thing multiplying + 5 is 3, so only half a crab-claw is required. The reason is that + 3 is not in brackets so only the 3 needs to be crabclawed:
4. 3.

+ 3 + 5 15 + 4 = + 3 + 15 15 + 4 Collecting like terms: = 11 + 19 For statement 2: use BIMDAS to get rid of the Brackets first, by using the crab-claw: + 3 + 5 15 + 4 Which gives:

1.8 equations

You have already been introduced to equations without it being said explicitly.
21

Theory: an equation is anything with an equals sign. Examples of equations include: 5+1=6 3 4 = 7 = 2 + 6 3 All these have equals signs so all are equations. Equations are used widely to find solutions to problems. Intro example 1: a customer wants to buy 45 laptop computers from a retail company. The retailer has only 13 in stock. The problem is to find how many computers need to be ordered. Write the problem as an equation: 13 + = 45 The left side is what is in stock (13) plus what needs to be ordered (), and the right side (45) is what the customer wants. This is a very simple example, and when 13 is taken from 45, the result will be , the number of computers that need to be ordered ( = 45 13 = 32). Manipulating equations is difficult to begin with, but the more you practice, the more natural it becomes. There are a few rules and a few hints which will make rearranging equations very simple. Theory: make sure there is a reason for rearranging an equation. This sounds obvious, but it is often forgotten. Most of the time, rearranging an equation is to isolate a variable. In the above example, was isolated to give the number of computers to be ordered. Theory: RULE 1: whatever is done to one side of the equation must also be done to the other side. If one side of an equation is changed without changing the other, it will no longer be equal.

Example 1: isolate in + 5 = 9 Solution: to isolate , the 5 needs to be removed. A +5 is reversed by subtracting 5 from the left side; but whatever is done to one side has to be done to the other side as well. So 5 is taken from both sides: + 5 5 = 9 5 This can then be simplified to: = 4 As on the left side, 5 5 = 0 and on the right side, 9 5 = 4. To make sure, go back to the original equation and substitute = 4. Does 4 + 5 = 9? Yes. Example 2: isolate in = 10 4 Solution: to isolate , the 4 needs to be removed. The reverse of a 4 is to multiply the left side by 4. But once again, whatever is done to one side must be done to the other, so both sides must be multiplied by 4: 4 = 4 10 4 On the left side, the 4s cancel to give 1 or simply on the left side: = 40 Substitute this into the original equation: 40 = 10 ? 4 Yes

Theory: RULE 2: when isolating a variable, use the reverse order of BIMDAS to get rid of the elements around the variable to be isolated. This simply means work backwards to BIMDAS when deciding what to get rid of on the side you are trying to isolate .

22

Example 3: isolate in the following: +5=7 3 Solution: to isolate , the 3 and the 5 need to be reversed, but they must be done one at a time. Using the reverse of BIMDAS, get rid of the 5 as it is an addition. To reverse the +5, subtract 5 from both sides: +55=75 3 =2 3 To reverse the 3 multiply both sides by 3 (remember that 3 = ): 3 =32 1 3 = 6 If = 6 is substituted into the original equation: 6 +5=2+5=7 3 Which is correct. Example 4: isolate in the following: 3 + 7 = 4 5
3 1

Divide both sides by 3 to get rid of the 3 on the left side: 3 55 = 3 3 55 1 = = 18 3 3 Note: the negative sign could have been moved to give
3 5

without changing the answer. Also, the 3

could have been reversed first, and then the 5, as BIMDAS does not give precedence to Division/Multiplication. Example 5: isolate in the following + 3 = 9 7 Solution: using the reverse of BIMDAS, the + or 3 must be removed. Below, the 3 is removed first by adding 3 to both sides, but the could have been removed first without changing the solution: + 3 + 3 = 9 + 3 7 + = 12 7 Get rid of the + (treat this as you would any other number). To reverse this +, subtract from both sides: + = 12 7 = 12 7 Finally, reverse the 7 by multiplying both sides by 7: = 7 12 Brackets are needed around the 12 as RULE 1 above is really: Theory: RULE 1: whatever is done to the whole of one side of an equation must be done to the whole of the other side.

Solution: to isolate , work backwards through BIMDAS. Get rid of the +7 by subtracting 7 from both sides: 3 + 7 7 = 4 7 5 3 = 11 5 The negative sign on the left can be put either up top, or down bottom (they are the same, and both will give the same answer): 3 = 11 5 To get rid of the 5 , multiply both sides by 5 (remember 5 =
5 ): 1

5 3 = 11 5 1 5 3 = 55

23

You might have thought to write: = 7 12

Find a Common Denominator for the right side (1 3 = 3): 13 6 2 = + 5 3 3 13 6 + 2 = 5 3 The reason why a Common Denominator is found for both sides is that it makes it easier to reverse the 5 making it easier to simplify the right side: 13 6 + 2 5= 5 5 3 Remember that 5 is really like multiplication by 1: 13 5 6 + 2 5 = 5 1 3 1 13 = 5 6 + 2 3
5

This is incorrect as the whole of the right side must be multiplied by 7, however here, only the 12 is being multiplied by 7. Given the correct form: = 7 12 It can be expanded using half a crab-claw: = 84 7 Example 6: isolate in 2 2 + 3 + 5 = 7 5 3 Solution: firstly, put everything not with an onto the right side, by adding 3 to both sides and subtracting 5 from both sides: 2 2 2 2 + 3 + + 5 5 = 7 + 5 5 3 3 3 2 2 + 3 = 2 + 5 3 Change each side to have a Common Denominator (the left side Common Denominator does not have to be the same as the Common Denominator on the right): 2 3 2 2 + = + 5 1 1 3
2

Finally, to get rid of the 13, divide the whole of both sides by 13: 13 5 6 + 2 13 = 13 3 1 To get rid of the sign on the right, invert the second fraction and multiply: 5 6 + 2 1 3 13 5 6 + 2 = 39 = That is the answer. Half a crab claw could be used to put that 5 into the brackets, which would give: = 30 + 10 39

On the left side, the Common Denominator is 5, so 3/1 needs to be changed to have 5 on the bottom, by multiplying by 5/5: 2 3 5 2 2 + = + 5 1 5 1 3 2 15 2 2 + = + 5 5 1 3 Change the left side under a single division: 2 + 15 2 2 = + 5 1 3 Simplify the top of the left side: 13 2 2 = + 5 1 3

A common application of equations is finding exchange rates. Example 7: if the currency conversion rate from American dollars ($) to Euros () is: $1.50 = 1 How many Euros would be obtained from converting $173? Solution: to solve this sort of question, find how many Euros you will get per American dollar. This

24

means both sides must be divided by 1.50, so as to get a single $ on the left side: $1 = 1 1.5

change the equation, but rather is a method of manipulating an equation. Intro example 1: for the equation = 2 + 2 Factorise out the number 2. Factorising out 2 from every part of the right side is analogous to dividing each term by the number 2, but then bringing 2 out front of brackets: = 2 + 1 This may be confusing but if half a crab-claw was used to get rid of the brackets, the original equation will be obtained. Example 1: factorise out of the following = 4 + 3 2 Solution: divide each of the parts on the right side by , then bring out front of brackets: = 4 + 3 Example 2: factorise anything common in the equation = 4 2 + 8 3 Solution: each part on the right has an 2 (the 3 is the same as 2 ), and also a 4 (as 8 = 4 2), so this means that 4 2 can be factorised out from each part on the right side: = 4 2 1 + 2 Theory: for a statement which is separated by additions/subtractions, and each part of the statement has a certain common aspect, then each separate part of the statement can be divided by the common aspect, then having that common aspect being put outside of the brackets. Example 3: factorise = 3 3 12 + 6 2

Since $173 is being converted, multiply both sides by 173: 1 $173 = 173 115.33 1.5 Theory: for currency conversions, obtain the exchange rate for a single unit of the currency you have, then multiply both sides of that conversion equation by the number of units of currency initially had.
Exercises: 1. Solve for in the following equations: ) 2 3 = 4 + 7 10 ) 12 15 + = 2 2 ) 17 3 = 15 2 + 13.5 19 ) 15 = 17 5 3 2 1 ) + 5 3 = 15 3 3 1 ) + + = 5 2 3 4 2. Isolate in the following equations, leaving answers as a single fraction (where applicable): ) 3 2 = + 15 ) = 3 15 ) + 1 + = 1 3 5 ) + 4 = 0 4 3 ) 17 13 11 = 7 4 1 ) =5 + 2 3. Given the initial amount of currency, and given the exchange rate, determine the equivalent value in the other currency. ) $181 $0.80 = $1.00 ) $47 $0.94 = $1.04 ) 1801 $1.03 = 96.1 ) $94 $1.23 = $0.92 1.9 factorisation

Factorisation is the opposite of expansion of brackets. The application of factorising will be seen in subsequent chapters. Factorising does not

25

Solution: the common aspect in each part is 3, so put 3 out front of brackets and then divide each part by 3: = 3 2 4 + 2 A common use of factorisation is finding the solution(s) to complex statements being equal to zero. However, after the statements are factorised, there are at least two big parts being multiplied together. Theory: when two statements are multiplied together and they equal zero, one of the statements must be equal to zero. Example 4: solve 0 = 3 2 + 6 Solution: factorise a common 3 out of each part: 0 = 3 + 2 Now there are two parts being multiplied to give zero. The two parts are colour coded below: 0 = 3 + 2 For the whole right side to equal zero, either 3 = 0 making = 0 or + 2 = 0 making = 2. The two solutions are = 0 and = 2.
Exercises: 1. Factorise ) 2 + 4 + 8 2 ) 3 2 + 9 12 ) 3 3 + 2 2 ) 13 2 + 3 2 ) + 4 4 2 ) 18 91 2 ) 12 2 2 48 2. Solve for using factorisation: ) 18 2 9 ) 8 4 2 ) 19 2 38 ) 17 18 2 ) 12 4 37 3 1.10 inequalities and absolute values

Theory: inequalities are noted with the signs < and >. The sign > means the left side is greater than the right side, and the sign < means the left side is less than the right side. Similarly, the sign means greater than or equal to, and the converse sign means less than or equal to. The easiest way of remembering which side is greater than and which side is less than, is that the side of the open part of the signs is greater than the pointed end. E.g. 5 > 3 as 5 is on the side of the open end meaning that 5 is greater than 3. Example 1: put in the inequality sign for 68 Solution: since 6 is less than 8, the inequality sign has to have the open part to the right: 6<8 Manipulating inequalities is a little different from equations. Theory: addition and subtraction of inequalities is identical to that of equalities. Example 2: take 5 from both sides of 11 > 7 Solution: 11 5 > 7 5 6>2 Theory: multiplication and division of inequalities is identical to equalities only when multiplied or divided by a positive number. Example 3: divide both sides of the inequality by 5 50 > 40 Solution: 50 40 > 5 5 10 > 8

An equality is when two things are equal. Inequalities are when two things are not equal.

26

Theory: when multiplying or dividing an inequality by a negative number, the inequality sign must be reversed. Example 4: multiply both sides by 3 8>5 Solution: 8 3 > 5 3 24 > 15 This is not true, so the inequality sign must be reversed to give the correct answer: 24 < 15 Moving on to absolute values. Theory: an absolute value makes any statement which is negative into a positive statement. Absolute values are denoted with straight lines around the statement: means the absolute value of . Example 5: find the absolute value of 5 Solution: 5 = 5 Example 6: Find the absolute value of 7 Solution: 7 = 7 This is not the extent of absolute values, but it is what you will need for understanding this book.
Exercises: 1. Divide both sides of the inequality by the number in brackets ) 15 > 4 2 ) 13 < 15 2 ) 12 < 6 1 1 1 ) > 5 5 8 2. Isolate in the following inequalities: ) 2 > 15 1 ) 13 + < 0 15 3 ) 11 12 < 12 11 15 ) 2 3 + > 21 3 2 3

3.

Find the absolute values of the following (Hint: simplify before finding the absolute value). ) | 4| ) |79| ) |5 4| ) |32 42 | ) |4 6 1|

1.11 the number zero

Zero is a special number, with special properties. Theory: Any number multiplied by zero has a result equal to zero. E.g. 5 0 = 0 Zero divided by any number (other than another zero) is zero. 15 = 0 Zero divided by zero does not exist, but is not necessarily equal to zero. 0 0 Example 1: solve the following problem when = 0: Solution: this is impossible, and further investigation into the original function is required. This above example does not mean that cannot be simplified. What it means is that when = 0, is undefined. However, is equal to 1, whenever is not equal to zero. Example 2: solve 15 2 0 Solution: because there is a multiplication by zero, the value of is irrelevant: 15 2 0 = 0 Theory: as mentioned in the previous section, when two statements are multiplied together and they equal zero, one of the statements must be zero.
0 0

27

Example 3: solve for: 0 = + 3 1 Solution: the two parts (bracketed statements) are colour coded below: 0 = + 3 1 Either + 3 = 0 which gives = 3 or 1 = 0 giving = 1. So the solutions are: chapter one summary
Arithmetic with negative numbers: + = = + = = = = =

= 3 Exercises:

= 1

1. Solve for in the following: ) 3 5 + 12 0 = 3 16 0 ) 15 + 0 15 = 0 ) 30 + 0 2 + 10 = 30 2 20 0 ) + 1 = 0

Different ways of denoting a multiplication: = = Multiplication of fractions: = Division of fractions: = = Addition and subtraction of fractions uses the Common Denominator approach. This approach changes the form of all fractions so that the denominators are all the same, but leaves the values of all fractions unchanged. A Common Denominator is found by multiplying the denominators (bottoms) of all the fractions to be added or subtracted. The form of each individual fraction is changed by multiplying by / where is the multiplication of all the other denominators. The numerators (tops) are then put over the common denominator. Simplifying a fraction involving whole numbers: multiply the whole number out front by the denominator (bottom), then add that result to the top. To find how many whole numbers there are in a fraction, work out how many denominators will fit into the numerator without exceeding the numerator. Then remove that many denominators from the numerator, and any remaining numbers are left over the original denominator. Collecting like terms is the process of bring together things that are the same. INDEX RULE 1: = + INDEX RULE 2: = INDEX RULE 3: 0 = 1 INDEX RULE 4: = 1/ INDEX RULE 5: = 1 INDEX RULE 6: = INDEX RULE 7: = Common numbers and their base: BASE 2: 2, 4, 8, 16, 32, 64, 128, 256 BASE 3: 3,9,27,81,243

BASE 4: 4,16,64,256 BASE 5: 5,25,125,625 The square root of a positive number will always have two solutions: one positive and one negative. BIMDAS is a method that gives the order in which operations must be done. BIMDAS is Brackets, Indices, Multiplication, Division, Addition, Subtraction. The multiplication/division have no precedence over one another, and neither does the pair of addition/subtraction. To expand the multiplication of two brackets, every term in one bracket must be multiplied with every term in the other bracket (i.e. First, Outer, Inner, Last FOIL) EQUATION RULE 1: whatever is done to the whole of one side of the equation must also be done to the whole of the other side. EQUATION RULE 2: when isolating a variable, use the reverse order of BIMDAS to get rid of the elements around the variable to be isolated. For currency conversions, obtain the exchange rate for a single unit of the currency you have, then multiply both sides of that conversion equation by the number of units of currency initially had. To factorise a statement which is separated by additions/subtractions, and each part of the statement has a certain common aspect, then each separate part of the statement can be divided by the common aspect, then having that common aspect being put outside of the brackets. When two statements are multiplied together and they equal zero, one of the statements must be equal to zero. Inequalities are noted with the signs < and >. The sign > means the left side is greater than the right side, and the sign < means the left side is less than the right side. Addition and subtraction of inequalities is identical to that of equalities. Multiplication and division of inequalities is identical to equalities only when multiplied or divided by a positive number. When multiplying or dividing an inequality by a negative number, the inequality sign must be reversed. An absolute value makes any statement which is negative into a positive statement. Absolute values are denoted with straight lines around the statement: means the absolute value of .

28

Any number multiplied by zero has a result equal to zero. Zero divided by any number (other than another zero) is 0 zero. = 0

Zero divided by zero does not exist, but is not necessarily 0 equal to zero. 0
0

chapter one questions

1. Simplify the following negative numbers: ) 3 5 ) 2 2 ) 5 5 2 ) 3 2 Simplify the following fractions: 1 1 2 1 ) ) 2 3 3 8 1 1 4 2 ) / ) 2 3 3 5 9 3 18 1 ) ) 7 7 2 3 27 1 3 5 4 3 2 1 ) ) 13 2 8 3 3 3 3 3 Simplify the following fractions: 1 1 2 1 ) + ) + 2 3 3 8 3 4 2 1 ) + ) 4 3 11 2 2 1 1 1 1 ) + ) + 13 5 2 3 4 6 5 4 2 3 ) + ) 3 + 7 6 5 3 7 Simplify the following fractions: 1 2 1 2 1 1 ) ) + 3 7 2 2 6 5 1 1 1 2 1 ) + ) 3 2 3 2 4 3 1 1 1 1 1 ) / ) 1 + + + + 5 4 6 2 3 4 3 5 1 1 2 ) 2 / + ) + 2 4 1 3 3 Simplify using index rules, leaving positive indices: ) 2 3 ) ) ) 2
4

15

2.

3.

4.

5.

) 2 3 43 + 2 3 ) 2 3 + 2 1 + 2 3 + 3 7. Expand and simplify the following: ) + 2 2 ) 3 2 2 ) 2 + 1 ) 1 2 ) + 3 2 + 2 4 ) 2 2 1 2 + 3 40.5 ) 3 1 2 + 1 ) 2 + 1 2 14 8. Isolate in the following equations: ) 4 = 1 ) 3 + 1 = 7 ) 2 1 = 4 3 ) 3 7 = 4 2 + 2 2 ) =5 ) 7 + = 1 3 3 ) 12 + 3 = 6 + 2 ) 3 + 7 = 2 4 2 ) =2 ) 7 = 5 3 + 2 9. Factorise out anything possible in the following: ) 2 + 2 + 2 ) 2 2 + 6 8 2 2 ) 13 12 + ) 3 2 + 9 3 + 12 5 1 2 1 4 1 ) 4 + ) + + 3 3 6 1 1 1 3 4 ) 15 + 25 50 ) + 2 3 10. Simplify and solve for in the following: ) 2 = 0 ) 2 + 3 = 0 2 ) 2 6 = 0 ) 4 2 + 4 = 0 ) 3 2 = 0 ) 3 4 5 3 = 0 11. Simplify, then factorise, the following: ) 2 + 3 2 + 3 ) ) 9
2

9 4
2

2 + 3 3 + 2 + 3 + 2 3 2 + 6 3 12 ( 3 2 4.5

8 3 4

1 216 6 3

4 0.5 1.25 3 2 0.5 81 9 3 2 3 ) 27 2 ) 2 4 0.125 8 2 1 ) ) 6. 216 3 8 36 1.5 0.5 25 4 0.25 0.5

3 3

) )

3 2 32 + 1
3

125 3 Simplify the following using BIMDAS: ) 3 + 5 7 (3 + 5) 2 ) 4 2 + 4 32 2 2 ) 3 2 2 3 2 + 23 ) 14 3 + 4 2 + 3 1 ) 2 3 32 1 2 + 4 ) 2 6 3 + 33 + 2 1 + 2

4 125 9 + 3 3 2 ) 5 2 + 3 1 2 12. Solve for in the following equations: ) 3 2 = 0 ) + 7 4 = 0 ) 2 4 3 = 0 ) 3 1 6 + 15 = 0 3 5 6 4 ) =0 3

3

27 6 2

) 4 2 = 0 13. Find the absolute value of the following: ) 3 ) 4 ) | 1| ) 15 ) 0.1 ) |2 3|

29

Chapter 2

Linear Algebra
How to describe and draw lines in maths
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Linear Equations Main Feature of Linear Equations Negative Gradients Graphing Lines from Equations Obtaining the Equation of a Line Intersecting Lines Microeconomic Applications Elasticity Interpreting Elasticity 31 32 33 34 36 38 40 42 44 46 47

Chapter Two Summary Chapter Two Questions

30

2.1 linear equations

These lines have the same slope (), but the values of differ. The value of is a constant that determines how much the graph of the line is shifted up or down (line has a larger value of than line ). Theory: a mathematical definition of gradient is: = =

Theory: linear equations have the general form: = + Where is the gradient, is a constant, and and are variables. For example = 2 + 3. Both and are definite numbers ( = 2, = 3). In simple terms, is the gradient of the line which is another way of saying the slope of the line. Steeper lines have larger values of . The is a constant which is added to everything else (it is just a number). The and the are variables; is the dependent variable, because its value depends on , which is the independent variable (see chapter 1). Graphs of linear equations are straight lines. Below is a graph of two lines which might help you understand this theory.

The graph below shows how this definition is used:

Going from point to point , ask, how much does the line rise for every unit it goes across (runs)? Example 1: determine the gradient of the following line:

Line is steeper than line , so it has a larger gradient (slope=gradient). Thus, line has a larger value of than line . The graph below shows how the value of affects the position of a line. Plan: use the equation = Solution: =

3 10

3 = = 0.3 10

Theory: the gradient of a line is the same at all points along it.

The values of and are actual numbers, such as: = 4 + 5 = 81 7 = 4 = 81 = 5 = 7

31

1 3 = + 4 4

1 4

3 4

The constants and can be positive or negative, and can be whole numbers, fractions or decimals. The = + equation is the general form of a line, but there are many other forms. Despite all these other forms, it is best practice to manipulate equations of lines to get them into this easier, general form. From Chapter 1, you should be able to rearrange equations easily: Example 2: rearrange to get into the general form 7 + 4 = 3 Plan: use the reverse of BIMDAS to isolate . Solution: add 7 to both sides. 7 + 7 + 4 = 3 + 7 Take from both sides (to have all the s on the left side): +4 = 3 + 7 3 = 7 3 Then divide the whole of both sides by 3. 3 7 3 = 3 3 7 3 = 3 3 7 = 1 3 Example 3: rearrange to get into the general form 3 4 =6 + 1 Plan: apply the reverse of BIMDAS to isolate . Solution: multiply both sides by ( + 1): 3 4 ( + 1) = 6( + 1) + 1 3 4 = 6 + 6 Add 4 to both sides: 3 4 + 4 = 6 + 6 + 4 3 = 6 + 10 Divide both sides by 3:

3 6 + 10 = 3 3 10 = 2 + 3 The gradient () and the constant () of each line is unknown until it is rearranged into the general form.
Exercises: 1. Get the following equations in general form: ) = 7 ) 2 2 4 = 0 ) 3 + 4 = 17 ) 3 2 = 2 ) = 2 0.5 + 8 + 3 ) =3 + 3 2. Determine the exact gradient and of the following equations: ) 8 + 3 7 = 0 ) 3 5 = 7 4 ) + = 7 3 1 5 6 ) + = 1 4 7 ) = 9 2 1 ) =5 + 1 2.2 main features of linear equations

The graph below shows a couple of lines.

Theory: the is where the line cuts the . Similarly, the is where the line cuts the . There are two aspects to note when graphing lines: 1. steeper lines have larger gradients ( values). 2. lines cutting the higher up have larger value; the value shifts the line up or down.

32

Example 1: from the following graph, order the lines from the largest value to the lowest value. Then order the lines from the largest value to the smallest value.

negative gradient go from the top left to the bottom right. The graph below shows lines with negative gradients: : = + 3

: = 3 1

Both lines have a negative gradient, however line Plan: use the fact that 1) steeper lines have larger gradients, and 2) lines cutting the higher have larger values. Solution: Looking only at the slopes of the lines, is steeper than which is steeper than . So the order of gradients is , , . Now, look at where the lines cut the ; cuts it higher than which cuts it higher than , so the order of values is , , .
Exercises: 1. Order the lines from the one with the largest gradient to the one with the lowest gradient:

is steeper than line . So the gradient is bigger for than for in absolute terms. That is, line has gradient 3 and line has gradient 1. Remember from Chapter 1 that 1 > 3, but in absolute terms (ignoring the negative signs) 3 > 1. Theory: the steeper a line with a negative gradient, the smaller is the gradient (as it is more negative) and at the same time, the larger the absolute value of . Example 1: for the three lines graphed below, determine 1) which has a larger value, 2) which has a larger absolute value of , and 3) which has a larger value.

2.

Order the above lines from the one with the largest to the one with the lowest.

Plan: the line which is steeper has a higher absolute value, and at the same time has a more negative value than lines less steep. The line with the higher has a larger value.

2.3 negative gradients

Up to this point, all linear equations have had a positive gradient. Theory: lines with a positive gradient go from the bottom left to the top right, and lines with a

33

Solution: From the graph, is steeper than which is steeper than . So the absolute values of the gradient is , , . Because is steeper than the other two, it must have a more negative gradient; similarly is steeper than so it must have a more negative value than . Thus, the normal value order is the opposite of the one above: , , . Finally, cuts the higher than , which cuts it higher than , so the order for the size of is , , .
Exercises: For the following lines:

Theory: to find: 1. the (where the line crosses the ), replace all values of with zero, then solve for . 2. the , replace all values of with zero, then solve for . This may be a little bit confusing at first. Example 1: plot the line = 2 + 6 Plan: set all equal to zero then solve for to find the . Then set all the 's equal to zero, and solve for to find the . Solution: for , set = 0: 0 = 2 + 6 2 = 6 = 3 This gives the coordinate 3,0 . Remember that at the , the value of = 0, and coordinates are written with first then : (, ). To find the , set = 0: = 2 0 + 6 = 6 This gives the coordinate (0,6), as at the , the value of = 0. These two points can be plotted on a set of axes, then joined with a ruler. (0,6)

a) Order the lines from the one with the lowest gradient to the one with the largest gradient: b) Order the lines from the shallowest to the steepest (in absolute terms). Compare a) and b). c) Order the lines from the one with the largest to the one with the lowest. 2.4 graphing lines from equations

Lines can be easily plotted on a set of axes. Theory: to plot a line, points are needed which are called coordinates. Coordinates are written as (, ), where is always written first, and second. For the coordinate (3,7), = 3 and = 7. To be able to draw a line, you need at least two points (sets of coordinates). It is good practice to have equations of lines in the general form, but the following method allows plotting of lines in any initial form.

(3,0)

Theory: the and are usually the easiest points to find to be able to plot a line.

34

Example 2: Plot = 3 7 Plan: find: 1) the by setting = 0 and solving for 2) the by setting = 0 and solving for . Plot these two points then join them with a ruler. Solution: for the , set = 0: 0 = 3 7 3 = 7 = 7 3 7 ,0 3 For the , set = 0: = 3 0 7 = 7 Which gives the 0, 7 . Plot these two points and join with a ruler: 7 ,0 3

= 2.5 The coordinate of the is (2.5,0). To find the , set = 0: 3 2 0 = 5 3 = 5 = 5 3

5 3

The coordinates of the is 0,

Plot these two points, then join with a ruler: 5 0, 3

Thus the is: (2.5,0)

Note, that if asked for the gradient of this last equation (3 2 = 5), you would have to rearrange the equation into the general form. Try rearranging it, and plotting the rearranged equation. Example 4: find the gradient and plot the line 3 + 4 = 1 2 1 Plan: rearrange into the general form to find the gradient. Then find two points:

(0, 7)

1) the by setting = 0 and solving for 2) the by setting = 0 and solving for . Plot these two points then join them with a ruler. Solution: rearrange into the general form: 3 + 4 (2 1) = 1(2 1) 2 1 3 + 4 4 = 2 + 1 4 3 2 3 = 3 3 2 3 = 3 3 2 = 1 3
35

Example 3: plot the equation 3 2 = 5 Plan: find: 1) the by setting = 0 and solving for 2) the by setting = 0 and solving for . Plot these two points then join them with a ruler. Solution: to find the , set = 0: 3 0 2 = 5 2 = 5

Now that it is in the general form, the gradient is = 2 3

8 + =4

To plot the line, use either the original equation, or the equation in the general form. The following uses the original equation: 1. To find the , set = 0: 3 0 +4 = 1 2 1 4 = 1 2 1 4 = 2 + 1 3 = 2 = 1.5 Giving coordinates (1.5,0). 2. To find the , set = 0: 3 + 4 = 1 2 0 1 3 + 4 = 1 1 3 + 4 = 1 3 = 3 = 1 This gives coordinates of (0, 1). Plot these two points: 1.5,0

2.5 obtaining the equation of a line In many cases you will need to find the equation of a line without being given a graph. Theory: when given two points, approximately plot the points on a set of axes (if not given the graph), then find how much the line runs along the , and then how much it rises along the between the two points. Applying the / formula, the gradient can be found. Using the general form of a line, substitute in the gradient and any one of the points given, and solve for . Rewrite the equation of the line. You will always be given either two coordinates, or a coordinate and a gradient. The second case is a subset of the first case, so if you know how to do the first case, you will be able to do the second. Intro example 1: find the equation of the line passing through the points (1,3) and (3,7). Solution: approximately plot the points: (3,7) 4 (1,3)

(0, 1)

2
intersection

Exercises: 1. Find the gradient of each of the equations, then plot the function: ) = 2 3 ) 3 = 6 9 ) 2 + 3 = 7 ) 12 = 3 ) 7 3 = 2 + ) = 4 3 1 ) =3 2 + 1

Then draw a horizontal line from the point that is most left, and a vertical line at the point most right. Ask yourself: how much does the horizontal line run before it reaches the intersection? The answer is two units along the . Then ask:

36

from this intersection, how much does the vertical line rise? The answer is four units on the . Use the / formula to find the gradient: 4 = =2 2 Rewrite the general form of a line: = = + Then replace the gradient with the value found: = 2 + To find , substitute either one of the two point in for and . Using the point (1,3), substitute 1 for and 3 for in the general form of the line: 3 = 2(1) + 3 = 2 + 1 = So the equation of the line is: = 2 + 1 Using the other point (3,7) will give the same answer. Try it! Theory: a gradient can be found using the / formula, which can be written in mathematical terms as: = 2 1 = 2 1

7 (16,4) (9,2)
The line runs between 16 and 9 , which is 7, and rises between 4 and 2 which is 2. Now, we ask, for every 7 that the line runs, how much does it rise? If the line falls, as in this case, the rise is negative! So: = 2 = (leave it as a fraction) 7

This could also have been done using the mathematical / formula: = 2 1 42 2 = = 2 1 16 9 7 2 = + 7 Next, substitute in either of the original points. The point (9,2) is used below, but the other point (16,4) will give the same answer. Substitute = 9, = 2: 2 9 + 7 18 2= + 7 14 18 = 7 7 4 = (leave this as a fraction) 7 2= So the equation of this line is: 2 4 = 7 7 You must know how to manipulate fractions to be able to find equations of lines (see Chapter 1).

Substitute this gradient into the general form:

where the subscripts refer to the two points (1 , 1 ) and 2 , 2 . This formula allows you to find the gradient between two points without plotting the points. Example 1: find the equation of the line going through the points: (16,4) and (9, 2) Plan: use the / formula to find the gradient, then substitute that gradient and one of the points into = + to solve for . Solution: approximately plot the points:

37

Example 2: find the equation of a line which has a gradient of 3 and passes through the point (1,6). Plan: use the general form of a line: = + Substitute the given facts ( = 3, and the point (1,6)) and solve for . Solution: substitute everything into the general form of a line: 6 = 3 1 + 6 = 3 + = 3 So the equation of the line is = 3 + 3. This example did not require you to sketch the line, as it involved only substitution.
Exercises: 1. Determine the equations of the lines passing through each of the two points (respectively): ) (1,10)(2,13) ) (1,6)(3,16) ) (1,3)(1,7) ) (1,1)(3, 3) ) (2,1)(5,0) 21 63 ) 1, 7, 15 15 2. Determine the equation of a line passing through one point, having the gradient shown: ) 2,7 = 4 2 ) 6, = 3 3 ) 1, 1 = 1 3 ) 15,8 = 7

1 = 51 + 1 2 = 42 + 11 The two lines above cross only once. Another way of thinking about this is that if you look along the blue line, the only point that it touches the red line is at the intersection; similarly, if you look along the red line, the only time it touches the blue line is at the intersection. On this graph, the two lines are labelled with subscripts on the and the to distinguish between the two lines. The only point on the graph where the lines do not need to be distinguished is at the intersection, as it is common to both lines. So at the intersection: 1 = 2 1 = 2

Theory: when linear equations with different gradients intersect, there is only one set of coordinates that is similar on both lines. At the intersection, the of both lines are the same and at the same time the of both lines are the same. This only applies to the intersection, as no other point will satisfy this condition. Example 1: find the intersection of the following lines = 2 + 5 = 3 Plan: the only point where the of both lines are equal, and at the same time, the of both lines are equal is at the intersection. Set the two 's equal to each other and solve for ; this gives the at the

2.6 intersecting lines All this mathematical theory is leading to real world applications. If you draw two lines on a set of axes, chances are they will cross. Theory: lines with different gradients will intersect only once.

38

intersection. Substitute this into either of the original equations to give the . Solution: rewrite the above equations with subscripts to distinguish between the two equations: 1 = 21 + 5 2 = 2 3 Set the two s equal to each other: 1 = 2 Then substitute the 's for their respective equations: 21 + 5 = 2 3 At the intersection, the s are the same so the subscripts can be removed and solved: 2 + 5 = 3 3 = 8 8 3 This gives the of the intersection, but = the is still required to get the coordinates. The comes from one of the original equations (it doesnt matter which one, as at the intersection, they both have the same and ). Using 1 : 1 = 2 1 = 3 So the intersection is at 3 , 3 . Try using the other equation to see if you get the same solution. Subscripts were used to distinguish between the two functions, however, this is not necessary. Example 2: find the intersection of: 4 3 11 = 1 4 = 2 Plan: rearrange into the general form, then set the 's equal to each other. Substitute with the
8 1

equations, and solve for . Substitute into one of the equations to find . Solution: rearrange the first equation: 4 3 = 12 4 = 3 + 12 3 = + 3 4 And the other equation: = 2 + 4 Set 1 = 2 and substitute the equations: 1 = 2 3 + 3 = 2 + 4 4 11 = 1 4 4 = 11 This is the of the intersection, and now for the : 3 = + 3 4 3 4 = +3 4 11 36 = 11 Thus, the two lines intersect at
4 36 , 11 11

8 + 5 3

If you are struggling with fractions, go back to Chapter 1.

Exercises: 1. Determine where the following pairs of equations intersect: ) = 4 + 3 = 6 + 7 ) = 3 + 8 = 7 + 4 ) = 7 + 12 = 2 + 21 ) = 4 12 = 1.5 7 ) = 0.5 + 15 3 = + 15 ) 5 3 = 31 8 2 = 16 ) 2 = 3 19 9 = 3 12

39

7 + 12 = 72 4 = 3 + 36

Intro example: you are thinking of starting a business selling guitars so you do a little research into the market for guitars. Looking at the demand side of the market, you

2.7 microeconomic applications

Economic theory: DEMAND: this is what you do as a consumer. You demand goods and services. For example, when you go to a surf shop to purchase clothes, you are demanding those clothes. If board shorts cost $1000 each, would you buy many? Probably not, as its too expensive. What about if they cost $2 each. Would you buy many? Yes, most probably. So at low prices, you would buy more, and at higher prices, you would buy less. This explains the downward slope of the demand function:
1000

estimate that if you started your business, the demand curve would be: = 2 + 700 Now looking at the supply side of the market, meaning how many guitars you would make at certain prices, the supply function is given by: = 4 500 You would like to know the equilibrium price and quantity (i.e. when the supply and demand curves intersect). Solution: at equilibrium, there is no excess supply or excess demand (dont worry too much if you dont understand excess supply/demand). Despite there not being any 's or 's, simply apply the same theory of lines; set the = (similar to 1 = 2 in the previous section). = Then substitute the functions of : 4 500 = 2 + 700 Rearrange to find : 6 = 1200 = 200 This is the price the guitars should be sold for, but the quantity of guitars to be made is still unknown. This quantity comes from either or (either one as it is at equilibrium): = 200 = 4 200 500 = 200 = 300 The interpretation is that 300 guitars should be produced and sold for $200 each. You may also be asked to draw the two lines on a

2 1 2

SUPPLY: when you go to purchase board-shorts, the shop supplies them, making them the supplier. If the price of board-shorts was $1000 (totally ignoring demand) the shop would supply a lot, to make a big profit. If the price went down to $2, then the shop wouldnt make much profit, so they wouldnt supply very many. This is why the supply curve slopes upwards. At higher prices, shops would want to sell more so supply more.
1000

2 1 2

set of axes. If you are asked to do this, in economics, the price of a good () is on the

40

 , and the quantity of that good () is on the . This is a standard which is used by economists, so to be consistent, you will have to rearrange both the supply and demand equation to have the price () by itself. For the demand equation: = 2 + 700 700 = 2 700 = 2 = 0.5 + 350 For the supply equation: = 4 500 + 500 = 4 = 0.25 + 125 Plot both equations individually using the method earlier in the chapter. For the demand equation: 1. To find the , set = 0: = 0.5 0 + 350 = 350 Giving a coordinate of 0,350 , remembering that is on the and on the . 2. To find the intercept, set = 0: 0 = 0.5 + 350 0.5 = 350 = 700 Giving a coordinate of (700,0). For the supply equation, you should get = 500 and = 125. Make sure you get this. Then plot both demand and supply on the same axes: (500,0) (0,350)

(0,125)

(700,0)

Theory: demand and supply can only exist when quantity and price are positive or zero. You cannot have a negative quantity, or a negative price (hence the dotted extensions). Also, in economics, is on the and is on the . Example 1: find the equilibrium quantity and price for the demand and supply equations = 0.5 + 25 1 = 2 4 Then sketch the two lines, and draw in the equilibrium. Plan: set = then solve for and . Sketch each of the two equations by finding the four axis intercepts. Solution: set = 1 0.5 + 25 = 2 4 Rearrange to isolate : 1 27 = + 0.5 4 Use fraction theory from Chapter 1 to find a Common Denominator: 2 + 4 4 3 27 = 4 27 = 108 = 3 = 108 = 36 3

41

To find the quantity, use either demand or supply (it does not matter). Demand is used below: = 0.5 36 + 25 = 18 + 25 = 7 The equilibrium is = 7, = 36. To sketch the lines, find the two intercepts (remember that is on the vertical axis, and is on the horizontal axis). Demand: to find the , set = 0: = 0.5 + 25 0 = 0.5 + 25 0.5 = 25 = 50 This gives coordinates of (50,0). To find the , set = 0: = 0.5 + 25 = 25 Supply: to find the , set = 0: 1 = 2 4 1 0 = 2 4 0.25 = 2 = 8 To find the , set = 0: = 1 0 2 4

Exercises: 1. Find the equilibrium price and quantity given the following demand and supply equations: ) = 7 + 50 = 0.5 = 5 77 ) = + 9 9 = 4 12 ) 0.25 + 23 = 0.2 + 8 ) = 0.8 + 15 = 1.2 + 115 ) 0.7 + = 6 7 + = 61 2. Find the equilibrium price and quantity given the following demand and supply equations, then plot the functions. ) = 0.9 + 12 + 0.9 = 117 ) = 2.5 + 26 = 2 + 158 ) = 1.7 + 21 + 2.3 = 182 ) = 1.3 + 24 = 1.5 + 148 ) 0.9 + = 4 7 = + 61

2.8 elasticity The concept of elasticity is best explained with intuition. Lets say that you own a business selling cars. You have a car that is not selling well, so you decide to reduce the price by $3,000. Thats a large reduction, right? Well, we dont really know. If the original price of the car was $6,000, then yes, the reduction is huge. But if the original price was $50,000 then the reduction is not very big at all. What we really want to know it the percentage change in price. In the first instance, the percentage change is price is 50% (its negative 7,36 because the price has decreased), and in the second instance, the percentage change in price is 6%. Theory: percentage changes are found like any other percentage is found:

= 2 Plot demand and supply separately, then join the respective dots: 0,50

(0,8) (2,0) 25,0

42

% =

100 = 100

2.

the and are symbols which are different from and . The and mean change in and change in , respectively.

If there is a $3,000 decrease, the = 3000. And if the original price = 50,000, then: % = 3000 100 = 6% 50,000

The form of elasticity used most often is: =

Back to the elasticity concept: will you sell more cars if you reduce the price by 6% or 50%? You probably said 50%. Yes that would be sortof correct: you would sell more cars, but by what percentage will your car sales increase? If you sell 3 cars when you decrease price by 6%, and sell 4 cars when you decrease price by 50%, what is a better option? (You dont need to answer this, just think about the concept). Theory: elasticity of demand is the responsiveness of quantity demanded to a change in price. Another way of thinking about this is: how sensitive is the quantity demanded to changes in price. An intuitive example is; if the shop reduced the price of beer by $1, would the number of cartons of beer sold increase a little or increase a lot? This is what elasticity determines. It uses percentages to get rid of the error we encountered in the car example before. Theory: the elasticity formula is: = % = %

This last equation is simpler than you think. The first part is simply the slope of the line () when you have the equation in the general form (with by itself). The second part is a point along the line. Intro example 1: a business selling motorboats to James Bond decides to hire an economist to estimate the demand curve. The economist comes back and gives the following function before he is shot: = 0.0004 + 10 Initially, the business sells 6 boats per year at $10,000 each, but then decides to increase the price by 25%. The question is, how responsive are boat sales to changes in price? Solution: a 25% price increase means the new price will be $12,500 = 10,000 1.25 . Substituting this into the demand equation: (12,500) = 0.0004(12,500) + 10 (7,500) = 5 So 6 boats are sold initially, and this is reduced to 5 after the 25% price increase. Now, what is the change in ? = 5 6 = 1 What is the percentage change in ? % = 1 100 = 100 6

The % and % can be replaced with their respective definitions (% = % =

100 and

100):

100 = = 100 NOTE: 1. the 100 cancels off

100

% 16.67% Putting all this information into the original elasticity equation: = % 16.67 0.67 % 25
43

Now the much easier way of doing this question. Using the easier form of elasticity: =

(1000) = 4(1000) 400 = 3600 Substitute = 3600, = 1000 into the elasticity formula: = 4 1000 3600

Look at the original demand equation: = 0.0004 + 10 Is the by itself? Yes, so remembering that the slope of the demand function, which is 0.0004. Substitute this into the elasticity equation: = 0.0004

is

10 1.11 9

The elasticity of supply is approximately 1.11. The elasticity of supply will always be positive.
Exercises: 1. Determine the elasticity of demand for the given information: ) = 0.5 + 50 = 20 ) = 3.5 + 75 = 31 ) = 4.15 + 103 = 27 2. Determine the elasticity of supply for the given information: ) = 3 + = 15 ) = 0.4 44 = 17 ) = 1.2 37.5 = 21

The needs to be found and it is simply the original point. The original price is $10,000 and original quantity sold is 6, so substitute these in: = 0.0004 10,000 2 = 0.67 6 3

The same answer as before. Plus this is a more precise answer. In the next section, the meaning of this number will be discussed. Also, the elasticity of demand will always be negative. Example 1: a producer of laptops has a supply curve approximated by = 4 400 The price the laptops are sold to a retailer is $1000 each. How sensitive is the quantity supplied to changes in price? Plan: use the elasticity formula, but now supply instead of demand: = Solution: the gradient of the supply curve, when is by itself is 4. Substitute this into the elasticity formula: = 4

2.9 interpreting elasticity Theory: the negative sign of the elasticity of demand means that as prices changes in one direction (either a positive or negative change), then the quantity demanded will move in the opposite direction. The positive value of the elasticity of supply means that as prices change, the quantity will change in the same direction as the price changes. Example 1: given the demand equation = 100 0.5 determine the elasticity at = 20 and also determine by what percentage and in what direction quantity will change when price is increased by 10%. Plan: find the elasticity using =

The price of the laptops is $1000, however is still required; it is found using the supply curve:

44

Then use the other definition of elasticity to determine the %

> 1 : ELASTIC if the price of a good is changed by a certain percentage, the quantity will change by a larger percentage. The James Bond question from the previous section had an elasticity of demand 0.67, so to interpret this number, take the absolute value of this number (i.e. giving 0.67). Since 0.67 < 1, it means that this good is inelastic to price changes. That is, if price of the motorboats changed by a certain percentage, the percentage change in sales would not be as large (i.e. only 0.67 as large) In the laptop example, the elasticity of supply was approximately 1.11, which means that the supply of laptops is elastic. Specifically, if price changed by a certain percentage, the producer would respond with a 1.11 times larger percentage change. Example 2: the demand function for cigarettes is (with quantity in millions): = 40 400 and the price of cigarettes is $80/carton. Find and interpret the elasticity of demand for cigarettes. Plan: use the elasticity equation =

Solution: isolate in the demand equation: = 200 2 The gradient is 2 so substitute this into the first elasticity equation: = 2

% %

Since = 20, is found using the demand equation: = 20 = 100 0.5 20 = 90 = 2 90 = 9 20

Now substitute the 10% increase in price and the elasticity into the other elasticity equation: % 9 = 10 % = 90 This means that as price is increased by 10%, the quantity demanded will decrease (i.e. move in the opposite direction due to the negative sign) by 90%. The interpretation of the actual number of an elasticity tells you the degree to which quantity changes when price is changed. Theory: to interpret elasticity, take the absolute value of the elasticity (if it is negative, make it positive, and if it is positive, leave it as a positive number), then apply the following rules: < 1 : INELASTIC in this case, if the price of a good is changed by a certain percentage, the quantity will change by a smaller percentage. = 1 : UNITARY ELASTIC if the price of a good is changed by a certain percentage, the quantity will change by that same percentage.

and the demand function to find the elasticity. Solution: needs to be isolated in the demand equation so the gradient can be determined: + 400 = 40 + 400 = 40 1 = + 100 40 The gradient observed is 1/40. Substitute this into the elasticity formula: = 1 40

45

Given = 80, to get substitute this into the rearranged demand function: 1 (80) = (80) + 100 40 80 = 98 So 98million cartons are sold. The elasticity is: 1 80 40 98 80 1 = = 0.02 3920 49 = Taking the absolute value, | | = 0.02 which means it is (highly) inelastic. For any price changes, the change in quantity will be significantly less (only 0.02 of the change in price). A highly inelastic product like cigarettes means prices can be changed by a large percentage without the loss of many sales. In reality, this is the case; smoking is addictive so when price increases, people still need to smoke, but maybe wont buy as many cartons. Example 3: a company selling beer conducted research and found that elasticity of demand was 1.2. Interpret this number. If the company increased price by 15%, how much would quantity demanded change? Plan: interpret the elasticity from the theory. Use the original definition of elasticity to work out by what percentage quantity will change: chapter two summary Linear equations have the general form: = + 2 1 = = = 2 1 The gradient of a line is the same at all points along it. 1. steeper lines have larger (absolute) gradients ( values). 2. lines cutting the higher up have larger value; the value shifts the line up or down.

% %

Solution: the absolute value of is 1.2, and since 1.2 > 1, then beer is an elastic good. This means that if price changes by a certain percentage, quantity demanded will change by a larger amount. Now, using the original definition of elasticity, and the fact that = 1.2 and % = 15%, substitute into the original definition: 1.2 = % 15%

Rearrange to isolate %: 1.2 15% = % % = 18% So the percentage change in will be larger than the percentage change in , but in the opposite direction (as it is the elasticity of demand).
Exercises: 1. Determine and interpret the elasticity for the following functions: ) = 1.6 27 = 27 ) = 49 0.7 = 40 ) = 2.7 + 111 = 100 ) = 50 + 0.1 = 50 ) = 1.7 104 = 20 2. Interpret the following elasticities, and determine the effect on quantity of a 10% price decrease. ) = 1.19 ) = 2.3 ) = 0.43 ) = 1.0 ) = 0.97

Coordinates are written as (, ). To be able to draw a line, you need at least two points (sets of coordinates). To find: 1. the , replace all values of with zero, then solve for . 2. the , replace all values of with zero, then solve for . Linear equations with different gradient intersect only once and there is only one set of coordinates that is similar on both lines.

46

DEMAND: this is what you do as a consumer. You demand goods and services. A demand curve slopes downwards. SUPPLY: this is what a firm does. A supply curve slopes upwards. Demand and supply can only exist when quantity and price are non-negative. Percentage changes are found: % = 100 = 100 Elasticity of demand is the responsiveness of quantity demanded to a change in price. % = = %

The and are symbols which are different from and . The and mean change in and change in , respectively. The negative sign of the elasticity of demand means that as prices changes in one direction (either a positive or negative change), then the quantity demanded will move in the opposite direction. The positive value of the elasticity of supply means that as prices change, the quantity will change in the same direction as the price change. To interpret elasticity: take the absolute value of the elasticity, then apply the following rules: < 1 : INELASTIC = 1 : UNITARY ELASTIC > 1 : ELASTIC
4. For each of the following graphs, determine the equation of the line: )

chapter two questions

1. Rearrange the following linear equations into the general form: ) 4 = 5 ) 2 + = 3 ) 2 = + 3 1 ) 2 = 4 2 2 + 1 ) 14 = 3 ) = 5 4 ) + =4 ) =4 5 3 3 3 4 ) = 14 5 3 For the following graph:

5,0

2.

? ? ??

(0, 6)

(2,3)
Determine: a) The order of the gradients from lowest to highest. b) The order of the steepness (the absolute value of the gradients) from shallowest to steepest. c) The order of the values of from lowest to highest. Determine the gradients of each of the following linear functions, then plot them: ) = 4 + 1 ) 2 = 6 4 ) 3 1 = 4 + 1 ) =2 3 3 ) 2 3 = 2 ) 12 18 16 = 4 + 2 + 3 ) =4 2 3 ) = 4

2, 9

5.

3.

6.

Determine the equation of the line passing through each of the two points: ) 1,3 3,15 ) 2,1 5,16 ) 0,0 3,4 ) 1,7 7, 1 ) 5, 2 3, 12 Determine the equation of the line passing through the point indicated, with the corresponding gradient: ) 2,3 = 2 ) 1, 1 = 3 ) 7,7 = 1 ) 3, 6 = 2 ) 1.4, 3.1 = 2.5

47

7.

Determine the coordinates where the following lines intersect: ) = 3 + 9 = 2 + 3 ) = 4 9 = 3 3 ) = 5 + 7 = 2 + 14 ) 2 + 3 26 = 0 5 + 4 = 51 ) + 4.5 = 44.75 5.5 + 2 = 58 8. Given the following supply and demand functions, determine the equilibrium quantity and price. = 0.5 + 89 = 2 + 44 Plot the two functions, and include the axis intercepts and the equilibrium. 9. Given the demand equation: = 0.4 + 24 And the supply equation: = 3.1 + 6.5 Determine the equilibrium price and quantity, and plot the market on a set of axes. 10. For the demand equation: = 0.6 + 89

Determine the elasticity at = 45, and interpret its meaning. 11. Determine the elasticity of supply at = 12 for the supply equation: = 1.75 + 4.8 12. A car manufacturer estimates its demand curve to be (in hundreds of thousands): = 0.2 + 23.06 And its supply curve is estimated to be: = 3.1 + 15.58 Determine: a) The equilibrium quantity and price. b) The elasticity of demand at the equilibrium, and its meaning. c) The elasticity of supply at the equilibrium, and its meaning. 13. The market for steel has an estimated demand and supply curve (in millions of tonnes) to be: = 1.7 + 26.48 1 = + 21.6 3 Determine: a) The equilibrium quantity and price. b) The elasticity of demand at the equilibrium, and its meaning. c) The elasticity of supply at the equilibrium, and its meaning.

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Chapter 3

Simultaneous Equations and Matrices

Solving the intersection of lines using different methods
3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 Simultaneous Equations Two Simultaneous Equations Three Simultaneous Equations The Matrix Solving Two Equation Matrices Solving Three Equation Matrices Notes on Solutions to Matrices Applications The Determinant of a 2 2 Matrix The Determinant of a 3 3 Matrix Using the Jacobian Determinant 50 50 52 54 55 58 61 62 65 66 68 70 71

Chapter Three Summary Chapter Three Questions

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3.1 simultaneous equations In Chapter 2, the intersection of two lines was found mathematically. Essentially, simultaneous equations were used to do this. Theory: simultaneous equations are used to solve for the variables when there are two or more equations. It involves finding the common intersection of multiple lines. Given the two equations: = 2 + 5 = 3 + 6

= 3 3 3

Thus a solution is possible (Note: see Section 3.7). Simultaneous equations are simply a certain number of equations to help solve for a certain number of variables. However, sometimes a set of lines do not all cross at a single point, and in such a case, there is no unique solution. Similarly, sometimes sets of equations cross at an infinite number of points, so there are an infinite number of solutions. This is explained in detail in Section 3.7.
Exercises: 1. Determine if the following sets of equations can be solved: ) = 2 + 3 = 3 14 ) = + 3 = 2 = 15 ) = + 1 = 12 3 = + + 3

Simultaneous equations can be used to solve for and . The and are notes to distinguish the two different equations. Theory: to be able to solve simultaneous equations, there needs to be at least as many equations as there are variables (this is not the only condition). Remember that and are two different variables, so there is no reason why more variables cannot be introduced. One such equation could be: = 4 + 3 1

3.2 two simultaneous equations Theory: to solve simultaneous equations: 1. set the s equal to each other. 2. substitute the functions of in and solve for . 3. substitute the solutions of back into either of the original equations to find the of the solution. Note: you could also set the s equal to each in step 1, and substitute for the functions of . This will give the same solution. Example 1: solve for and in 1 = 2 + 1 2 = + 4

Here, z is the dependent variable, and x and y are the independent variables. Can the following equations be solved? = 4 + 3 1 = 2 + 2 + 4

The answer is no, as according to the theory above, there are more variables (3) than there are equations (2), so there will be no unique solution. In the following case, there are three equations (, and ) and three variables (, and ). = 4 + 3 1 = 2 + 2 + 4

Plan: set 1 = 2 and substitute the equations, then solve for . Substitute back into one of the

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original equations to find the at the intersection. Solution: 1 = 2 2 + 1 = + 4 3 = 3 = 1 So = 1, but for a coordinate, a is still needed. To find this , substitute the back into either of the original equations (both will give the same answer). Using equation : = 1 + 4 =3 So the solution to the two equation is = 1, = 3 or in coordinate form: (1,3). Try substituting the into equation to see if the is the same (it should be). Theory: another method of solving simultaneous equations is: 1. isolate one variable in one equation 2. substitute it into the other equation. 3. solve for the other variable, 4. substitute this solution back into either of the original equations to solve for the other variable. Example 2: solve for and in 2 + 2 1 = 7 5 3 + 4 = 0

compared to . Now, choose the variable easiest to isolate. In the following, is isolated however is just as easy. 2 + 2 1 = 7 2 + 2 = 8 2 = 8 2 = 4

This rearranged version is labelled . Substitute (4 ) in for in the other equation. (this means the modified equation 1 (labelled ) is substituted into equation ) 5 4 3 + 4 = 0 Use the crab-claw from Chapter 1: 20 5 3 + 4 = 0 24 8 = 0 = 3 To find the value of , substitute = 3 into either , or . is easiest as is already isolated: = + 4 = 3 + 4 = 1 Thus the solution is = 3, = 1, or in coordinates (3,1). Go back to the beginning of this example, and try to isolate in . Also, try to isolate or in . All these should give the same solution. The hardest part using of this method is knowing which equation is easier to use and this will take practice. However, even if you choose the harder one, the answer will still be the same. It is also a good idea to substitute the solution you get back into both original equations, to double check that you have the correct solution. Exercises: 1. Solve the following sets of equations
) 7 = 5 + 9 5 = 4 + 15

Plan: isolate one variable in one of the equations, and substitute it into the other equation to solve for the other variable. Substitute this solution into any of the modified or original equations to solve for the other variable. Solution: choose as the numbers in front of the variables are even and look easy to solve

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) ) ) )

2 = 3 + 8 5 + 9 = 15 6 + 7 = 15 2 = 7 + 13

4 + = 9 6 + 4 = 15 6 = 3 + 12 4 5 17 = 0

This is the solution to one variable. Substitute this value of into an equation with only and ; use either or ( is easier as is already isolated): = 2 2

3.3 three simultaneous equations A similar theory applies to three equation systems. A simple example will show you the technique before the theory is introduced. Example 1: Solve for , and in = 2 + 3 + 6 = + + 4 = 2 + 5 + 8

= 2(1) 2 = 0 With two variables solved, the last variable can now be solved (i.e. ) using : = 2 + 3 + 6 = 2(0) + 3(1) + 6 = 3 So the solution is = 0, = 1, = 3, or in three dimensional coordinates , , = 0, 1,3 . Theory: to solve three simultaneous equations: 1. take one equation and substitute it into the other two equations. This will make two new equations with only two variables.

Plan: use the substitution method to solve one variable at a time. Solution: To solve for three equations; first, take one of the equations, and substitute it into the other two equations (below, is put into both and ): : 1 = 2 2 + 3 + 6 = + + 4 + 2 = 2 : 1 = 3 2 + 3 + 6 = 2 + 5 + 8 4 2 = 2

2. substitute one of those equations into the other to solve for one of the unknowns. 3. use this solution to solve for one of the other variables. 4. lastly, use these two solutions to solve for the third variable. Note: the hardest part is organising and manipulating the three equations. The solution is also written in coordinate form , , . Example 2: Solve for , and in 3 + 8 = 4 4 = + 7 1 4 2 = 3 9

The two modified equations and are now two simultaneous equations with two variables (like in the last section). is no longer used. Isolate in : + 2 = 2 = 2 2 Substitute : 4 2 2 2 = 2 8 8 2 = 2 10 = 10 = 1
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Plan: substitute one equation into the other two, then use those two modified equation to solve for one of the variables. Work backwards to solve for the other variables.

Solution: in looks easiest to isolate 3 + 8 = 4 = 4 + 3 8

This solution for is used to find the other two unknowns. Substitute = 2 into either of the equations with only two variables (i.e. or ). Substitute = 2 : 33 14 2 5 5 33 28 = 5 5 5 = = 1 5 = Finally, use any of the equations with all three variables to solve for . The easiest is as is already isolated. Substitute = 1, = 2 = 4 + 3 8 = 4(2) + 3(1) 8 = 3 The solution is = 1, = 2, = 3, or 1,2,3 . Solutions will not always be nice round numbers, so it is a good habit to always work with fractions, as then you will always have an exact answer.
Exercises: 1. Solve the following sets of equations: ) = 4 + 6 2 = + 2 + 6 = + 2 + 2 ) 5 = 13 2 2 + 4 = 8 3 + 2 = 2 ) + 2 = 3 + 12 2 = 5 + 2 + 7 + 2 5 20 = 0 ) 2 + 5 = 4 + 2 4 + 4 + 6 = 10 4 = 2 + 2 + 8 ) 5 = 7 6 + 8 5 = 2 8 + 12 2 + 2 + 2 = 16

Correctly label this as as it has been slightly modified. Then put into both and : : 4(4 + 3 8) = + 7 1 16 + 12 32 = + 7 1 9 + 13 = 31

Again, this equation is labelled as as it has been modified. : 4 2 = 3(4 + 3 8) 9 4 2 = 12 + 9 24 9 5 14 = 33 Again, notice the labelling. Working with only and isolate any variable in either or . Both are difficult, so use either. Equation has been used below: 5 14 = 33 5 = 33 + 14 33 + 14 5 33 14 = 5 5 =

Again, this equation is labelled appropriately. This equation () is substituted into the other equation (i.e. ). : 33 14 9 + 13( ) = 31 5 5 429 182 9 + = 31 5 5 137 274 = 5 5 274 5 =2 = 137 5

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3.4 the matrix The substitution method for solving equations was quite easy for two equations, but was a lot harder for three equations. There is a shortcut method for solving simultaneous equations and it involves using matrices. To understand what a matrix is and how it is created, equations need to be in a particular order. Theory: every equation has to be in the general matrix form: + + = Where , , and are constants. Essentially, this form has all the variables on the left in a consistent order (e.g. alphabetical), and any numbers without variables (i.e. solitary constants) on the right side. For the equation 3 + 4 = 5 To get it into the general matrix form, rearrange it: 5 3 + = 4 Here, = 5, = 3, = 1 and = 4. The order of the variables is alphabetical order, as it is easy to remember. Example 1: rearrange the following equations into the general matrix form = 2 3 + 9 3 4 = 4 + 2 + = 2

+ = 2

Rewrite the original equations into a new set: 2 + 3 + = 9 4 2 + 3 = 4 + = 2

It is from this new set that a matrix can be constructed. Theory: a matrix is a set of square brackets summarising equations in a simpler form. To construct a matrix: 1. take the numbers in front of the variables and put them into square brackets. 2. draw a new set of brackets and vertically write the order of the variables you have chosen (e.g. alphabetical). 3. after writing an equals sign, the constants on the right side are written vertically in square brackets. Example 2: write the following equations in matrix form 2 + 3 + = 9 4 2 + 3 = 4 + = 2 Solution: 2 3 1 4 2 3 1 1 1 9 = 4 2

Plan: rearrange to get variables in alphabetical order on the left, and any numbers without variables (constants) on the right. Solution: use alphabetical order : = 2 3 + 9 2 + 3 + = 9 : 3 4 = 4 + 2 4 2 + 3 = 4 :
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Look at the left matrix. The first column is the column, the middle column is the column and the right column is the column. The next matrix has the , and so that the variables are defined. Then there is the equals sign, with the from the equations as another matrix. To understand how this system works, take your left index finger and put it onto the 2 on the top left of the left matrix, then put your right index

+ = 2

finger on the in the middle matrix. What you are pointing to is the number in front of the in the first equation (look back up at , it is 2). Now move your left hand across one entry, and your right hand down one entry. You should be on 3 with your left hand, and with your right, just like in ). Move your left finger across one more place and your right finger down one place. You should have the last entry of 1 (or just ). Going across these three numbers gives the left side of , and this is equal to 9, which is the top entry of the last matrix. If you go back to the beginning and put your left index finger at the start of the second row (i.e. the number 4), your right index finger back on and repeat the process, you will get equation . Example 3: find the original equations for the matrix 1 1 1 3 7 3 3 0 2 11 = 5 2

the column. The are separated from , and by a dotted line. A good habit is to write what the columns represent with a different colour: 2 3 1 9 4 2 3 4 1 1 1 2 You have to understand how a matrix relates to a set of equations before you can solve that system.
Exercises: 1. Put the following sets of equations into a matrix: ) 3 + 5 12 12 = 4 5 + 2 3 = 15 2 + 5 3 = 3 + 1 ) 12 11 + 10 = 9 7 3 + 2 = 7 1 2 + 3 4 + = 14 ) 2 + 4 = 14 7 + 7 = 7 9 + 5 = 0 ) 12 5 = 3 = 3 2 + 4 13 = 12 4 2. Extract the equations from the following matrices. 2 1 3 5 6 7 15 2 ) ) 5 2 6 14 3 2 0 3 4 7 1 11 2 12 2 5 4 8 3 5 5 8 0 5 ) ) 5 0 4 2 5 12 3 7 9 4 0 0 1 2 1 2

Plan: go across each row of the left matrix and multiply by each entry of the variables column. Add these together and make this equal to the entry in the respective row of the right matrix. Solution: + = 11 3 + 7 + 3 = 5 3 + 2 = 2

3.5 solving two equation matrices Having a set of equations in matrix form allows you to solve for , and in an easier way than the substitution method. Intro example 1: solve the following equations using matrices 2 = 3 + 5 0 = + 10

This is how matrices work. Once you are comfortable with moving between equations and matrices, you will find there is an easier way of writing all the information in a matrix: 2 3 1 9 4 2 3 4 1 1 1 2 In this form, the first column is the column, the second column the column and the third column

First, these equations must be rearranged into the general matrix form: : 2 = 3 + 5 3 + 2 = 5 : 0 = + 10

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 + = 10

The results are in red, which is the same as adding the two equations together. Theory: ROW operations involve adding/

Equations and allow construction of the matrix: 3 2 5 1 1 10 The idea now is to change the second row to get the number zero in the bottom left corner (circled in blue). The reason is that an equation made from that row, would be of the form: 0 + = Where and are constants. Then 0 is just zero, leaving: = Which can then be solved for . However, the circled number cannot simply be erased and replaced by 0, as this would change the equation. What must be done is use something called row operations to manipulate that bottom row to get a zero in the bottom left corner. Theory: A row operation is a process where a multiple of one ROW is added/subtracted from another ROW. Before row operations are done on a matrix, it is best to understand what is being done. For the two equations below to be added to one another: 3 + 2 = 5 + = 10

subtracting the COLUMNS of a matrix. Using this theory, to get a zero in the bottom left corner, and knowing row operations can be used without changing the equalities, how many ROW2s will need to be added/subtracted to how many ROW1s? Look only at the first column (the column). If 3 times ROW2 were added to ROW1, the answer would be zero (as 3 1 + (3) = 0). This is similar to finding a common denominator is Chapter 1. This ratio cannot be only applied to one column; this same ratio must be applied to all columns. The easiest method of doing this is to come up with a short sentence once you have figured out the ratio. In the above example, the sentence would be: three lots of bottom plus top 3 2 5 1 1 10 For the first column: three lots of one plus negative three is 3 1 + (3) = 0 For the second column: three lots of one plus two is 31 +2=5 For the third column: three lots of ten plus five is 3 10 + 5 = 35 The way this is represented on a matrix is: 3 1 3 0 2 1 2 5

The two left sides must be added, and the two right sides must be added. + : 3 + 2 + + = 5 + 10 Simplifying this gives: 2 + 3 = 15 Back to the matrix, if the columns are added together: 3 2 5 1 1 10 2 3 15
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5 10 5 35

2 = 32 + 1

This is pronounced: the new ROW2 is three times the old ROW2 plus ROW1. Once the zero is in the bottom left, the equations can be extracted from this matrix: 3 + 2 = 5 0 + 5 = 35 Then working from the bottom equation up, solve for the unknowns: 5 = 35 = 7 Move up to the next equation, and substitute in = 7: 3 + 2(7) = 5 3 + 14 = 5 3 = 9 = 3 The hardest part when using matrices is finding the ratio to be able to get zero in the bottom left corner. Theory: use ROW operations to find the ratio of ROW 1 added/subtracted from ROW 2, which will give a zero in the bottom left corner. Apply this ratio to all columns, then extract the equations from the modified matrix. Solve for the unknowns, working from the bottom equation up. Example 1: solve for and in 1 6 7 4 2 5 Plan: use row operations to get a zero in the bottom left corner. 1 6 7 4 2 5 Then extract the equations from this matrix, and solve for and from the bottom up. Solution: how many lots of 1 's need to be added/subtracted to how many lots of 4 's to get zero in the bottom left? Four of the top are

required to make the bottom, but if you are not sure whether to add or subtract, then write it out: 4 1 4 = 0 4 4 = 0 If you have an addition, it will make 8 so the black space must be a subtract sign. This is where many students stuff up, so dont be one of them. Write out your saying: four lots of top minus bottom For the first column: four lots of negative one subtract negative four 4 1 (4) = 0 For the second column: four lots of six subtract two 4 6 2 = 22 For the third column: four lots of seven subtract negative five 4 7 (5) = 33 In matrix form, this whole process would be written: 1 6 7 4 2 5 2 = 41 2 1 6 7 0 22 33 There is now a zero in the bottom left corner, so the equations can be extracted: + 6 = 7 0 + 22 = 33 Solve from the bottom up: 22 = 33 = 33 = 1.5 22

Up to the next equation: + 6(1.5) = 7 + 9 = 7 = 2 So the solution is = 2, = 1.5 or 2,1.5 .

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Check if the solution is correct by substituting it into either of the original equations (the bottom row of the matrix, just for consistency): + 6 = 7 2 + 6 1.5 = 7 2 + 9 = 7 This means the solution is correct. Example 2: use matrices to solve for and 4 = 3 + 17 6 + 9 = 2

595 208 35 35 387 3 = 35 129 = 35 3 = The solution is =

129 , 35

= 35

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Then check that the solution is correct: 4 = 3 + 17 52 129 = 3 + 17 35 35 208 208 = 35 35 4

Exercises: 1. Solve the following matrices for the unknowns: 2 1 12 1 1 9 ) ) 3 4 8 2 1 9 3 2 7 5 1 9 ) ) 4 2 0 1 7 39 2. Solve the following equations using matrices. ) 2 = 7 ) 3 + 7 = 13 4 + 4 = 8 5 + 9 = 11 ) = + 8 ) 9 3 = 5 4 = 2 3 = 3 + 13 3. A company initially sets a price for a good at = 15, and sells a quantity of = 30. When they increase price to = 20, the company sells 25 units. Find the equation of the demand function, then determine the equilibrium price and quantity given that supply is = 0.5 1.5.

Plan: construct a matrix from the equations, then use row operations to get a zero in the bottom left corner. Extract the equations, then solve for the unknowns, one at a time. Solution: put and into general matrix form: 3 4 = 17 2 + 9 = 6 Construct the matrix: 3 4 17 2 9 6 Find the correct ratio from the first column two lots of top minus three lots of bottom Apply this to all columns: 3 4 17 2 9 6 3 4 17 0 35 52 3 4 = 17 0 35 = 52 Working up, solve for : 35 = 52 = 52 35 2 = 21 32

3.6 solving 3 equation matrices Solving three equation matrices uses row operations, but there are some differences. Theory: to solve a three equation system, zeros are needed in the bottom left triangular area: 0 0 0

Write the equations from this matrix:

From this matrix, the bottom equation will be 0 + 0 + = This will have some multiple of equal to a constant. The middle row will have and , so can be solved as will already be known, and the top row will have all three variables, so can be found. This is the reason why zeros are needed in

Then solve for : 52 3 4 = 17 35 208 3 + = 17 35

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the bottom left triangular area; working from the bottom up, we can solve for , and . However, these zeros need to be found in a particular order. Theory: the two bottom entries of the first column must be changed to zero first, and then the bottom entry of the second column can be changed to zero. The reason for this will soon emerge. Intro example 1: solve for the unknowns in the matrix 3 1 1 8 6 2 3 10 2 2 3 18 Firstly, both the 6 and 2 in the blue box must be changed to zeros. For now, they will be done one at a time, but later you can do them at the same time. To get zeros in the blue box, ROW1 must be used. To change the 6 into a zero, work with ROW1 and ROW2: Find the ratio by asking: for the new ROW2, how many ROW1s will need to be added/subtracted from how many ROW2s? The short sentence is: two tops minus bottom 3 1 1 8 6 2 3 10 2 = 21 2 2 2 3 18 3 1 1 8 0 4 1 6 2 2 3 18 Remember that the two tops minus bottom applies to every entry in the second row. To change the number 2 to a zero in the third row (i.e. the bottom left corner), ROW1 and ROW3 must be used, ignoring ROW2. How many ROW1s will need to be added/subtracted from how many ROW3s? The short sentence is: two tops minus three bottoms

3 0 2 3 0 0

1 1 8 4 1 6 2 3 18 1 1 8 4 1 6 8 7 38

3 = 21 33

Now that the circled entries are zeros, the next requirement is to change the 8 (highlighted) into a zero. If the top row is used, it would ruin the zero in the bottom left corner, as the number 3 from the first row would be introduced again. However, if ROW3 is changed using ROW2, then the blue zeros will remain unchanged (as any ratio of two zeros added or subtracted is still zero!). To get a zero in place of the highlighted 8 , ask: how many ROW2s will you have to add/subtract from ROW3? Two lots of ROW2 are needed, but because of the negative signs, you may not be sure whether to add or subtract. So write it out: 2 4 8 = 0 8 8 = 0 The sign can only be a subtraction, so: two tops minus bottom In matrix form: 3 0 0 3 0 0 1 1 8 4 1 6 8 7 38 1 1 8 4 1 6 0 5 50

3 = 22 3

The matrix is reduced into the form that is required, so , and can now be solved. Extract the equations from this matrix: 3 + = 8 4 = 6 5 = 50 Work from the bottom equation up: = 50 = 10 5

Substitute into the next equation up: 4 10 = 6

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4 = 16 = 4 Next equation up: 3 4 + (10) = 8 3 + 14 = 8 = 2 The solution is = 2, = 4 and = 10, or 2, 4,10 . Finally, to check if the solution is correct, substitute it back into the bottom row of the original matrix: 2 + 2 + 3 = 18 2 2 + 2(4) + 3(10) = 18 4 8 + 30 = 18 Theory: to solve a system of three equations, row operations need to be used to get zeros in the bottom left triangle corner of the variables matrix, getting zeros in the left-most columns first. Example 1: solve for , and in the matrix 2 1 1 17 3 1 4 11 5 3 5 9 Plan: use row operations to get zeros in the first column where 3 and 5 are located using ROW1. Then using the modified ROW2, get a zero in the bottom entry of the second column. Rewrite the equations from the final matrix then work up to solve for , and . Solution: For ROW2: three lots of top minus two lots of bottom For ROW3: five lots of top minus two lots of bottom 2 3 5 2 0 0
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To get a zero in the bottom entry of the second column: one lot of top plus bottom 2 0 0 2 0 0 1 1 17 1 11 73 1 5 67 3 = 2 + 1 1 1 17 1 11 73 0 6 140

Rewrite the equation from this matrix: 2 = 17 11 = 73 6 = 140 Solve for using the bottom equation: = 140 70 = 6 3

Solve for using the next equation up: 70 = 73 3 770 = 73 3 219 770 = 3 3 551 = 3 11 Solve for using the next equation up: 551 70 = 17 3 3 481 2 = 17 3 51 481 2 = + 3 3 532 2 = 3 266 = 3 2 The solution is: =
266 551 70 , 3 , 3 3 266 , 3

551 , 3

70 3

or

1 1 17 1 4 11 3 5 9 1 1 17 1 11 73 1 5 67

Check this solution is correct: 2 = 31 22 3 = 51 23 5 3 5 = 9 5 266 551 70 3 5 =9 3 3 3

1330 1653 350 + =9 3 3 3 27 = 9 3 Note: the notes next to any matrix, such as 3 = 2 + 1 refer to the what is being done to that matrix, and the solution is shown in the following matrix. The 1, 2 etc. do not refer to the original matrix, just the matrix the note is written next to. These notes are also a good way of finding any mistakes, if the final check is found to be incorrect.
Exercises: 1. Solve the following matrices. 4 1 2 8 5 2 9 9 ) ) 7 3 4 10 2 2 3 12 3 3 1 25 1 3 4 13 2 3 4 8 1 5 1 15 ) ) 2 5 2 1 71 6 12 2 3 7 5 3 3 14 2 2. Solve the following sets of equations using matrices. ) 2 + 6 3 = 6 + 3 = 17 4 + 2 + 4 = 4 ) 6 + 4 + 6 = 2 + 2 = 3 2 3 + 3 = 6 ) 3 6 = + 4 2 + = 2 + + 12 6 + + + 4 = 0 ) 4 = 7 + 5 4 = + + 15 2 2 10 = 2 3. A computing company makes computers at to capacity in three identical factories in three different states. Each factory uses labour , metal and silicone chips . Due to differences in union powers, taxation laws and property rights, the costs of , and in these three states are not the same: State 1: $7.20/, $18.50/ and $31.00/ State 2: $7.50/, $21.00/ and $29.00/ State 3: $9.00/, $16.50/ and $30.00/ At full capacity, the total cost for each of the three factories is: State 1: $3373.00 State 2: $3589.00 State 3: $3564.00 Determine: a) Three expressions equating units of each of the three inputs to total cost.

b) The amount of , and used in each of the three identical factories.

3.7 notes on solutions to matrices When the intersection of two lines was found back in Chapter 2, if the two lines had the same gradient but different constants , then there would be no intersection. Similarly, if two lines had the same gradient and the same constants (that is, two equations for the same line), then there would be infinite intersections (every point on the two lines is an intersection). Theory: since matrices are just a simpler form of writing out a number of equations, then there can be: A single solution (what we have been doing in the last two sections) No solutions (if there is no common intersection of all lines) Infinite solutions (if we do not have enough equations and/or if some of the equations are the same) Only after you have tried getting the zeros in the bottom left triangle can you determine if there is infinite, a unique, or no solutions. The following is a matrix where there are no solutions (notice that there are zeros in the bottom left triangle): 2 0 0 1 4 9 2 3 5 0 0 4

If the bottom row is written in equation form: 0 + 0 + 0 = 4 0=4 But it is impossible for 4 to be equal to zero, thus there are no solutions.

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An example with an infinite amount of solutions (again, notice that the zeros in the bottom left triangle): 5 1 0 1 0 0 5 9 3 6 0 0

Economic theory: the macroeconomic model of an economy determines the income of all the people in an economy, and is written: = + + Where is the total income of an economy, is the total consumption expenditure in an economy, is the sum of all investment expenditure in an economy, and the government spending. To be able to solve for , , or , other independent equations need to be found. That is, above is one equation with four variables, so it cannot be solved. After earning income from working, the government takes a proportion of it through taxes, so that income is reduced. If the government taxes at a rate (e.g. 20%: = 0.20), then the income actually obtained is called disposable income (denoted ): = 1 Most people do not spend everything they earn, but rather save a proportion of it. The assumption is made that individuals save at a rate of their disposable income (i.e. the income they physically receive). = Where is the total savings of all consumers. Whatever is not saved, must be spent on consumption goods: = 1 From before, = 1 so this allows us to get rid of the in the above two equations: = 1 = 1 1 Lastly, for anyone in an economy to invest money (say in constructing an office block), that money needs to come from somewhere; it comes from savings. Thus = , so from the above equation:

This matrix has the same number of equations as there are variables, however one of these equations is all zeros: 0 + 0 + 0 = 0 This gives no information, because any values of , and will give 0 = 0, which is already known. If the other equations are extracted: 5 + + 5 = 9 + 3 = 6 The result is two equations and three variables, so this cannot be solved for a unique solution, thus there are infinitely many solutions.
Exercises: 1. Determine the number of solutions for the following matrices: 6 2 4 5 7 5 3 17 ) 6 6 4 3 ) 21 3 7 5 3 4 2 20 14 34 38 146 12 2 6 5 5 2 45 ) 6 3 7 5 ) 6 6 4 3 18 19 41 12 3 4 22 2. Determine if the following sets of equations can be solved, then solve them if possible. ) 12 5 = 7 + 19 = 8 4 + 8 6 + 34.5 4.5 52.5 = 0 ) 8 3 = 14 5 12 = 6 4 4 + 5 + 2 = 2 ) 12 + 4 = 9 + 16 2 + 9.5 + 3 = 15 6 3.5 = 24 10 3. Find the value(s) of where there are zero solutions, infinite solutions and a unique solution. 6 4 3 12 3 8 3 8 1 1 3

3.8 applications An application you will surely come across is the macroeconomic model of an economy.

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 = 1 Where the right side is the equivalent of . This gives three equations, and six variables: = + + = 1 = 1 1

The variables will be arranged in alphabetical order: , and . Rearranging the equations into the general matrix form: : : : + = 300 0.56 = 0 0.14 = 0

However, assumptions are made about , and . Government spending () is constant regardless of the level of income (as even in a recession, the government spends approximately the same amount); the savings rate takes a long time to change, so is assumed to be constant; the government sets the tax rate and is usually the same for at least a year, and if it is changed, it is not changed much. Working through the following example will show you how to solve this set of equations. Example 1: if the government of an economy spends $300billion and taxes at a rate of 30%, with the citizens, on average, saving 20% of their income, what is the consumption, investment and total income of the economy? Plan: use the model of a closed economy = + + = 1 1 = 1

Construct the matrix: 1 1 1 300 1 0 0.56 0 0 1 0.14 0 Use row operations to get zeros in the bottom two entries of the first column: 1 1 1 300 2 = 1 + 2 1 0 0.56 0 0 1 0.14 0 1 1 1 300 0 1 0.44 300 0 1 0.14 0 Get a zero in the bottom entry of the second column: 1 1 1 300 0 1 0.44 300 3 = 2 + 3 0 1 0.14 0 1 1 1 300 0 1 0.44 300 0 0 0.3 300 Extract the equations from this last matrix: + = 300 + 0.44 = 300 0.3 = 300 Work from the bottom up: = 300 = 1000 0.3

Substitute all the values that are known, then rearrange into the general matrix form, use row operations to get the zeros in the bottom left triangle, then solve for , and . Solution: = + + 300 = 1 0.2 1 0.3 = 0.2 1 0.3 Lastly:

Substitute this into the next equation up: + 0.44 1000 = 300 = 140 + = 300 140 + 1000 = 300 = 560

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This economy has consumption of $560billion, invests $140billion and has a total income of $1,000billion (or $1trillion). Example 2: If a government has a tax rate of 40% and spends $600billion, and the people in the economy save, on average, 20% of their income, what is the consumption, investment and total income of the economy? Plan: use the model for a closed economy = + + = 1 = 1 1

0.4 = 600 Work upwards: = 600 = 1500 0.4

Then up one equation: 0.12 1500 = 0 = 180 Up one more equation: 180 + 1500 = 600 = 720 Thus consumption is $720billion, investment is $180billion and total income is $1,500billion. If you think it would be easier to solve the model using the substitution method, you would be correct. Unless you are not given enough information to solve for actual numbers. Example 3: Given the following closed economy = + + = 1 1 = (1 )

Substitute in the known information ( = 0.2, = 0.4, = 600), then rearrange to get into the general matrix form. Use row operations to get zeros in the bottom left triangle, then solve for , and . Solution: substitute in all the known information: = + + 600 = 0.2 1 0.4 = 0.12 = 1 0.2 1 0.4 = 0.48 Rearrange into the general matrix form: + = 600 0.12 = 0 0.48 = 0 Construct the matrix: 1 1 1 600 0 1 0.12 0 1 0 0.48 0 3 = 1 + 3 1 1 1 600 0 1 0.12 0 0 1 0.52 600 3 = 2 + 3 1 1 1 600 0 1 0.12 0 0 0 0.4 600 Extract the equations from this last matrix: + = 600 0.12 = 0

and assuming the tax rate is 15% and government spending is $600billion, what is the solution to this system of equation in terms of the savings rate ? Plan: substitute the numbers that are known, and then rearrange to get into the general matrix form, assuming is just a number. Solve for , and in terms of . Solution: substitute in the known numbers = + + 600 = 1 1 0.15 = 0.85 0.85 = 1 0.15 = 0.85

Rearrange to get into the general matrix form + = 600 (0.85 0.85) = 0 0.85 = 0

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Remember that is the savings rate and is a constant. Construct the relevant matrix: 1 1 1 1 0 0.85 + 0.85 0 1 0.85 of the first column: 1 1 1 600 0 1 0.15 + 0.85 600 0 1 0.85 0 3 = 2 + 3 Then get a zero in the bottom entry of the second column: 1 1 1 600 0 1 0.15 + 0.85 600 0 0 0.15 600 Rewrite the equations: + = 600 + 0.15 + 0.85 = 600 0.15 = 600 Work from the bottom up: = 4000 Up one more equation: + 0.15 + 0.85 4000 = 600 + 600 + 3400 = 600 = 3400 Then: 3400 + 4000 = 600 = 3400 3400 The answer in terms of the savings rate is: Consumption is $(3400 3400)billion, Investment is $(3400)billion, and Total income of the economy is $4000billion. 600 0 2 = 1 + 2 0

3.

Given an economy with the following facts, solve for , and using matrices in terms of the tax rate . Government spending = 500, savings rate = 18%.

Manipulate this to get the zero in the middle entry

3.9 the determinant of a matrix For a small number of equations, using matrices seems pointless, but with a large number of equations, matrices simplify the mathematics. This is why you should know a few different ways of solving matrices. Theory: the determinant of a 2 2 matrix is found by multiplying the numbers in the right hand diagonal, and then subtracting the multiplication of the numbers in the left hand diagonal. For the matrix: =

The determinant of matrix is: = Not to be confused with absolute values, the determinant is written with two vertical lines around either the whole matrix, or the letter defining a matrix. For the 2 2 matrix: 2 4 3 7

The determinant is: 2 7 (4 3) = 14 12 = 2 An easy way of remembering this (especially if youre right handed) is right hand diagonal take away left hand diagonal (actually do the karate chops!). To show that the determinant is being found, straight lines are drawn either side of the matrix: 3 4 5 8 Example 1: find the determinant of the matrix 3 5 4 8

Matrices make easy work of a large number of equations.

Exercises: 1. Given an economy with the following facts, solve for , and using matrices. Government spending = 400, tax rate = 20% and savings rate = 15%. 2. Given an economy with the following facts, solve for , and using matrices. Government spending = 700, tax rate = 10% and savings rate = 25%.

65

Solution: the determinant is the multiplication of the right diagonal minus the multiplication of the left diagonal which gives: 3 8 4 5 = 24 (20) = 24 + 20 = 4
Exercises: 1. Find the determinant of the following matrices: 2 1 4 4 1 2 ) ) ) 2 3 7 5 2 6 3 2 2 4 8 3 ) ) ) 29 5 3 6 16 6 6 12 2 4 3 5 ) ) ) 8 11 7 0 5 3

Draw the matrix from the remaining numbers, and find the determinant: 1 1 5 2 = 1 2 5 1 = 7 Go on to the last number: 2 5 3 1 1 1 5 3 2 Finding the determinant of the remaining numbers: 1 1 5 3 = 1 3 5 1 = 8 Then bring it all together. Theory: The determinant of a 3 3 matrix is: = + 1 det 2

3.10 the determinant of a matrix This is a harder section, so make sure you are very comfortable with all the material in Section 3.9. Intro example 1: find the determinant of the 3 3 matrix: 2 5 3 1 1 1 5 3 2 Solution: Circle the first entry (2), then cross out all the numbers in that row and column, but leave the circled number alone: 2 5 3 1 1 1 5 3 2 With the remaining numbers, draw a matrix: 1 1 3 2 Find the determinant of this matrix using the right hand/left hand method. = 1 2 3 1 = 1 Go on to the next number along in the original 3 3 matrix; circle it and cross out the vertical and horizontal numbers: 2 5 3 1 1 1 5 3 2

det + 3 And the circled numbers are the numbers in the top row. Notice also the highlighted signs and how they alternate (+, , +) which we will come back to soon. The determinant of the original 3 3 matrix is: = + 2 1 5 7 + 3 8 = 61 The +, , + pattern does NOT come from the sign of the numbers in the original matrix, but it is a pattern unrelated to the original matrix. Many students stuff up here, so dont be one of them. This pattern works for the top row, but as you will soon see, sometimes you will not want to use the top row.

66

Theory: when finding the determinant using any row or column, the pattern for the determinant equation is given by the matrix: + + + + + An easy way of remembering this matrix is that the top left is an addition sign, and then the signs alternate across every row and down every column. Remember, this does NOT mean that the numbers in the original 3 3 matrix are positive or negative, but rather that when you come to find the determinant, this is the pattern of signs you put in front of the in the formula. In the introductory example, the top row was used, but any row or any column can be used. There is a good reason why the +, , + matrix should be remembered. Theory: when asked to find the determinant of a matrix and one of the rows or columns has one (or more) zeros in it, use that row or column. It makes life a lot easier, as the following example demonstrates. Example 1: find the determinant of the matrix 2 3 1 = 1 0 4 4 5 3 Plan: use the middle column (because it has a zero): circle the top number and cross out the other numbers in that row and column. Then find the determinant of the remaining numbers. Repeat for the other two numbers in the middle column. Use the sign matrix to get the correct pattern: + + + + +

Since the middle column is being used, the signs in the determinant equation will be , +, :
= 1 det + 2 det 3 det

Solution: Circle the first number: 2 3 1 1 0 4 4 5 3 Find the determinant of the remaining matrix: = 1 4 = 13 4 3

Circle the next number: 2 3 1 1 0 4 4 5 3 = 2 1 =2 4 3

For the last number: 2 3 1 1 0 4 4 5 3 =

= 1 det + 2 det 3

2 1 = 7 1 4

= = 3 13 + 0 2 5 7 =4 But the middle number is (0)(2) = 0, so the will always be zero. This is why columns/rows with lots of zeros are chosen; because the determinant of a circled zero does not need to be found. Try the above example using the middle row. You should get the same answer.

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Finding determinants of 3 3 matrices is not too difficult, but it requires a lot of work. The more you practice, the easier it will be. Exercises: 1. Find the determinants of the following 3 3 matrices:
) ) ) 2 5 10 5 6 3 1 2 8 3 7 1 5 8 4 1 9 9 11 12 15 11 19 18 3 23 27 ) ) )

= 0

19 3 5 3 + 1 10 2 3 2 19 5 (1) 10 3

= 1 68 1 7 = 61 Then to find the actual value of , the following fraction is used: = 61 = = 1 61

1 4 1 4 5 4 1 4 1 3 2 8 0 7 5 1 2 1 0 5 3 11 6 2 5 6 0

Theory: to solve for a variable using the Jacobian Method, firstly find the determinant of the variables matrix (||). Then replace the appropriate column (for the variable to be solved) with the constants column, and find the determinant of this (| |). The solution is this second determinant divided by the determinant of the variables matrix: =

3.11 using the Jacobian determinant Previously, the values of , and were found by finding the zeros in the bottom left triangle. The following is a different way of finding the solution to a set of equations. Intro example 1: to solve the matrix 2 5 3 1 1 1 5 3 2

19 0 10

Example 1: solve for and using the Jacobian Method in the matrix that was started above 2 5 3 1 1 1 5 3 2

find the determinant of the 3 3 variables matrix (left of the dotted line) which was done in the previous section. The determinant was 61. This is denoted by || and it is the determinant of the original 3 3 variables matrix. Next, the column of the variable to be solved is REPLACED by the column of constants. That is, to solve for , replace the column (i.e. first column) in the matrix with the constants column (i.e. the numbers on the right of the dotted line): 19 5 3 0 1 1 = 10 3 2 Find the determinant of this new matrix using the method from the last section. Use the middle row as it has a zero (remembering the signs matrix):

19 0 10

Plan: use the Jacobian method; find the determinant of the variables matrix. Then replace the constants column into the column of the variable being solved, and find the determinant of this new 3 3 matrix. Divide this determinant by the determinant of the original variables determinant to solve for the unknown variable. Solution: to solve for , replace the column with the constants column 2 19 3 1 0 1 = 5 10 2 Find the determinant of this matrix using the middle row:

68

 = 1

19 3 + 0 10 2 2 19 (1) 5 10

2 5

3 2

Repeat for and with the appropriate columns. Also, when finding the determinant, remember the signs matrix: + + + + + Solution: determinant of the variables matrix: = 2 1 0 4 4 2 1 1 3
4 4 2 4 1 2 1 1 1 2 4 + (3) 1 2

= 1 68 1 115 = 183 Solve for : = 183 = =3 61

To solve for : 2 5 19 1 1 0 = 5 3 10 Find the determinant (yourself!) to make sure it is = 122, which then gives: = 122 = = 2 61

Use the bottom row:

= + 0

= 1 2 + 3 8 = 26 To find : = 0 5 10 4 4 2 1 1 3

Thus = 1, = 3, = 2, or 1, 3, 2 . To make sure this answer is correct, substitute it back into the bottom equation of the original matrix: 5 3 2 = 10 5 1 3 3 2 2 = 10 10 = 10 This is a complicated method, but the more you practice the easier it becomes. When you have a zero in a matrix, use it, and remember that you do not need to find the determinant of the smaller matrix when that zero is circled. Example 2: solve for , and in the following matrix using the Jacobian Method 2 4 4 1 2 1 0 1 3

Use the top row (leaving the zero out from now on): = 4 5 1 5 + (4) 10 3 10 2 1

= 4 25 + 4 25 = 200 To find replace the middle column with the constants, and use the top row: = 0 4 5 1 10 3 5 1 1 =+ 2 + (4) 10 3 0 2 1 0

5 10

= 2 25 + 4 10 = 10 To find , replace the middle column with the constants, and use the top row: = 2 4 0 1 2 5 0 1 10 2 5 1 5 =+ 2 (4) 1 10 0 10

0 5 10

Plan: find the determinant of the variables matrix, using the 3 3 method. Call this . Replace the column with the constants column. Find the determinant of this matrix, and call it . Solve for by: =

= 2 25 4 10 = 90 Finally, for a solution: = 200 100 = = 26 13

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 = =

10 5 = = 26 13 90 45 = = 26 13
100 5 45 , , 13 13 13

2.

The solution is = 100/13, = 5/13, = 45/13 or .

Check if the answer is correct by substituting it back into one of the rows of the original matrix. To be consistent, use the bottom equation: 3 = 10 5 45 3 = 10 13 13 5 135 + = 10 13 13 5 + 135 130 = = = 10 13 13 The solutions are fractions, so leave them as fractions!
Exercises: 1. Solve the following matrices. 8 1 2 1 ) 2 2 7 14 ) 4 1 3 5 3 6 8 12 ) ) 1 1 2 13 3 2 1 11 3.

1 1 3 7 2 1 4 7 8 5 3 7 4 6 2 10 2 1 5 6 1 7 1 5

Solve the following sets of equations using Jacobian determinants. ) 6 + 3 + 3 = 18 2 = 24 2 + 2 4 = 15 ) 4 + 5 = 2 + 6 5 = + 5 + 2 3 = 5 + 6 ) 6 + 4 + 6 = 3 + 4 9 = 0 2 2 3 = 8 ) 9 + 3 = 2 2 + 2 = 6 4 2 + 2 = 8 A toy manufacturing company uses metal () plastic () and labour (). The company owns three identical factories in a country where the costs of each of the three inputs is different: City 1: metal costs $2/, plastic costs $8/, labour costs $7/. City 2: metal costs $5/, plastic costs $6/, labour costs $3/. City 1: metal costs $7/, plastic costs $3/, labour costs $9/. If all factories are at full capacity, the costs for each of the factories is as follows: City 1 factory costs are $342 City 2 factory costs are $255 City 3 factory costs are $375 Determine: a) The equation in terms of , and for each of the three cities. b) The amount of labour, plastic and metal used in each of the three identical factories.

chapter three summary

Method 1 to solve two equation systems: 1. set the s equal to each other. 2. substitute the functions of in and solve for . 3. Substitute the solutions of back into either of the original equations to find the of the solution. Note: setting the s equal to each other initially will give the same answer. Method 2 to solve two equation systems: 1. isolate one variable in one equation 2. substitute it into the other equation. 3. solve for the other variable, 4. then substitute this solution back into any one of the original equations to solve for the other variable. To solve three simultaneous equations: 1. take one equation and substitute it into the other two equations. This will make two new equations with only two variables. 2. substitute one of those equations into the other to solve for one of the unknowns. use this solution to solve for one of the other variables. 4. lastly, use these two solutions to solve for the third variable. The solution is also written in coordinate form , , . The matrix ready form of an equation is: + + = To construct a matrix: 1. take the numbers in front of the variables and put them into square brackets. 2. draw a new set of brackets and vertically write the order of the variables you have chosen (e.g. alphabetical). 3. after writing an equals sign, the constants on the right side are written vertically in square brackets. Manipulating matrices involve ROW operations; this is the process of adding/subtracting the COLUMNS of a matrix. For two equation systems, a zero is needed in the bottom left corner. For three equation systems: zeros are needed in the bottom two entries of the first column (this must be 3.

70

done first), as well as the bottom entry of the second column. Matrices can have: A single solution No solutions (if there is no common intersection of all lines) Infinite solutions (if there are not enough equations and/or if some of the equations are the same) The macroeconomic model of an economy is: = + + Where is the total income of an economy, is the total consumption expenditure in an economy, is the sum of all investment expenditure in an economy, and is government spending. Consumption is determined by what is not saved (at a savings rate ) and not taxed (at the tax rate ): = 1 1 Investments comes from savings, = : = 1 Government spending () is constant regardless of the level of income; the savings rate takes a long time to change, so is assumed to be constant; the government sets the tax rate and is usually the same for at least a year. For the matrix:

The determinant is: = The determinant of a 3 3 matrix is: = + 1 det 2 det + 3 When finding the determinant using any row or column, the pattern for the determinant equation is given by the matrix: + + + + + It is easiest to find the determinant of a matrix using the row/column with the most zeros. Using the Jacobian Method to solve a system of equations: = Where is the determinant of the variables matrix, and is the determinant of the variables matrix with the column replaced with the solitary constants matrix. = 4. ) ) ) ) ) ) ) 5. If possible, solve the following matrices for a unique solution: 2 1 8 1 4 29 ) 2 2 2 5 3 26 1 1 3 1 3 10 ) 2 2 6 3 1 6 2 4 14 4 5 100 ) 3 2 9 3 6 84 3 3 24 1 5 42 ) 2 2 18 2 1 9.5 12 13 104.5 3 12 25.5 ) 1 2 16.5 18 7 23 1 8 36 1 3 18.4 ) 1 9 40.2 1 5 33.6 9 1 65.8 4 1 26.5 Use matrices to solve for the following demand and supply equations: ) = 2 + 62.5 = 2 + 28.5 ) = 1.5 + 59.75 = 1.8 + 30.5 ) = 1.4 + 72.6 = 2.2 + 4.2 ) = 4.3 + 349/30 = 4.1 + 97/30 ) = 2 + 24.07 = 0.41 + 3.7537 Solve the following sets of equations using matrices: ) 4 + + 8 = 21 5 + 2 = 6 6 + 3 + 2 = 3 ) 2 + + 2 = 0 2 + 3 + 11 = 0

chapter three questions

1. Convert the following sets of equations into matrix form: ) = 3 1 ) 3 = = 2 17 15 + = 3 ) 17 13 = + 1 ) 11 3 = 1.4 2 3 1 = 0 11 3 = 1.5 ) 3 = 3 4 + ) + = 4 4 15 = 13 = 1 1.4 = 3 3 = 1 Solve the following sets of equations without using matrices: ) 5 + = 14 2 + 8 + 2 = 0 ) 4 = + 6 7 + 3 = 20 ) 3 = 7 + 30.5 4 + = 17.75 ) 3 = 2 4 + 9 + = 3 + 5 + = 4 + 6 ) 2 + 2 + 2 = 16 3 + 3 = + 20 3 + = + 6 Solve the following sets of equations using matrices: ) 12 + 7 = 19 ) = + 1 8 + 13 = 21 3 + 3 9 = 0 ) 6 = 8 + 6 ) 12 + 22 = 5 5 + 6 = 3 3 + 8 + 2 = 0 ) 7 + 12 = 319 ) 2 + 13 = 140 9 = 18 63 2 + 8 = 80 ) = 3 + 7 ) 4 = 5.75 8 + 2 = 10.5 2 + = 25.25

2.

3.

6.

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7. ) ) ) ) ) ) ) ) 8.

) ) ) 9.

4 + = + 12 2.5 + 3 + 7 = 92 1.5 + 2 + = 17 3 2 + = 16 ) 5 + 2 + + 4 = 0 1 + 5 + 3 5 = 5 3 + + 4 + 13 = 0 If possible, solve the following matrices: 3 2 1 4 2 3 3 1 1 1 2 4 2 8 12 49 1 7 0 23 4 1 2 13.5 4 7 7 7 1 12 11 49 4 5 11 49 1.2 12.2 1.7 67.43 3.3 8.3 8 20.91 4.5 7.1 2.9 28.08 4/3 2 2 26/3 7/9 11/9 9 254/9 1/9 1/2 1 43/36 1.3 1.75 2.3 11.21 1.3 2.1 1.4 2.07 2.5 3.1 4.1 20.51 4.1 4.2 0.2 18.31 3.6 4.4 0 17.24 3.8 2.6 1.1 16.23 1.1 2.34 1.21 0.1 1.22 4.11 0.98 8.12 1 0.23 1.31 10.78 Determine the number of solutions (none, one or infinite) for the following matrices. Justify your answer. 2 1 8 19 2 1 3 15 ) 2 4 10 20 3 1 1 12 5 2 3 21 3 1 2 5 3 2 7 0 2 1 5 7 8 3 2 4 ) 8 3 4 2 5 2 1 1 10 1.5 14 18 1 5 3 8 5 2 1 3 ) 1 4 5 7 3 21 18 9 5 1 3 18 9 8 3 20 Find the determinant of the following 2 2 matrices. 4 7 18 1 2 2 ) ) ) 1 1 2 3 2 3 3 1 3 3 1 1.5 ) ) ) 1 3 1 1 3.5 1 1/3 5/7 8/7 2.2 2.2 1.5 ) ) ) 2/3 1/7 2/9 1/3 8 7 1.1 2 2 2 0 0 ) ) ) 2 1.1 2 2 1 1 )

10. Find the determinant of the following 3 3 matrices: 1 5 7 5 2 6 ) 1 3 2 ) 1 1 2 1 1 2 3 3 2 4 2 4 1 4 3 ) 1 2 2 ) 0 8 0 1 0 3 2 1 1 7 6 4 19 23 14 ) 3 1 6 ) 20 41 18 1 8 0 0 37 0 11. Find the solution to the following matrices using the Jacobian Method: 2 4 1 6 ) 1 1 1 2 2 1 9 16 7.5 5.5 9 95 ) 1.5 3.5 2.5 21 2.5 1 1.5 19 4.5 2.25 8.25 60 ) 4.5 1.75 3.25 13 3.75 0.5 1 9.25 1/3 1/2 1/9 1/3 ) 1/6 1/4 2/9 8/30 5/6 3/4 1/3 2/3 12. A mobile phone manufacturer has three identical factories in Malaysia, Indonesia and Taiwan, all running at capacity. To make mobile phones, plastic (), silicone chips () and labour () is required. These three inputs all have different cost structures in the three countries (e.g. due to unions) which are: Malaysia: = $7.00, = $19.00, = $14.00 Indonesia: = $9.00, = $21.00, = $11.00 Taiwan: = $4.00, = $20.00, = $25.00 If the total costs of the three factories is: Malaysia: = $2853.00 Indonesia: = $2873.00 Taiwan: = $3594.00 Determine: a) Equations relating inputs and costs for the three factories. b) The amount of labour, plastic and silicone chips used in each of the three identical factories. 13. For the macroeconomic model of an economy with the following facts, solve for , and using matrices. Government spending = 600, tax rate = 10% and savings rate = 10%. 14. For the macroeconomic model of an economy with the following facts, solve for , and using matrices. Government spending = 540, tax rate = 23% and savings rate = 9%. 15. For the macroeconomic model of an economy with the following facts, solve for , and in terms of the savings rate . Government spending = 200, tax rate = 20%.

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Chapter 4

Non-linear functions
Moving away from lines towards curves
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 Defining Non-Linear Functions Defining a Quadratic Function Quadratic Graphs Sketching Quadratic Functions The Cubic Function The Exponential Function The Logarithmic Function Logarithmic Graphs The Natural Number The Hyperbolic Function Economic Applications 74 75 76 77 80 82 84 88 89 90 91 93 94

Chapter Summary Chapter Four Questions

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4.1 defining non-linear functions Theory: a function is defined as having only one for every . That is, for every value on the , there is only one plotted by the curve. If this occurs for all on a given curve, then the curve is a function. This does not mean that two different cannot give the same . A function is still a function if multiple plot to a sinlge . H M

J L

K Different people denote functions differently. For example, has been used when referring to linear functions (lines), but there are many ways of defining functions: (), (), (), , etc. All these mean the same thing: they are all . Graphically, the letters denote the vertical axis, and is the horizontal axis. Sometimes the letters might mean something: if referring to revenue from selling a certain quantity of computers, the function may be defined as: = 50 0.6 2 Where is the quantity of computers sold (the ) and means , (the ). Common non-linear functions include: Cubic Exponential Logarithmic

The curve above is a function as all plot to only one : , . This is the only thing that makes it a function. Two different (such as and ) can plot to a single . Theory: to find if a curve is a function, apply the vertical line test: The curve above passes the vertical line test, so it is a function, but the following curve does not pass the vertical line test, and therefore a single (e.g. ) plots two different ( and ). Part of the curve passes the vertical line test, but unless the whole thing passes, it is not a function.

Hyperbolic

Quadratic Look closely at the graphs above and you will see that for each (on the horizontal axis), there is only one value for each function (colour). All these curves pass the vertical line test (try it!), therefore, they are all functions.

74

where = 18, = 0 and = 2.

Exercises: 1. Determine which of the following curves are functions.

Note that or can equal zero, but cannot, otherwise it would be a linear function. The general form of the quadratic is not the only quadratic form, however it is the easiest to work with. When presented with other forms, rearrange them into the general form using the crab-claw method from Chapter 1. Example 5: find the values of , and for = + 2 ( 3)

4.2 defining a quadratic function The quadratic is by far the most common non linear function you will come across. It involves the squaring of a variable. Theory: the general form of a quadratic is: = 2 + + Where , and are constants. Example 1: find , and for = 2 2 + 3 5 Solution: = 2, = 3 and = 5. Example 2: find , and for = 3 2 2 + 4 Solution: = 3, = 2 and = 4. It is easier to have the quadratic in the general form to get the constants , and . Example 3: find , and for = 2 7 2 + 3 Solution: rearrange: () = 7 2 + 3 + 2 So = 7, = 3 and = 2. Example 4: find , and in: = 2 18 Solution: = 18 + 2
2 2

Plan: simplify using the crab-claw method. Solution: draw the crab-claw, and then follow the lines: = + 2 ( 3) = 2 + 2 3 6 = 2 6 So = 1, = 1 and = 6. Example 6: find the general form of 3 = 2 + 1 (3 1) Plan: simplify and rearrange using the crab-claw Solution: Multiply both sides by (3 1) to get rid of it on the left and have it as a multiplication on the right. 3 = 2 + 1 3 1 Then apply the crab-claw on the right side: 3 = 2 + 1 3 1 3 = 2 3 2 + 3 1 The 2 out front of the square brackets goes into every term in the square brackets, after the inside of the square brackets have been simplified: 3 = 6 2 + 4 2 Isolate by dividing both sides by 3: = 6 2 + 4 2 4 2 = 2 2 + 3 3 3
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Example 7: find the general form of = + 2

2

= 2 2

= 2

Plan: simplify and rearrange using the crab-claw Solution: this is solved using the crab-claw method, but the + 2 as two separate parts: = + 2 ( + 2) 3 = 2 + 2 + 2 + 4 3 Simplify: = 2 + 4 + 1 Note: remember from Chapter 1: + 2
2 2

must first be rewritten

= 0.5 2 Three different quadratics are drawn above in general form with = 0 and = 0 (i.e. = 2 ). The difference between the three graphs is the value of . Theory: The larger the value of , the steeper the curve (black); similarly, the smaller the value of , the shallower the curve (blue). The following functions are of the form: = 2 + That is, is set to zero. = 2 + 3

2 + 22

You cannot simply put the squared into every term inside the brackets. This is where many students stuff up, so dont be one of them!
Exercises: 1. Determine the value of , and in the following quadratics: ) = 6 2 5 1 ) = 1 2 + 2 ) 6 2 = 2 2 2 1 1 ) = + 3 2 3 ) = 8 8 3 2 2 ) = 2 1 + 1 ) = + 1 2 8 + 23 ) + 2 2 = 2 1 2

= 2 1 = 2 3

4.3 quadratic graphs Quadratics have a distinctive shape which you must recognise.

The shape of the graphs are identical, except for their vertical position (vertical displacement). Theory: the value of in the quadratic equation determines the vertical displacement of the graph. Look at all the graphs so far; the turning points (minimum points in the cases so far) have been on the . However, if the value of is not zero, there is a vertical and horizontal shift.

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2.

= 3 2 = 2 + 2 2 = + 10 + 25 = 2 + 8 Match the graphs to the equations

= 2 = 2 + 4 Notice how the turning point has moved away from the and there has also been a vertical shift. Theory: changing the value of in the general quadratic form shifts the graph both horizontally and vertically. Finally, a note about the sign of . Theory: a positive value of will result in quadratics with a shape of a smiley face, whereas when the value of is negative, the shape becomes inverted; a sad face. = 2 + 4 = 2 2 Example 1: Find the of = 2 2 + 8 6 Plan: set all the s equal to zero. Solution: = 2(0)2 + 8 0 6 = 6 The values of , and still change the graph in a similar way, but the sign of determines if it is a smiley or sad face.
Exercises: 1. Match the graphs with the equations. = 3 2 + 2 = 3 2 + 3 = 3 2 + 10 + 28 + 5 = 2 = 2 + 2
2

4.4 sketching quadratic functions All quadratics can be described as having: a ; a turning point; and either two, one or no . To find these three main features of quadratics, theory from Chapter 2 must be applied. Theory: To find the of any function, set all the s in the equation equal to zero.

So the point 0, 6 is the . The is also simply the value of the constant . To find the (), set all the s equal to zero. In the example above, this would be: 0 = 2 2 + 8 6 Rearranging this to isolate is very difficult, so a formula is used to solve for . The formula is called

the Quadratic Formula (QF) which you must memorise.

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Theory: the Quadratic Formula is: = 2 4 2

Theory: to find the of the turning point (TP), rewrite the Quadratic Function and only look at the things not under the square root sign (i.e. only look at the circled part): = 2 4 = 2 2

This is a very important formula, and it may be easier to memorise the words negative plus or minus the square root of squared minus four , all over two . This formula is finding where a quadratic function crosses the and these point(s) are called roots. Example 2: determine the roots of 0 = 2 2 + 8 6 Plan: use the quadratic formula = Solution: 8 82 4 2 (6) = 2(2) = = 8 64 48 4 2 2 4

Then to find the of the turning point, substitute this into the original function. Example 3: find the coordinates of the turning point of the quadratic = 2 2 + 8 6 Plan: use the Quadratic Formula ( but ignore everything under the square root sign) to find the of the turning point, then substitute this value into the original equation to find the . Solution: = 8 = =2 2 2 2

8 16 4 8 4 = = 1 = 3 4 The last step is split into two. Instead of having the sign, it is separated out into a + and a to get two answers: 8 + 4 4 8 4 12 = = = 1 = =3 4 4 4 4 So there are two : (1,0) and (3,0). The only point that remains to be found to determine the nature of a quadratic is the turning point (the point where the function turns). If you memorised the quadratic formula, it makes finding the turning point (TP) easier. Remembering that a point has an and value, so once we find the , the corresponding needs to be found.

Substitute = 2 into the original equation to find the of the turning point: 2 = 2 2 =2 Giving the turning point (2,2). A different short-cut is knowing that the of the turning point will always be half way between the two . Example 4: Plot the results from Examples 1 3. Plan: plot and label the coordinates, then join up all the dots with a nice curve.
2

+8 2 6

= 8 + 16 6

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Solution: (1,0) (0, 6) (2,2) (3,0)

square root of a positive number will have two solutions a positive and negative number). If the value of 2 4 equals zero, then the curve crosses (touches) the only once (the square root of zero is zero). If the value of 2 4 is negative, then the curve does not cross the (as the

The dotted black line is what the graph should be, and the blue line is a freehand sketch. As long as it approximately looks like a quadratic, and goes through the labelled coordinates, then the curve will be fine. Notice that this graph is a sad face, which from the last section, the value of must be negative ( = 2). Also notice that the turning point is half way between the two . On a related topic, on the following graphs notice that the blue function cuts the twice, the red function only just touches the (cuts it once), and the black function does not cross the at all (cuts it zero times). = 2 + 4 + 8 = 2 + 2 + 1

square root of a negative number does not exist). Example 5: using the Quadratic Formula, determine how many times the following equation crosses the = 2 2 16 + 32 Plan: find the value of the part under the square root sign in the Quadratic Formula: 2 4. If it is positive 2 intercepts, if zero 1 intercept, and if negative 0 intercepts. Solution: 2 4 = 16 = 256 256 = 0 only one x intercept Example 6: Sketch 8 2 + 26 = 7 Plan: rearrange to get the general form, then find the by setting all s to zero. Find the by setting = 0 and then applying the Quadratic Formula:
2

4 2 32

= 5
2

= Theory: From the Quadratic Formula, it is possible to determine how many times a quadratic crosses the . The value underneath the squareroot sign determines this: 2 4
2

2 4 2

Use the part of the QF not under the square root sign to find the of the TP, then put back into original equation to get the of the TP. Solution: rearrange into the general form = 8 2 26 7 : 0 = 8 0
2

If the value of 4 is positive, then the curve will cross the twice (as the

26 0 7

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= 7 (0, 7) : 0 = 8 2 26 7 (26) (26)2 4 8 (7) 2(8)

= =

(3) (3)2 4 1 (9) 2(1)

3 9 36 3 27 = 2 2

= = =

Since there is a negative number under the square root sign, it means there are no . : = 3 3 = = = 1.5 2 2 1 2
2

26 676 + 224 16

26 900 16 26 30 = = 3.5 = 0.25 16 Coordinates of are: (3.5,0) and 0.25,0 . : (26) 26 = = = = 1.625 2 2(8) 16 : (1.625) = 8 1.625 = 28.125
(0.25,0)
2

: (1.5) = 1.5 TP coordinate: (1.5,6.75)

3(1.5) + 9

= 1.5 = 2.25 4.5 + 9 = 6.75

Plot all the points, and remember, there are no and it is a smiley face as is positive: 26(1.625) 7 (1.625, 28.125)
(3.5,0)

(0,9)

(1.5,6.75)

(0, 7) (1.625, 28.125)

Example 7: Sketch 3 3 = 2 Plan: set all s to zero to find the , then rearrange to get into general form, then use the QF to find the and . = 2 4 2

Exercises 1. Find the (if any) for the following quadratics: ) = 2 + 2 15 ) = 2 2 20 + 42 ) = 3 2 + 18 + 27 ) = 2 + 2 + 9 2. Sketch the following quadratics. ) = 2 5 6 ) = + 2 2 1 ) = 1 2 + + 2 2 ) = + 1 1 + 1 ) = 2 + 1 2 3 ) = 2 2 2

Solution: rearrange into the general form 3 9 = = 2 3 + 9 : = (0)2 3 0 + 9 = 9 coordinate: (0,9) :

2

4.5 the cubic function Theory: The cubic function is a function where the highest power of is 3 (i.e. 3 ). For example: = 2 3 4 2 + 3 17

80

Notice that there is an 2 , but the highest power is 3 (i.e. the 2 3 ) so this is a cubic function, not a quadratic function. Theory: The general form of a cubic function is: = 3 + 2 + + Where , , and are constants. The simplest cubic is: = 3 where , and are all zero. These simple cubic functions have an shape:
= 3

= 3 2 21 + 45

= 3 + 2

= 3 2 20

These functions still have the general shape; it is the values of , , and that determine the sharpness of this shape. The blue graph is much sharper than the black one, which is sharper than the red one.

= 0.5 3

Also, count how many times each colour crosses the . The blue one crosses three times, the black one crosses twice (touching the

= 2 3

counts as a cross), and the grey curve cuts the only once. Theory: depending on the values of , , and , a cubic can cross the once, twice or three times. Just like in quadratics, the sign of in a cubic function has an interpretation. Theory: when is positive, the ends of the graph extend to the top right and bottom left , but when is negative, the ends of the graph extend to the top left and bottom right . The reason why is important is that as becomes very large in a positive direction or in a negative direction, the cubed term dominates over all other terms. The number of times a cubic function crosses the is determined by the values of , , and , with the sign of determining the direction the ends of the graph extends. Notice the sign of in

Here, there is only one (through the origin), and unlike the quadratic functions, the ends of the graph go in different directions. That is, as becomes more positive (i.e. to the right of the origin on the ), the value on the also becomes more positive; similarly, when the value of becomes more negative (to the left of the origin on the ), the value on the also becomes more negative. Compare this to a quadratic where both ends of the graph go in the same direction (either both ends go up, or both ends go down). More complex cubic functions look like:

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the following graph and the direction the ends extend.

= + 21 + 45
3 2

last round you won $800, which are not the same, but every round, you doubled your earnings. This is what exponential growth means. After every round (or time-period), the final amount is a certain ratio of the amount of the previous timeperiod.

= + 5

In the example above, the amount of money () after turns (assuming you keep winning) can be defined by: = 100 2 The 2 comes from the fact that earnings are doubled every time-period, and the 100 from the initial amount. Theory: an exponential function is one which has a variable in the index. The general form of an exponential function is = ( ) + Where , and are constants. is a number that determines the growth rate (e.g. doubling; = 2, tripling; = 3 etc.)

Exercises 1. Match the following graphs to the equations:

) = + 4 + 2 2 + ) = 3 + 4 ) = 3 3 + 2.5 ) = 3 + 1 3 Hint: expand all the brackets before deciding.

is the initial amount. It determines the shape of the graph and where it intersects the . a constant that shifts the graph up or down, but doesnt change the shape of the graph. It is

4.6 the exponential function Before defining the mathematical exponential function, an intuitive understanding is needed. You are given $100 to go to the casino and have fun. You play the coin-toss, and (somehow) can predict the outcome every single time. After the first round, you win $100. You then have $200, and bet it again. You win, and now you have $400. You bet it all again, and win again. Now you have $800. You bet it once more and win, and end up with $1600. Every time you play, you double your earnings, but you dont win the same amount every time. The first round you won $100, and the
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also the value of the asymptote (the value the function will approach but will never reach). The simplest exponential is where = 1 and = 0: = This exponential function cuts the at 0,1 as any number to the power of 0 equals 1.

The shape of an exponential function: = 2

Example 1: sketch the two exponential functions on a single set of axes 1. = 3 2 + 4 2. = 0.5 2 2 Plan: to find the , set the

= 3(2 )

0,3 0,1 0, 2

to zero. The asymptote is the number added to the end of the exponential. = 2 3 Solution: for the 1. = 3 20 + 4 = 3 + 4 = 7 2. = 0.5 20 2 = 1.5 For the asymptotes 1. = 4 2. = 2 Notice that for the first function above, there is a 3 in front which makes the graph much steeper. Conversely, the 0.5 in the second function makes it shallower. There is also a negative sign in front of in the second function above meaning it is flipped along the .

The black line is the simplest exponential function, and crosses the at = 1, as 20 = 1. It is also the value of (= 1). The asymptote is at = 0 as the further left the curve extends, the closer it gets to the (i.e. = 0). The red line has the 3 out front, meaning that it crosses the at = 3 but also that the general shape has been changed to be steeper. Similar to the black line, the asymptote is at = 0. The blue line is the same as the black line, except that it has 3 subtracted from it. This shifts the graph down 3 units and also changes the asymptote to = 3. The graph will get closer and closer to = 3 but will never reach it. The other two functions have = 0 which means the asymptote for those two functions is the . Theory: to sketch an exponential function, the and the of the asymptote are required (remember, an asymptote is a value that the function approaches but never reaches). The is found by setting all s equal to zero. The of the asymptote is any number added onto the end of the exponential function (i.e. the number ).

= 3 2 + 4
= 4

= 0.5 2 2
= 2

A concept similar to growth is that of decay; the reverse of growth. For growth, the more time passes, the faster the thing grows. In decay, the more time passes, the slower things decay. Theory: the general form of the decay function is very similar to that of growth, except there is a negative in front of the index x: = ( ) +
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The graph which was shown in the last exercise is one of decay, as are the following:

The answer is = 2, as 102 = 100. These are easy, but how about: 10 = 50 The answer is not = 1.5 because 101.5 31.6. It is exactly this sort of situation where logs are used.

= 2

= 3 2 + 1
= 1

Theory: the definition of a logarithm is: For = = log = log log

Exercises: 1. Match the following graphs with the equations:

Where is called the index, and is called the base. However, with the following log rules, this definition can be easily found. There are some log rules you will have to learn to be able to solve these problems. Without knowing these rules, you will make lots of mistakes. Back to the previous problem: 10 = 50 Theory: RULE 1: taking logs of the whole of both sides separately allows the index to be brought down in front of the log. log = log Example 1: solve for in 10 = 50 Solution: log the whole of both sides log 10 = log 50 Then bring down any exponents log 10 = log 50 log(10) = log(50) This is read as log(10) is equal to log(50). log(10) and log(50) are just numbers (the values can be found using a calculator). Treat it as you would any other number. To isolate in: 5 = 15 Divide both sides by 5. It is the same for log(10) = log(50)

2.

) = 3 2 ) = 3 2 ) = 5 3 ) = 4 2 + 5 Sketch the following equations on a single set of axes (they must be correct, relative to one another!): ) = 5 2 4 ) = 2 + 3 ) = 2 3 + 1 ) = 4 2 + 5

4.7 the logarithmic function For an exponential function such as: = is already isolated, but sometimes needs to be isolated. It is impossible to isolate without using logarithms. A logarithm (log for short) is a mathematical method used to solve exponents. Intro Example 1: use common sense to solve: 10 = 10 Obviously = 1. Now how about: 10 = 100

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Divide both sides by log(10): = log(50) log(10)

Move the log 73 onto the other side by subtracting it from both sides to get: log 3 = log 4 log 73 RULE 1 can now be applied to bring out front on the left side: log 3 = log 4 log 73 To solve for , divide the whole of both sides by log 3: = log 4 log 73 2.6435 (4. . ) log 3

That is the answer. Always give this exact answer, but you can also give a decimal answer; put it into your calculator and you should get 1.69897 (5. . ). The place where most students fail is not realising that something has to be logged. The logarithm changes one thing to another. If you log nothing, then how can it be changed? When travelling in Europe, dollars need to be exchanged for Euros, however if you give the bank nothing, nothing will be exchanged! However, if you give the bank $100, then that $100 will be changed to Euros. The same applies to logs; you have to log something! Example 2: solve for 73 3

Finally, the last rule is similar to RULE 2, but it is for division instead of multiplication: Theory: RULE 3: the log of a division of two terms is equal to the subtraction of the separate logs. log = log log Example 3: solve for without simplifying first

= 4

4 = 12 56 Solution: log the whole of both sides: log 4 = log 12 56

Solution: You could divide both sides by 73 and then apply RULE 1. But if both sides were not divided by 73 to begin with, and instead logged: log[ 73 3 ] = log[4] The square brackets on the left is 73 3 , so the index of cannot be brought down front. It is not 73 3 , but rather two separate parts being multiplied together (see Chapter 1). Theory: RULE 2: the log of a multiplication of two terms is equal to the addition of the logs of the separate terms. log( ) = log + log Example 2 (cont): solving for in log[ 73 3 ] = log[4] Solution: by RULE 2, 73 and 3 can be separated into two logs, with an addition sign between: log 73 + log 3 = log 4

Use RULE 3 to separate the 4 and the 56 by subtracting their logs: log 4 log 56 = log 12 Use RULE 1 to bring out front and rearrange: log 4 = log 12 + log 56 Use RULE 2 in reverse on the right side: log 4 = log 12 56 Rearrange and simplfy: = log 12 56 log 672 = 4.6962 (4. . ) log 4 log 4

Theory: all rules can be used forwards or backwards. It all depends on what is being found. Think about it; if RULE 2 can be used to separate the log of a multiplication into two log additions, then there is no reason why it cannot be used to

85

bring two log additions into a single log multiplication. Practice with your calculator to make sure. The same applies to both RULE 1 and RULE 3. Note: when given: log 672 log 4 many students think they can bring everything inside of a single log: log 672 672 = log log 4 4 This is not correct! Never write this! When two logs are divided, they cannot be simplified further. Similarly, if two logs are multiplied, they cannot be simplified further. One last rule is: Theory: RULE 4a: log(1) = 0, which is like saying 0 = 1. RULE 4b: log 10 = 1 (ln = 1; this will be explained later in the chapter) Remember that you can use these rules backwards or forwards. It all depends on what is being isolated and where it is. Example 3: a countrys Gross Domestic Product () has the following form (in $billions): = 4.3 1.1 When will reach $7billion? Plan: substitute 7 for the left side in the above equation (as is set to $7b), then solve using log rules. Solution: 7 = 4.3 1.1

log 7 = log 4.3 + log(1.1 ) Move log 4.3 to the other side, and bring down using RULE 1: log 7 log 4.3 = log(1.1) Using RULE 3, bring the left side under a single log: log 7 = log(1.1) 4.3

Then divide both sides by log 1.1: 7 log 4.3 = 5.113 (3. . ) log 1.1 The short-cut is to simplify first, then use RULE 1. However, there are times where you have to use all the rules, so learn them. Example 4: inflation is the growth in prices. The estimated inflation rate, relative to the base year 0, is determined by the following function: = 1.01

1.02

1 51

The government wants to find out when the price level will double. Plan: when the price level has doubled, = 2. Substitute this into the equation above, and use log rules to solve for . Solution: 2 = 1.01

1.02

1 51

Rearrange before applying any log rules: 2 1 = 1.01 51

1.02

Log the whole of both sides: log 2 1 = log[ 1.01 51

1.02

Using RULE 2, separate the square bracket into two separate logs with an addition sign in between: log 2 1 = log 1.01 51

This could be solved in a number of ways, but the following is the harder way. Try find the short-cut. Log the whole of both sides: log 7 = log 4.3 1.1 Separate the right side into two logs using RULE 2:

+ log 1.02

Use RULE 1 to bring down the two exponents in brackets:

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log 2

1 = log 1.01 + ( 1) log 1.02 51

Example 5: An economist has come up with an equation that tells how many cars (in thousands) Nissan will be producing at a given year into the future = 48 0.03 + 2 The head of Nissan wants you to find out when: a) Output will break the 80,000 cars/year level. b) Output will double. Plan: a) replace () with 80, and solve using log rules, but instead of log, use ln (as the base is ). b) Find out the number of cars at = 0 (i.e. the starting point), then find when this will double. Solution: a) Replace with 80 and move the 2 to the other side: 80 2 = 48 0.03 Take the natural logarithm (ln) of both sides: ln 78 = ln 48 0.03 Since the square brackets have two things being multiplied, RULE 2 will need to be used: ln 78 = ln 48 + ln 0.03 Move ln 48 to the left side, and using RULE 1, bring the 0.03 down in front: ln 78 ln 48 = 0.03 ln Use RULE 4b, ln = 1, so: ln 78 ln 48 = 0.03 Use RULE 3 to bring the two logs on the left into one log, and then divide both sides by 0.03: 78 ln 48 = t 16.18 2. . 0.03 Determine how many cars are produced currently: 0 = 48 0.03 So 50 doubled is 100: 100 = 48 0.03 + 2 98 = 48 0.03
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0

Half crab-claw the log 1.02 into the bracket: 1 log 2 = log 1.01 + log 1.02 log 1.02 51 Move the log 1.02 to the other side: log 2 1 + log 1.02 = log 1.01 + log 1.02 51

Factorise out the on the right side: 1 log 2 + log 1.02 = log 1.01 + log 1.02 51 Divide both sides by the blue part: log 2 1 + log 1.02 51 = log 1.01 + log 1.02

Simplify the numerator (top) with RULE 2, and the denominator (bottom) also with RULE 2: 1 51 23.63 (2. . ) = log[ 1.01 1.02 ] log 1.02 2 This seems very complex, but only use rules when you are trying to do something specific. That is, isolating requires RULE 1, separating out two parts which are logged requires RULE 2. Always think about what you are trying to do as well as the final outcome, and then decide which rules are needed. Theory: the logarithmic function log is usually used to the base 10. There are many bases, but the most commonly used bases are 10 and : log10 log When a logarithm to the base is used, it is called ln (the natural logarithm). All the same log rules apply, but it is easier to use ln when working with exponential functions involving . NOTE: see Section 4.9 below for a definition of . For now, treat it as just another number.

+ 2 = 50

98 = 0.03 48 98 ln = 0.03 ln 48 98 ln 48 = 23.79 (2. . ) 0.03 In a problem with , ln is used because ln can be cancelled off (as ln = 1). If instead, both sides were logged, the result would be log and this is NOT equal to 1. If you used log instead, you can still get the same answer, however a lot more work is involved. As a general rule, use ln as it allows manipulation using all the same log rules. Remember to be consistent; if you use a log, keep using log in that question; if you use ln for a given problem, keep using ln throughout that problem.
Exercises: 1. Solve for leaving answers in the simplest form: ) 15 = 10 ) 15+1 = 10 ) 8 2 = 31 ) 25 5 = 9 1 5+1 ) 2 16+1 = 31 3 ) ln(53 ) ln(25) = ln 5 ) 2. 3
2 +2

a) Determine the cost level in 5 years. b) Determine when costs will double.

4.8 logarithmic graphs A log function has the general shape:

Theory: the key aspects of this graph are the general shape of a lower case r, and that it is asymptotic (approaches but never touches) to a particular . The graph comes from the equation of the general form: = log( + ) + Where determines the sharpness of the r shape, shifts the whole graph left or right, and shifts of the whole graph up or down. = log + 4 = log = log 4 = 5log

= 9 3

) 8 = 323 Solve for in terms of in the following: ) = 15 + 18 ) = 2 3 ) = 13 2+1 321 ) = 2 32 ) 3 + 42 = 24 3+1 If a countrys GDP (in $billion) grows according to the following equation: = 700 1.2 Determine when GDP will reach $1200. The government has employed you to study the inflation within a particular city, and provide future forecasts. You determine that the historic inflation rate can be accurately estimated using: 7 = 1.035 1 + 207 a) Forecast the price level in 4 years. b) Determine how long (in years) it will take for prices to double. c) Determine how long (in years) it will take prices to triple. A manufacturer of laptop computers forecasts costs will rise according to the equation: = 1.03 0.02 0.03
2

2 2

3.

4.

As you can see above, the grey line is exactly the same as the black line in shape, except it has been shifted right. The red line is also exactly the same as the black one, except it has shifted vertically. The blue line shows how determines the sharpness of the curve. Sketching log graphs is not as important as knowing the four log rules and their applications, so it will not be covered any further.

5.

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Theory: any time is used, the variable in question must be changing continuously. In very large populations, can be a good approximation of growth and decay.
Exercises: 1. Match the graphs to the equations.

A simple example will demonstrate this theory: if a colony of ants doubles every year, which of the following is occurring: 1. The population of the colony is constant throughout the year, and then on December 31st, it suddenly doubles. 2. The population of the colony constantly increases throughout the year, and at

2.

) = 4 log( 2) ) = log( 4) ) = log + 4 ) = 2 log() Sketch the following functions on the same set of axes (make sure they are correct relative to each other): ) = log() 3 ) = log( + 2) + 2 ) = 3 log ) = 2.5 log() + 1

December 31st, it just reaches the doubling point. The colony of ants obviously grows throughout the year, and it is such a large colony that we can assume that it grows continuously. It is in this sort of situation where the number is used. Theory: the growth of anything continuous has the general form: = 0 In words; the amount available at some time in the future is equal to the initial amount (0 ) multiplied by the continuous growth base () to the power of the rate of growth per time period multiplied by the number of time periods (). This equation is very similar to the exponential growth rate equation. Example 1: the of England is estimated to be growing at 2.3% per year. Currently, the is 4trillion. Estimate the in 10 years time. Plan: can be assumed to grow continuously as the citizens of England are constantly earning money throughout the year, so the growth equation can be used. Substitute the growth rate, time and initial amount into:

4.9 the natural number This section is all about a special number. This number is called and is approximately equal to 2.7183 (4d.p.). It is like the number pi (), which is used for circles, but is used to describe things that are continuous (i.e. things that happen all the time). For example, a bank offering continuous compounding of any savings will have to use the number , as say $1000 in an account must be compounded all the time. That is one situation of growth, but works just as well in decay; business examples of continuous decay are not as common as growth and usually very complex.

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 = 0 then solve for , which is the in ten years. Solution: replace the known variables in the exponential growth rate equation: 10 = 4
0.023 10

5 ln 3.67 = 11.89 2. . 0.026

Exercises: 1. Solve for in the following: ) 15 = + 1 ) 15 = +1 ) 170 = 12 0.1+ ) 13 = 6.5 0.03 ) 21 = 10.5 0.027 1 2. If of Fiji grows at a rate of 4.1%p.a. and is currently $50, determine: a) The GDP in 5 years. b) How long it takes for the GDP to double. c) How long it takes for the GDP to triple. 3. A dishonest bank lends you $5000 to purchase a car, at a rate of 4%p.a. The fine-print stated that the amount is compounded every second. Determine the amount you will have to pay back in 3 years. 4. An investment portfolio is estimated to grow continuously for 7 years at 6.5% p.a. and then at 8.3% p.a. every year after that. If the initial investment is $1,000, determine: a) when the investment will double in value. b) how many years until the portfolio reaches a value of $5,000. c) The value of the portfolio after 8 years, 312 days.

The trillion has been left out, but will be brought back at the end. Also, 0.023 has been used instead of 2.3%. The reason is that for use in most equations, the growth rate must be in decimal form, not percentage form. 10 = 4 0.23 10 = 5.03 (2. . . ) Example 2: Woolworths, a large company, has a growth in customers across its 400 stores in Australia at a rate of 2.6% per year. If they currently have 3.67million customers, approximately how many years will it take for the customer base to grow to 5million? Plan: since 400 stores is a large number of stores, and the growth of a population is accurately approximated by continuous growth, the growth formula can be used: = 0 Substitute in all known information, then rearrange to solve for . Solution: 0 = 3.67, = 0.026 and = 5, so the equation is: 5 = 3.67 0.026 Divide both sides by 3.67: 5 = 0.026 3.67 Take the natural log (ln) of the whole of both sides: 5 = ln 0.026 3.67 5 ln = 0.026 3.67 ln

4.10 the hyperbolic function Despite hyperbolic functions not being very common, the basics are still important. You have probably seen the function: = 1

This is the simplest hyperbola. What makes hyperbolas special is that they have two asymptotes. Remember that an asymptote is a line to which the function approaches but never reaches. The following is the graph of this simplest hyperbola: = 1

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In this case, the hyperbola (the two blue lines constitute a single function) has two asymptotes; the and the . For the asymptote, the closer the get to zero (trace it with your fingers by going towards the origin), the greater the value of the function on the becomes (but it never touches the ). Similarly, the second asymptote is the and the greater the become (both in a positive or negative direction) the closer the function gets to the , but never touches it. Theory: the general form of a hyperbola is: = +c + The denominator ( and ) determines the locations of the vertical asymptote. That is, setting the whole denominator ( + ) equal to zero and solving for is how the vertical asymptote is found. The value of determines the location of the horizontal asymptote. The value of determines how close the curve gets to the intersection of the two asymptotes. To make this last point clear, the following graph shows the same hyperbolic function, with different values of . = 3 = 1

The smaller is (blue), the further from the intersection of the asymptotes the graph will lie. Example 1: sketch the following function = 1 +5 2 + 3

Plan: for the vertical asymptote, set the denominator equal to zero and solve for . The horizontal asymptote is the number added on to the fraction. Solution: for the vertical asymptote: 2 + 3 = 0 2 = 3 = 1.5 For the horizontal asymptote, = 5. Lightly draw the vertical and horizontal asymptotes, then draw in the general shape of a hyperbola. = 1 +5 2 + 3

= 5

= 1.5

The dotted vertical line crosses the at = 1.5, and the horizontal line = 5.
Exercises: 1. Match the following graphs to the equations:

The larger the value of (red), the closer to the intersection of the asymptotes the graph will lie.
= 2 2 + 4 = 5 1 6 + 91

2.

3 3 +3 = 3 + 3 9 3 + Sketch the following functions: 1 ) = 1 2 2 ) = +2 1 1 ) = 1 ) = =

Here, 1 and 2 have been used as and population grow at different rates. Combining the two formulas, per capita is: = = 60 0.04 26 0.019

Simplify the 60billion/26million (billion/million=thousand): = 60,000 0.04 26 0.019 60,000 0.040.019 26

4.11 applications Economic theory: per capita is a measure of the mean income per person in a particular country. It is defined as: =

Simplify further using index rules (Chapter 1): = = 60,000 0.21 26

Example 1: a developing country like Papua New Guinea (PNG) has a of $60billion with a growth of 4% per year. PNG has a population of 7million, which grows at 1.9%. When will per capita reach $15,000? Answer in years and days. Plan: and populations are both very large so can be assumed to grow at an exponential rate: = 0 Two equations are needed; one for growth and one for population growth, as both grow at different rates. These are then combined to get per capita. Solution: the growth rate for is: = 0 1 Substitute what is known: = 60 0.04 The population growth rate is: = 0 2 = 26 0.019

This is the per capita function, but what is required is when per capita will reach $15,000. Set per capita to 15,000, and solve: 15,000 = 60,000 0.21 26

390,000 = 0.21 60,000 6.5 = 0.21 Take logs of the whole of both sides: ln 6.5 = ln( 0.21 ) Simplify: ln 6.5 = 0.21 ln Remember ln = 1: = ln 6.5 8.91 (2. . ) 0.21

Finally, to get the solution in years and days, take the decimal (i.e. 0.91) and multiply it by the number of days in a year (assume 365) to get = 8 , 333 (to the nearest day). Example 2: a company that takes care of its employees spends dollars per year on the well-

92

being of each employee, where is related to profits (in millions of dollars), by the function: = 2500 1 0.1 Determine: a) The spending on each employee when profits are $5million. b) The profit level when spending on each employee will double from that in part a). c) The profit level when spending on each employee is $2,000. Plan: a) Set to 5 and solve for . b) Multiply the from a), then substitute it in for in the equation; solve for . c) Set = 2,000 and solve for . Solution: a) Set to 5: = 2500 1 0.1
5

Take the natural log of the whole of both sides: ln 0.1 = ln 1 2 1 0.5 0.1 = ln 1 2 1 0.5 = ln 1 2 1 0.5 0.1 15.462million

c) Set = 2000 and solve: 2000 = 2500 1 0.1 4 = 1 0.1 5 0.1 = 0.2 ln 0.1 = ln 0.2 0.1 = ln 0.2 = ln 0.2 16.094million 0.1

= 2500 1 0.5 983.67 2. . b) Multiply the exact value determined in a) by 2: 2 2500 1 0.5 = 5000 1 0.5 Set this equal to the original equation: 5000 1 0.5 = 2500 1 0.1 Divide both sides by 2500: 2 1 0.5 = 1 0.1 Rearrange to isolate : 0.1 = 1 2 1 0.5 chapter four summary
A function is defined as having only one for every . A curve is a function if all vertical lines cross the curve only once. The general form of a quadratic is: = 2 + + The value of determines the sharpness of the quadratic. The value of in the quadratic equation determines the vertical shift of the graph. Changing the value of in the general quadratic form shifts the graph both horizontally and vertically.

Exercises: 1. Spains economy has a approximating 800billion and grows at approximately 3.7%p.a. If the population of Spain is currently 40million, and is growing at 0.7%p.a., determine: a) When the population will reach 50. b) The current GDP per capita. c) The GDP per capita in 5 years time. d) When the GDP per capita will reach 30,000. 2. A company invests dollars in the health of each of its employees according to the equation: = 750 1 0.08 Where is profit in millions of dollars. Determine: a) The amount spent on each individual if the company has a profit of $7million. b) The total amount spent on healthcare when profits are $10million and there are 19 employees. c) The profit level when the amount spent on each employee is double that in part a). d) The number of employees when profits are $15million and total spending on healthcare is $15,200.

A positive value of will result in quadratics with a shape of a smiley face, whereas when the value of is negative, the shape becomes inverted; a sad face. The Quadratic Formula is: 2 4 = 2 The of the turning point (TP), if found in the Quadratic Formula by evaluating everything not under the square root sign. Then to find the of the turning point, substitute this into the original function. 2 4 determines the number of solutions:

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 2 4 > 0 two solutions 2 4 = 0 one solution 2 4 < 0 no solutions The cubic function is the name of a function where the highest power of is 3. The general form of a cubic is: = 3 + 2 + + A cubic can cross the once, twice or three times. When is positive, the ends of the graph extend to the top right and bottom left , but when is negative, the ends of the graph extend to the top left and bottom right . An exponential function has the general form: = ( ) + is a number that determines the growth rate is the initial amount. a constant that shifts the graph up or down To sketch an exponential function, determine: The is found by setting all s equal to zero. The of the asymptote is . The general form of the decay function is: = ( ) + The definition of a logarithm is: For = log = = log log Where is called the index, and is called the base. LOG RULE 1 log = log LOG RULE 2: log( ) = log + log

LOG RULE 3:

log

= log log

LOG RULE 4a: log(1) = 0 LOG RULE 4b: log 10 = 1 (ln = 1) All these rules can be used forwards or backwards. The logarithmic graph has the general form: = log( + ) + Where determines the sharpness of the r shape, the shifting of the whole graph left or right, and the shifting of the whole graph up or down. Any time the number is used, the variable in question must be changing continuously. The growth of anything continuous has the general form: = 0 The general form of a hyperbola is: = +c + Setting the whole denominator ( + ) equal to zero and solving for is how the vertical asymptote is found. The value of determines the location of the horizontal asymptote. The value of determines how close the curve gets to the intersection of the two asymptotes. per capita is a measure of the mean income per person in a particular country. It is defined as: =

chapter four questions

1. Determine if the following curves are functions:

2. ) ) ) ) 3. Determine the values of , and for the following quadratics: = 3 4 5 2 = 3 + 2 = 2 + 2 1 = + 1 3 Match the following quadratics to the functions. 4. = 2 6 = 3 2 + 27 54 2 = 25 + 150 = 2 + 18 45 Find the roots of the following quadratics: ) = 2 + 3 6 ) = 4 2 9 ) = 1 + 3 ) = + 4 2 ) = 3 6 2 9 ) = 2 2 + 12 + 5 ) = + 4 3 Sketch the following quadratics: ) = 2 3 10 ) = 2 3 28 ) = 2 + 11 + 30 ) = 3 2 ) = 4 5 2 ) = 2 4 13 + 6 ) = + 4 3

5.

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6.

7.

2 + 2 1 Determine the number of solutions for: ) = 2 + 5 + 6 ) = 2 6 + 16 ) = 4 2 3 + 1 ) = 2 18 ) = 14 2 2 2 ) = 2 + 6 + 9 Match the following functions to their equations: ) 1
1

11. Match the following to their equations:

= 1 4 2 = 1 6 + 4 = 2 +5 5

8.

= 3 3 3 = 2 3 3 3 2 = + 5 + 48 252 = 3 + 12 2 + 11 168 Match the following exponential functions to their equations:

= 1.5 = 3 2 = 2 + 2 9. Sketch the following exponential functions on the same set of axes. ) = 2 ) = 3 + 2 ) = 4 2 ) = 3 3 1 10. Match the following logarithmic functions to their equations:

= 4 log

= log 2

= 2 log 2 + 5

12. Solve for in the following logarithmic functions: ) 12 = log 4 ) 13 = 2 log 3 +3 ) 7 = log 2 ) log 2 = 4 + 2 4 ) log 2 =0 ) 18 = 4 ln 2 +1 ) log 8 = 182 ) 7 log 2 = 1 ) 25 ln 3 = ln 61 13. Solve for in the following exponential functions: ) 15 = 2 ) 18 = 4 3 2 ) 9 23 = 41 ) 34 9 = 3 2 ) 21 = 323 ) 4 23 = 2 ) 14 23 = 2133 14. The of Indonesia is approximately $550billion, and is growing at 4.1% p.a. If the population is currently 120million, and is growing at 1.1% p.a. Determine: a) When the population will reach 140million. b) The in 10 years time. c) When will reach $1trillion. d) When per capita will reach $10,000. 15. The price level of an economy is accurately estimated by the function: 1 = 1.03 1.05 1 + 21 Determine: a) The price level in five years time. b) When the price level will reach 1.5 times that of the current level. c) When the price level will double. 16. A company invests dollars in the relaxation of each of its employees, according to the amount of profit (in millions) generated by the firm: = 1200 1 0.1 Determine: a) The amount spent on each employee when profits are $5million. b) The total amount spent on relaxation when profits are $10million, and there are 20 employees. c) The profit level when spending on each employee is $1000. d) The number of employees when profits are $12million, and total spending on relaxation is about$10,900.

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Chapter 5

Single Variable Differentiation

Finding the slope of curves at any point along the function
5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 What is Differentiation? Differentiation by First Principles Differentiation Rules: Power Rule Differentiation Rules: Chain Rule Differentiation Rules: Product Rule Differentiation Rules: Quotient Rule Differentiation Rules: Rule Differentiation Rules: ln Rule The Second Derivative The Gradient Function Graph Simple Applications 97 99 103 104 105 107 109 110 111 112 113 114 115

Chapter Five Summary Chapter Five Questions

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5.1 what is differentiation? Engineers, economists, financial analysts, managers and most professionals use differentiation in everyday tasks. Theory: differentiation is finding the rate that one thing changes when something else is changed. Typically, it is the rate of change of the when there is a change in the . A revenue function is determined by how much output is sold. Differentiation gives the rate of change of revenue for changes in output (or the marginal revenue; how much extra revenue will be obtained from selling an extra unit of output). A profit function is also determined by the quantity of goods sold. Differentiating this will give the rate of change of profit as output changes (or marginal profit). Theory: the rate of change of a function is found by finding the slope of a curve at a given point. The slope of a curve at a given point is found by determining the slope of a line just touching that point (i.e. tangent to that point). Four lines have been drawn tangent to the blue function:

and ). This means the rate of change of as changes is positive (from the slope of the tangent line). If the slope is negative, it means the function is decreasing (e.g. point ). Interpreting this, the rate of change of , as changes, is negative (as the point has a negative gradient). Theory: the gradient of a line tangent to a given point is the rate of change of for changes in . The following is a profit function: 2 1

At point , the tangency has a positive gradient, so the rate of change of profit ( ) for changes in output ( ) is positive. If output is increased from 1 , profits will also increase beyond 1 . On the other hand, for point , the tangency has a negative gradient meaning the rate of change of profit for changes in output is negative; as output increases beyond 2 , profit falls below 2 . Theory: The gradient of a given point along a curve is often called the marginal value. = = For the profit function, the gradient would be called marginal profit, because the slope determines the extra profit if output were to increase. Marginal

The gradient at a point along a curve gives information about the function. If the slope is positive, the function is increasing (e.g. points

means at the margin, or extra. Theory: Differentiation is the process of finding the gradient at all points along a function.

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The gradient function is a function that gives the gradient of the original function at all the points along the original function. For the functions above, the gradient (or slope) of the tangent changes when moving along the . Differentiation provides a way of finding the gradients of any given point along a curve. The following shows a simple use of gradients. Example 1: if output is currently = 50, and the profit function is = 2 + 110 1000 As a manager, you would like to know if increasing output will increase profits. Plan: if the rate of change of profit (marginal profit) is positive, then additional output will generate more profit. If the rate of change of profit (marginal profit) is negative, additional output will reduce profits. Production is to increase from = 50 to = 51. Solution: The profit function is a sad quadratic (as < 0), meaning there is a maximum. If current output is to the left of the maximum, an increase of one unit will increase profits (as the marginal profit is positive). If current output is to the right of the maximum, an extra unit will reduce profits (negative marginal profit). Look at points and of the last graph. Find the turning point (which is a maximum) using part of the quadratic formula: = 110 110 = = = 55 2 2 2
2.

50 = 50 = 2000

+ 110 50 1000

51 = (51)2 + 110(51) 1000 = 2009 Thus profits will increase if output is increased by one unit. The actual value of the gradient at = 50 was not determined, but from working with quadratics, it was known that anything to the left of the maximum must have a positive gradient. Most of the time, however, it will not be so simple. The rest of this chapter is devoted to finding the gradient function mathematically. However, before this can be done, the gradient function must be denoted by something that distinguishes it from the original function. Theory: mathematicians denote the derivative (gradient) function in a number of ways: is pronounced prime

is pronounced dee y dee x. For a small

change in (the ), will change by a certain small amount (). The means very small.
Exercises: 1. Determine if the following points have a positive or negative gradient

Since = 50 is to the left of the maximum, the slope at = 50 must be positive, so the marginal profit is positive. This means that if output were to increase to = 51, total profits will increase. Find the profit at = 50 and at = 51 to make sure of this result:

3.

Using your knowledge of quadratics and turning points, for the function 7 3 = 2 Determine if the following points have a positive or negative gradient: = 1, = 2, = 6 Order the following points from lowest (i.e. most negative) to highest (i.e. most positive):

98

= 4 2 (3) = 4 3 2 3 = 4 1
2

2 2

+2 +2

+2=6

The first coordinate is (3,6). The other point on the red line is 1 unit above 3, so = 4. Again, the is found using the

Hint: use a ruler and draw in the tangencies.

original function: = 4 2 (4) = 4 4 2 4 = 4 2

2 2 2

5.2 differentiation by first principles Differentiation is simply finding the gradient function of an original function. The following is the long method, but it is necessary that you understand it. Intro example 1: beginning with the function = 4 2
2

+2 +2

+ 2 = 18

which gives the second coordinate (4,18). Plot these two points on a set of axes (previous graph), then find the gradient: 2 1 18 6 12 = = = = 12 2 1 43 1

+2

for which the gradient at = 3 is to be found. On the graph, draw a line through this point and another point on the curve, say 1 unit up from 3 (i.e. = 4):

Thus 12 is the gradient of the red line. However, this red line is not a good approximation to the blue line. To get a better approximation, we look back to the start of this problem and instead of having a point 1 unit up from 3, a point a little closer to = 3 is used, say 0.5 units up from 3 (i.e. the other is 3.5):

This is called a rough approximation of the gradient at = 3. It is just an approximation, as it is obvious that the gradient of this line (red) and the tangent (blue) line are not the same. Ignore this for the time being and determine the gradient of this red line. From Chapter 2, to find the gradient of a line, two points are needed (i.e. two coordinates). The first is = 3, but for a coordinate we also need a . To find the , substitute = 3 into the original function: 3 3.5 4

This red line is a closer approximation to the actual gradient than the black dotted line (which was the first approximation). Despite this new approximation not being perfect, the gradient is still found because this approximation is better. Two coordinates are still needed: one is still the point (3,6). The other coordinate has the

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 as = 3.5. The comes from the original function: = 4 2 3.5 = 4 1.5

2

plus a very small amount). In the above example, was initially 1, then 0.5. Thus the two points are: 1 = (this is the base point)

+2
2

(3.5) = 4 3.5 2
2

+2

2 = + (an a little more than 1 ) The of these two are found using the original function . Since these are not numbers but rather letters, the same process is done as if they were numbers.

+ 2 = 11

Plot the two points on a set of axes (previous graph), then finding the gradient of the connecting line: = 2 1 11 6 = = 2 1 3.5 3

For the first point 1 , the function will be (1 ), which is simply () ; the function that is given. The coordinate is then , .

5 = = 10 0.5 This is a closer approximation to the actual gradient at = 3, but it is still not the actual gradient. How would we get a better approximation? Instead of adding 0.5 to 3, something smaller could be added, like 0.01, or 0.001 etc. This will not be done mathematically, but the graph below shows what is meant:

For the second point 2 = + , the function will be 2 = ( + ). The coordinate is then + , + .

Having two coordinates allows the gradient of this line to be found using rise/run: = = = 2 1 = 2 1

+ + + ()

This generalises what was done graphically. However, remember that the gradient of the line is not a good approximation of the actual gradient of
3 3.25 3.5 3.75 4

a point if the value of is too large. That is why mathematicians invented something called a limit. Theory: the limit as goes to zero: lim
0

As points closer and closer to = 3 are chosen as the other coordinate, the approximations become better and better (red arrow). So using very small additions to = 3 gives approximations very close to the tangent at = 3 (blue line). Theory: to mathematically find an approximation to the tangent at a point (this was 3 in the above example), a point is chosen a very small distance above this . The other point will have an of + (i.e. the point in question

The idea is to get to go to zero (but not be zero) because when is very small the approximation becomes better and better. Differentiation by First Principles is the formula: = lim 0

Example 1: Find the gradient function of = 5 + 2 Plan: use the first principles formula;

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 Solution: the trick with this formula is that only the ( + ) part ever needs to be found. To find this, replace every in the original function with ( + ) in brackets: The original function is () = 5 + 2 Replace every with + in brackets: ( + ) = 5( + ) + 2 ( + ) = 5 + 5 + 2 Substitute the ( + ) in the first principles formula with what was found above: = lim
0

= lim 0

Think about the answer = 5. The original function was a line with equation = 5 + 2, and from Chapter 2, the gradient of this line is = 5, which is the same answer. A line has the same gradient all along it, but the gradient of a quadratic changes along its curve. Example 2: find the gradient function of = 3 2 6 Plan: use the first principles formula + = lim 0 Solution: The only thing we need to find in this formula is ( + ) and this is done by replacing every in the original function with ( + ) in brackets: () = 3 2 6 + = 3 +
2

[5 + 5 + 2]

Then replace the () part, which is simply the original function: = lim
0

5 + 5 + 2 [5 + 2]

( + ) 6

Write out the squared term as two terms: + = 3 + + + 6 + = 3 + + + 6 + = 3 2 + 2 + 2 + 6 + = 3 2 + 6 + 3 2 6 This is the ( + ) part done, so replace () with the original function in the first principles formula: + = lim 0 2 2 3 + 6 + 6 [3 2 6] = lim 0 The tricky part is to simplify this. The easiest way is to look at the numerator (top), and you will see a lot of terms can be cancelled off (colour coded below). This results in something much simpler. The ultimate goal is to get rid of the on the bottom, by cancelling it off with an on top. = lim
0

= lim
0

5 + 5 + 2 5 2

Simplify the top by cancelling: = lim

0

+ 5 + 2

= lim
0

And then

the

part can be crossed off:

= lim
0

5
can every other be

Only after

crossing off

replaced with zero. But since there is no left: () = lim 5 = 5

0

The lim part can now be ignored as there is no 0 longer an left, giving the gradient function: = 5

=5

To repeat, this is the gradient function, and it is different from the original function, however, they are related (see section 5.10).

+ 6 + 2 + +

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Note that the negative sign must be put into all the terms of () when it is taken away from ( + ). 6 + 2 = lim 0 To cancel off the in the denominator, an in the numerator should be factorised out first. Only then can it be cancelled off with the bottom one. (6 + 1) = lim 0 (6 + 1) = lim 0 Having cancelled off the on the bottom, all other s can be replaced with zero, and the limit notation removed: = 6 + 0 1 = 6 1 This is the derivative function. It is the function that gives the derivative (gradient) at every point on the original function. For example, the gradient of the original function at = 2 would be found by substituting = 2 into the gradient function (i.e. 2 = 6 2 1 = 11). Example 3: using first principles, find the derivative function of = 3

Isolate the numerator (top) of this fraction, so simplification is easier (it will be brought back in later): 3 3 3 3 ( + ) = + + ( + ) This is finding a Common Denominator (Chapter 1). The Common Denominator is the multiplication of the two denominators. Get rid of the brackets: = = 3 3 + + +

3 3 + 3 + () + ()

Having the Common Denominator present, a single fraction can be written: = 3 3 + 3 3 3 3 = + + 3 + ()

Cancel off the 3 3: =

Bring everything back into the first principles formula: = lim 0 3 + ()

From Chapter 1, the division of fractions can be written as the multiplication of the inverse: 3 1 = lim 0 + Cross out the two red : 3 = lim 0 + () Replace the remaining with zero and remove the limit notation:

Plan: use the first principles formula + = lim 0 Solution: find ( + ) () = 3

3 + This cannot be simplified right now, so substitute ( + ) = everything into the first principles formula: 3 3 + = lim 0

3 3 3 = = = 2 + 0 () ()
Differentiation by first principles requires knowing how to simplify and factorise, so if youre not comfortable spend some time revising Chapter 1.

102

Exercises: 1. Using Differentiation by First Principles, determine the gradient function given the following original functions: ) = 7 3 ) = 9 + 1 ) = 2 + 2 ) = 3 2 + 14 11 2. Using First Principles, determine the gradient function of the following: ) = 3 2 3 5 2 12 ) = + 1 7 5 5 ) = 3 ) = 7 1 ) = 2

= (3)2 2 Multiply the 2 and 3 together to give the solution: = 6 2 Example 3: find the gradient function of = 4 3 2 2 + 7 1 Plan: use the power rule to differentiate each section, one at a time. Solution: the four sections are: = 4 3 2 2 + 7 1 Apply the power rule to each of the sections: = 12 2 4 + 7 Remember: when you see by itself, it is really 1 and when this is differentiated, it gives 11 = 0 = 1, so the is no longer present. Theory: the derivative of a constant is zero. It means the gradient of a horizontal line is zero. This is why, in the last example, the 1 differentiated to give zero. Example 4: differentiate = 3 + 5 2 + 15 4

5.3 differentiation rules: power rule This is a rule which makes the last 4 pages redundant. Sorry, but at least now youll know what you are actually doing. Theory: the power rule states that to find the derivative function, you bring the power to the front and then subtract 1 from the power. For the original function: The derivative function is: =

= 1

Plan: use the power rule, one section at a time. Example 1: use the power rule to differentiate: = 2 Solution: bring the 2 out front of the , then subtract 1 from the power: Step 1: Step 2: = = 2 = 2
21

Solution: you cannot simply differentiate using the power rule if the term is not up top. The original function must first be simplified (see Chapter 1): = 3 4 + 5 2 + 15 Then differentiate each section separately:

= 2

= 4 3 41 + 2 5 21 1 11 + 0
= 12 5 + 10 1 Watch out for the negative signs!

Example 2: find the derivative of = 2 3 Plan: use the power rule to bring the power out front then subtract one from the power. Solution:

Exercises: 1. Differentiate the following using the power rule: ) = 3 2 ) = 2 3 + 2 3 3 ) = 7

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) ) ) ) ) ) ) )

5 2 4 5 2 3 1 = + 2 3 1 1 1 = + 2 + 3 3 3 = 3 + 2 4 15 = 6 + 4 1 = 14 + 14 = 13 13 + 15 = 12 =

rule, then multiply by the derivative of the inside of the brackets. Solution: Differentiate as if using the power rule: 3(4 + 2)31 = 3 4 + 2
2

Then multiply this by the derivative of the inside of the brackets: = 3 4 + 2 2 (4) = 12 4 + 2 2 The 12 came from multiplying the 3 and 4 together. We cannot put the 12 into the brackets because the bracket is squared. Example 2: Find the gradient function of = ( 2 + 3)5 Plan: use the chain rule to differentiate: differentiate the function as if using the power

5.4 differentiation rules: chain rule Intro example 1: differentiate = (4 + 2)3 Solution: to solve this, you might expand it using the crab-claw, and then differentiate the sections: = 4 + 2 4 + 2 4 + 2 = 16 2 + 16 + 4 4 + 2 = 64 3 + 80 2 + 48 + 8 Differentiate this: = 192 2 + 160 + 48 This is a very long method (especially when you show all working) but there is an easier method; the chain rule. There is the formal and informal way of remembering the chain rule. Theory: the informal method is: differentiate the function as if using the power rule, then multiply by the derivative of the inside of the brackets. Example 1: differentiate the above example = (4 + 2)
3

rule, then multiply by the derivative of the inside of the brackets Solution: the first underlined part of the following is the as if part of the chain rule, and the second underlined part is the derivative of inside the brackets. = 5 2 + 3 4 (2 + 3) The 2 + 3 must be in brackets as 5 2 + 3 imply that the 5 2 + 3
4 4

is multiplied by all of 2 + 3 . Otherwise, it would is only multiplied by 2, and then 3 is added onto the whole thing, which is not the case! This last example can be simplified to: = (10 + 15) 2 + 3 which is to the power of 1. Example 3: differentiate = 2 3 3 4 2 + 1
5.5 4

As the 5 can only go into every term in the bracket

Plan: use the informal chain rule method: differentiate the function as if using the power

104

Plan: move everything up top so the chain rule can then be easily used. Chain rule: differentiate the function as if using the power rule, then multiply by the derivative of the inside of the brackets. Solution: use index rules to bring the denominator up top and change the sign of the index: = 2 3 3 4 2 + 1
5.5

= = With the equation above: = 76 2 = 146 = 2 7 2 + 1 = 14 2 + 1

6 6

Replace with what it was originally defined as (i.e. it was defined as ( 2 + 1) in this question). You get the same answer using the formal or informal method, however always write out the theory used.

Apply the chain rule: the first underlined part below is the as if part, and the second underlined part is the derivative of the inside of the brackets. = 2 5.5 3 3 4 2 + 1
5.51

(9 2 8)

Simplify the constants (2 5.5) into the only brackets which are to the power of 1 (9 2 8): = 99 2 88 3 3 4 2 + 1
4.5

The formal method of the chain rule is temporarily inventing a new function. Theory: formally, the chain rule is: = To demonstrate this, the following function will be used: = ( 2 + 1)7 Invent the function = 2 + 1, which is whatever is inside the brackets. Then replace the brackets in the original equation with the function : = ()7 Differentiate both of these new functions:

Exercises: 1. Differentiate the following using the chain rule: ) = + 1 3 ) = 2 3 4 ) = 3 + 1 4 ) = 2 + 2 3 ) = 2 2 3 4 ) = 4 2 3 ) = 12 3 4 ) = 4 2 + + 1 5 ) ) ) = 5 = 3 3 1 + 8

3 4

1 1 + 2

= 12 2 + + 5 +

1 5 + 2

5.5 differentiation rules: product rule This rule applies whenever two separate functions are multiplied together. The following shows examples of two separate functions: = + 2
2

4 + 2

= 76
And:

= (4 1) 3 = +2 4
2

1 +1

= 2
If these two derivatives are multiplied together, the wanted derivative is obtained:

These cannot be differentiated using the rules learnt so far, so a new rule is required: the product rule.

105

Theory: given the function = .

1 2

Plan: two rules will be required: (1) the product rule as our base rule, (2) the chain rule within our base rule. Solution: Use the product rule to find all the parts needed (with the chain rule used within these parts): 1 = 3 4 = 12(4)2 2 = 6 3 2 1 = 36 3 2 5
5 5 2

where () and () are separate functions. The derivative function is then: () = () () + () () Informally: the derivative function is the derivative of the first part multiplied by the second part, plus the derivative of the second part multiplied by the first part. = 1 2 + 2 1 Example 1: find the gradient function of () = (15 2 + 3 3 )(4 7 + 6) Plan: use the product rule: = 1 2 + 2 1 Solution: defining the two functions: () = (15 2 + 3 3 )(4 7 + 6) 2 1 Following the product rule, do one section at a time: 1 = 30 + 9 2 2

4 6

Substitute into the product rule formula: = 1 2 + 2 1

= 12 4
2

3 2 1

+ 36 3 2 1

This looks very big, but it is essentially in two parts, separated by an addition sign. If you look carefully in both sections, it is possible to factorise out some of those parts (underlined below) to make it a bit simpler:
= 4
2

32 1

12 3 2 1 + 36 4

Simplify the square brackets:

6

= 28

= 4

32 1 5 [362 12 144]

Put all the parts in brackets and substitute into the power rule formula:
= (30 + 9 2 )(4 7 + 6) + (28 6 )(15 2 + 3 3 ) 1 2 2 1

That is the extent of simplifying. The product rule is not complicated, but determining the two functions is sometimes difficult, and the simplifications can, at times, be complex.

Try simplifying this last line using the crab claw (twice). You should get: = 120 9 540 8 + 54 2 + 180 You could have crab-clawed the original function and then applied the power rule four times. But in harder examples, it would take too much time. Example 2: find the gradient function of = (4)3 3 2 1
1 2
6

Exercises: 1. Differentiate the following using the product rule: ) = 5 4 3 2 + 1 ) = 3 + 1 2 + 5 ) = 3 2 7 13 4 ) = 12 4 + 12 5 7 2 ) = 15 3 + 7 13 7 + 4 1 2 ) = 15 3 + +5 1 1 ) = 17 5 4 + 2 ) = 0.25 + 0.5 7 3 + 7 3

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2.

Using all the differentiation rules learnt so far, differentiate the following: ) = 2 + 1 3 7 2 1 ) = 1 5 2 2 1 2 3 1 1 2 ) = + 2 4 5 5 ) = 4 + 7 3 1 3

= []2

Solution: using the quotient rule, differentiate the two parts: = 60 3 + 6 = 5 Substitute each section in brackets into the quotient rule:

5.6 differentiation rules: quotient rule This rule is similar to the product rule, except now, we have one function divided by another function. Theory: the quotient rule applies for functions of the form: () = () ()
2

60 3 + 6 5 + 1 5 (15 4 + 3 2 ) = [5 + 1]2
You dont usually need to expand the denominator, especially if you need to use the crab-claw method. This is because sometimes you might be able to cancel it off. However, always simplify the numerator; in this last case by using the crab-claw method. Do it yourself, as the following is only the answer:
300 4 + 60 3 + 30 2 + 6) 75 4 + 15 2 = 5 + 1 2

For example, these can look like: = 3 1 + 3

2 + = 4 3 + 3 Theory: formally, the quotient rule is () () = () 2 Informally, it is: the derivative function is the derivative of the top times the bottom minus the derivative of the bottom times the top, all divided by the bottom squared. For the numerator (top part of the fraction) the order of what you differentiate first is important as there is a minus sign.
= []2

225 4 + 60 3 + 15 2 + 6 [5 + 1]2 3 75 3 + 20 2 + 5 + 2 = [5 + 1]2

3 could also be factorised:

If simplification is obvious, then it should be done. Example 2: find the gradient function of = 3 2 4 2 + 1

Plan: use the quotient rule = []2 Solution: find the derivative of each of the two parts: = 6 + 4 5 = 2 Substitute back into the quotient rule formula (remember the brackets): 6 + 4 5 2 + 1 2 3 2 4 = 2 + 1 2

Ask yourself, would you naturally differentiate the top or bottom first? Most people say they would differentiate the top first, and that is what is done. Example 1: differentiate = 15 + 3 5 + 1
4 2

Plan: use the quotient rule:

107

Then use the crab claw method (you should do it!) to simplify the top: 12 2 + 8 4 + 6 + 4 5 6 2 + 2 4 = 2 + 1 2 Bring together like terms: 6 2 + 10 4 + 6 + 4 5 = 2 + 1 2 Factorise out the number 2 from the top: 2 3 2 + 5 4 + 3 + 2 5 = 2 + 1 2 This next example combines the quotient rule with other differentiation rules. Example 3: find the derivative of 4 2 + 1 (3 5 ) = 2 5 Plan: use the quotient rule as the base rule and the product rule within the quotient rule:
= []2

[ 36 4 + 15 6 5 4 2 + 1 3 5 ] = 2 6

Crab-claw the numerator (do it yourself!) and you should get: 96 3 + 30 5 = 2 6 A rule of thumb for simplification using the quotient rule is: if you cant factorise anything out or do a simple crab-claw, then dont bother. Keeping track of all the separate sections as well as simplification are the hardest parts of using the quotient rule, but the more you practice, the easier it will become.
Exercises: 1. Differentiate the following using the quotient rule: + 1 ) = 3 1 2 ) = + 1 2 3 + 1 ) = 5 + 2 3 2 + 4 3 ) = 2 14 4 + 5 ) = 13 3 2 2. Differentiate the following using any of the rules learnt so far: 3 4 3 ) = 5 1 2 1 7 ) = 3 + 1 3 15 3 + 3 2 ) = 1 2 12 2 8 9 ) = 1 + 5 8 13 2 + 14 ) = 18 3 2 ) ) ) = 5 4 +1 3 12 2
2

= 1 2 + 2 1
Solution: find the derivative of each section of the base rule: = 1 2 + 2 1 = 8 3 5 + 15 6 4 2 + 1 = 36 4 + 15 6 = 10 4 Substitute back into the Quotient Rule:
= 36 4 + 15 6 2 5 10 4 4 2 + 1 (3 5 ) [2 5 ]2

Factorise out 2 4 from the top, and also simplify the denominator (which we wouldnt usually do, except here, we can see that part of it will cancel off with the denominator):
2 4 [ 36 4 + 15 6 5 4 2 + 1 3 5 ] = 4 10

3 1 + 2 = 1 2 1 1 + 2 = 1 1 3 2

Cancel off the 2 4 with part of the bottom:

108

5.7 differentiation rules: Remembering that is just a number, there is no reason why it could not have an index. In Chapter 4, an exponential function of the form = 2 was discussed, but it could just as easily have been = . This is also an exponential function because is a number, not a variable. Theory: the formal rule is: For the function =

The

2 +2

could be crab-clawed into the brackets

but in this case, there is no point. Example 3: find the derivative of = 14

3 +111

Plan: use the rule of differentiation = Solution: = 3 2 + 11 Put this out front in brackets, then multiply by the original function = 3 2 + 11 14
3 +111

The derivative is =

The informal rule is: differentiate the exponent, bring it out front in brackets, then multiply it by the original function. Example 1: differentiate the function =
2+1

Simplify the 14 into the first bracket to get: = 42 2 + 154 could the
3 +111 3 +111

The 14 was simplified into the front bracket as , however it looks cleaner if

Solution: differentiatie the exponent to get 2. Bring this out front and then multiply it by the original function: = (2) 2+1 Example 2: differentiate = 3
2 +2

we do not. Either way is fine. Example 4: find the gradient function of = (4 3 + ) 3 the rule within it:
5

Plan: use the product rule as the base rule with

= 1 2 + 2 1
=

Plan: use the exponential rule differentiate the exponent, bring it out front in brackets, then multiply by the original equation Solution: differentiate the exponent: = 2 + 2 Then bring it out front in brackets and multiply by the original equation: 2 = 2 + 2 (3 +2 ) This can be simplified a bit, by putting the 3 into each of the terms in the bracket: 2 = (6 + 6) +2

Solution: the two functions are underlined = 4 3 + 3 1 = 12 2 + 1 2 = (15 6 ) 3

5 5

Substitute into the base (product) rule:

5 5 = 12 2 + 1 3 + (15 6 3 )(4 3 + )

5 = 3 (12 2 + 1 + 60 3 + 15 5 ) A step was deliberately missed, so you should do it and see if you can get the same answer.
Exercises: 1. Differentiate the following using the rule: ) = 23 ) = 42 109

) ) 2.

= =

2 +1

Example 1: find the gradient function of = ln 3 + 16 5 4

3 2 +
1 +

) = Differentiate the following using any of the rules learnt so far: 2 ) = 3 +1 1 + 3 ) ) ) ) ) ) ) = 10 15 2 + = 92 = 21 + 2 = 12 =

1 2 32 2 3

Plan: simplify the brackets, then use the ln rule: differentiate the inside of the brackets, then divide by the inside of the brackets Solution: simplify the inside of the brackets:

= ln 3 4 + 16 5 Differentiate using the ln rule: 12 5 + 16 = 4 3 + 16 5 That is the extent of the ln rule. It only gets more complex when other rules also need to be used. Example 2: find the derivative of = 3 5 + 1 ln( ) Plan: use the product rule (as there are two functions being multiplied together) as the base rule = 1 2 + 2 1 then the ln rule and the rule within the base rule. Solution: the two functions for the product rule are underlined = 3 5 + 1 ln( ) 1 = 15 4 2

4 4 4

+ 5
4

1 + 32 1 1 5 = + 4 2 4 1 = + 33

5.8 differentiation rules: rule The natural log is the log of a function with as the base rather than 10. If you dont understand this, go back to Chapter 4, but its not entirely vital for this section. Theory: formally, the ln rule is: For the function = ln () The gradient function is = Informally: To differentiate the log of something in brackets: differentiate the inside of the brackets, then divide by the inside of the brackets. If you are to find the derivative function of = ln( 2 + 1) Differentiate the inside of the brackets, then divide by the inside of the brackets (NOT the whole function, just the inside of the brackets). So in this case, the derivative function would be: 2 = 2 + 1 Ignore the ln when differentiating the function.

4 3
4

= 4 3

In 2 both the ln rule and the rule were used. The cancelled off so only 4 3 was left. Substitute into the base (product) rule: 4 = 15 4 ln + 4 3 (3 5 + 1) Factorise out 3 and simplify inside the brackets: 4 = 3 15 ln + 4 3 5 + 1 4 = 3 15 ln + 12 5 + 4
4

110

Exercises: 1. Differentiate the following using the ln rule: ) ln ) ln 15 ) ln 2 ) ln 2 + 3 ) ln 3 4 + 17 2 ) ln +1 1 2. Differentiate the following using any of the rules learnt so far: ) = ln 2 + 1 3 4 ) ) ) ) ) ) ) =
2 +3

2 = 2 2 2 + 1 4 = 8 2 2 + 1 Substitute it into the product rule: = 12 2 2 + 1 Factorise out 12 2 2 + 1 : = 12 2 2 + 1 2 2 + 1 + 8 2 = 12 2 2 + 1 10 2 + 1 Example 2: find the second derivative of = 36 1 3 2
2

+ 8 2 2 + 1 12

ln 2 + 3 8 + 3

= ln 4 3 + 7 2

2 = ln 5 63 1 2 = + ln 3 2 1 2 2 = ln + 4 3 ln 5 3 = 2 + 1 = ln ln 3

Plan: differentiate, then differentiate the derivative. Solution: simplify first: = 36 1 + 0.5 3 Differentiate using the product rule: 1 = 3 36 2 = 1.5 2 Substitute into the base (product) rule: = 3 36 1 + 0.5 3 + 1.5 2 36 Now to find the second derivative, you must use the product rule twice (for the two sections shown below). You should do this one section at a time to avoid confusion: = 3 36 1 + 0.5 3 + 1.5 2 36 Differentiate the red section first: 1 = 9 36 2 = 1.5 2 Substitute into the product rule formula:
= 9 36 1 + 0.5 3 + 1.5 2 3 36 = 9 36 1 + 0.5 3 + 4.5 2 36

5.9 the second derivative Theory: the second derivative of a function is obtained by differentiating the function once, and then differentiating the derivative. Similar to the first derivative, there are several different notations for a second derivative, the common ones being: 2 2

Example 1: find the second derivative of = 2 2 + 1

3

Plan: differentiate the function, then differentiate that derivative. Solution: find the first derivative: = 3 2 + 1
2 2

4
2

Differentiate the blue section: 1 = 3 2 = 3 36 Substitute into the product rule formula: = 3 36 + 3 36 1.5 2 = 3 36 + 4.5 36 2

= 12 2 2 + 1

To find the second derivative, must be differentiated, and the product rule is required. = 1 2 + 2 1 1 = 12

111

The second derivative is the sum of the derivative of the red section and the blue section: = 936 1 + 0.53 + 4.52 36 + 3 36 + 4.5 36 2 Factorise out
36

2.

Find the second derivative of: 2 ) = 2 5 2 2 ) = ln +1 3 ) = ln 4 3 + 2 2 ) ) = 4 7

1 3
2

because each term has

36

= 36 9 1 + 0.53 + 4.52 + 3 + 4.5 2 Then simplify everything inside the square brackets: = 36 4.5 3 + 9 + 9 2 + 3 After the first derivative was found, the 36 could have been factorised out, and then the derivative found that way. Both methods will give the same solution. Try it. Example 3: find the second derivative of = ln(3 4 + ) Plan: differentiate the function, then apply differentiation rules to differentiating the first derivative. Solution: the first derivative is 12 3 + 1 = 3 4 + To differentiate this, the quotient rule is needed. = 36 2 = 12 3 + 1 Replacing the base (quotient) rule: = 36 2 3 4 + 12 3 + 1 12 3 + 1 3 4 + 2
2

= 21 ln 2 + 1

5.10 the gradient function graph Just like any function, a gradient function can be graphed.
7

Theory: The gradient function is related to the original function: any value of the gradient function at a given is the gradient at that same of the original function. That is, to find the gradient of any point on the original function (which has not been shown above), you go up from that point on the to hit the gradient function, then across to the which gives a value; this value is the gradient of the original function. On the graph above, the gradient of the original function at = 1, is 2. At = 3, the gradient of the original function is 7 (Note: the original function is not shown). Shown below is shown a function as well as its gradient function, to reinforce the relationship.

Try simplifying this last equation to see if you get the following: = 36 6 + 12 3 1 3 4 + 2

Exercises: 1. Find the second derivative of the following functions: ) = 3 + 2 1 4 ) = + 2 4 1 ) = 2 + ) = 3 5 3 5 ) = 2 2 1 + 3 4

112

is from the . Similarly, the smaller the slope of the original function, the closer the gradient function is to the at that point.

= ()

Re-read this section before trying the following exercises, as it takes a little time to fully understand.

Whenever the original function (blue) is sloping upwards (i.e. a positive gradient), the gradient function (red) is above the (i.e. is positive). For any to the left of = 2, the gradient of the original function is positive, and so the gradient function to the left of = 2 is above the . Similarly for any to the right of = 1. Whenever the original function is sloping downwards (i.e. negative gradient), the gradient function is below the . That is, any between = 2 and = 1, the slope of the original function is negative, and so the gradient function is below the . Where there is a maximum or minimum on the original function, the gradient is zero, and this is where the gradient function crosses the . That is, at = 2, = 1. Theory: a positive gradient on the original function gives a value above the on the gradient function. A negative gradient on the original function gives a value below the on the gradient function. When the original function is at a stationary point, the gradient function crosses the . An inflection point on the original function maps to a turning point on the gradient function (i.e. either a maximum or a minimum). The steeper the slope at a particular point on the original function, the further the gradient function

Exercises: 1. Sketch the original function (i.e. the quadratic): = 3 + 3 2 5 (using theory from Chapter 4) then sketch the gradient function on the same set of axes. 2. Given the function graphed below, sketch in the gradient function.

= ()

3.

Given the gradient function below, sketch in the original function.

5.11 simple applications Remember that the gradient function gives us a method of finding the gradient of a point on the original function. Theory: to find the gradient of a point = where is a number, differentiate the original function to get the gradient function, then put the number into the gradient function. The value

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from the gradient function is the gradient of the original function at = . Example 1: find the gradient of 2 3 = 4 1 when = 3 and also when = 1. Plan: use the quotient rule as the base rule = []2 then use the rule to find the gradient function. Substitute the (one at a time) into the gradient function. Solution: = 2 3 = 4 2 3 =
4 4

5 4 + 5 16 4 = 1 = 4 1 2 = 21 4 + 5 4.7892 (4. . ) 4 1 2

which is the gradient of the original function at = 1. Example 2: a car manufacturer has a monthly profit function = 2 + 150 5000 and is currently producing 70 cars per month. Use the properties of the gradient function to determine if it is more profitable for the firm to increase production. Plan: differentiate the profit function, then substitute = 70 into the gradient function. If the gradient is positive, more output will increase
4

Substitute into the quotient rule: 1 4 4 1 2 3

2

profits. If the gradient is negative, then increased output will reduce profits. Solution: = 2 + 150 Substitute = 70 into this gradient function: 70 = 140 + 150 = 10 > 0 Since the gradient is positive, if output is increased, profits will also increase.
Exercises: 1. Determine the gradient of the function 1 = 54 + 7 At the points = 4, = 7. Give exact answers. 2. Determine the gradient of the function 2 = 3 + 2 2 At the points = 2, = 5. Give exact answers and approximations. 3. A firm manufacturing cranes has current output of 10 and a profit function: = 207 log 0.032 + 0.02 30 400 Will increasing output lead to increased profits? Justify your answer.

Simplification is not required as only the final number is needed (i.e. the gradient at a point). To get this number, substitute = 3 into the gradient function: 3 = 6 3 12 1 4 12 9 + 9 12 1 2 9 + 9 72 3 = 12 1 2 =
12 12

Simplifying gives:

81 12 + 9 8.9996 (4. . ) 12 1 2

Thus the gradient of the original function at = 3 is approximately 8.9996. For the gradient at = 1, substitute = 1 into the gradient function: 2 3 4 1 4 4 1 + 3 1 = 4 1 2 Simplify:

114

chapter five summary

Differentiation is finding the rate the changes when there is a change in the . The gradient of a line tangent to a given point is the rate of change of for changes in . = = The gradient function is a function that gives the gradient of the original function at all the points along the original function. Differentiation by First Principles is the formula: + = lim 0 The power rule: For the original function = The derivative function is = 1 The derivative of a constant is zero The chain rule: differentiate the function as if using the power rule, then multiply by the derivative of the inside of the brackets. = The product rule: For the function:

() () = () 2 = []2

The formal rule is: For the function The derivative is Formally, the ln rule is: For the function The gradient function is

= =

= ln () =

() = (). ()
The derivative function is: () = (). () + (). () = 1 2 + 2 1 The quotient rule is. For the function: () () = () The gradient function is:

The second derivative of a function is obtained by differentiating the function once, and then differentiating the derivative. The gradient function is related to the original function: any value of the gradient function at a given is the gradient at that same of the original function. A positive gradient on the original function gives a value above the on the gradient function. A negative gradient on the original function gives a value below the on the gradient function. When the original function is at a stationary point, the gradient function crosses the . An inflection point on the original function maps to a turning point on the gradient function (i.e. either a maximum or a minimum). To find the gradient of a point = where is a number, differentiate the original function to get the gradient function, then put the number into the gradient function. The value from the gradient function is the gradient of the original function at = . = 8 4 + 3 6 = 12 2 + 3 + 3 + 2 1 ) = 2 15 ) = 2 + 2 3 1 1 1 ) = + 2 3 Using the chain rule, differentiate the functions: ) = + 1 2 ) = 3 4 5 ) = 2 + 5 6 ) = 12 1 4 3 ) = 75 2 + 4 3 4 1 4 ) = 5 Using the product rule, differentiate the following functions (Hint: underline the two functions first): ) = 3 15 + 2 ) = 3 1 9 + 1 ) = 15 4 1 3 ) = 4 7 2 + 4 1 ) = 3 + 4 5 3 3 ) )

chapter five questions

1. Order the points on the following graph from lowest gradient to highest gradient:

4.

2.

3.

Use differentiation by first principles to determine the gradient of the following functions: ) = 18 ) = 2 ) = ( + 3)( + 4) ) = 3 + 4 2 5 1 ) = ) = 2 Using the power rule, differentiate the following functions: ) = 3 2 ) = 15 2 + ) = 2 + 2 + 3 17 3 ) = + 5 2 2

5.

115

6.

7.

6 + 2 1 3 4 ) 6 6 6 6 6 Use the quotient rule to find the derivative of the following functions: + 1 2 + 1 ) = ) = 1 1 2 3 2 2 + 1 ) = ) = 2 1 2 1 13 +1 2 3 2 ) = ) = 2 5 2 13 3 3 ) = +9 1 + 4 2 3 + 1 + ) = 1 3 2 Use the rule to find the derivative of the following functions: ) = 2 ) = 51 2 14 ) = ) = 1 2 4 3 ) = 13 ) = 2 1+ ) = 2 2 4/ ) = 12 ) = 7 Using the ln rule, find the derivative of the following functions: ) = ln 5 ) = ln 2 ) = 2 ln 5 1 ) = 3 ln 2 4 ) = ln 3 + 3 1 ) = 2 ln 2 3 + ) = 0.04 ln 8 2 2 Using any of the rules, determine the derivative of the functions: ) = 2 3 1 2 3 + 5 3 ) = 1 51 1 4 3 ) = ln 0.2 + 2 1 ) = 2 1 + ) = 15 ln 12 3 4 1 ) = 5 1 + ln 1 2 31 ) = 5 1 + 1 ) = 3 2 3 4 2 ) = 2 3 1 7 1 + ln + 1 71 + 4 ) = + 18 4 ln 7 1 ln 5 + 7
3

10. Find the first and second derivatives of the following functions: ) = 4 + 15 3 1 17 ) = 4 + ln 8 ) = 0.03 9 + 2 1 4 2 ) = 2 1 4 + 1 1 12 ) = 3 2 + 1 ) = ln 5 2 + 11. Determine the gradient at = 10 and at = 35 for the production function: = ln 0.25 + 4 12. For the following original function, sketch in the gradient function:

= ()

13. For the following gradient function, sketch in the original function:

8.

9.

14. For the total cost function: = 3 152 + 75 5 Determine: a) The gradient function (i.e. marginal cost function). b) When the marginal cost function is at a minimum. c) The gradient of the marginal cost function at = 15. d) Sketch the marginal cost function using quadratic theory. e) Sketch the total cost function from the marginal cost function. 15. A company producing fishing rods faces a cost function of the form: = 50 ln 0.1 2 + 2 3 + 15 18 Determine: a) The marginal cost function. b) The gradient of the marginal cost function when = 30 and when = 60.

116

Chapter 6

Applications of differentiation
The usefulness of differentiation
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 Graphical Optimisation Mathematical Optimisation The Nature of an Optimal Point Inflection Points Combining All Theory Applications Profits Applications Break-Even Applications: Marginal and Average Values Differentiation and Elasticity Elasticity and Total Revenue 118 118 120 123 124 126 129 130 133 135 137 138

Chapter Six Summary Chapter Six Questions

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6.1 graphical optimisation Theory: optimisation is the process of finding an optimal point, with that point usually being a maximum or minimum. A shop selling mobile phones aims to maximise profit. As a consumer, you would like to minimise how much you pay for a given phone. These are two optimisation problems; in one case, the firm is finding a maximum, and in the other case, the consumer is finding a minimum. The profit of a firm (usually denoted by ) is a function of the quantity of goods sold to consumers. The following is a typical profit curve, with on the and quantity, , on the . How many units would you produce?

Above, there are two maximum points and one minimum point. Point is a local maximum (a maximum over a small range around the point), whereas point is a local and global maximum (a maximum over the entire number range: ). Point is a local minimum, but is not a global minimum as the ends of the curve are lower. Be aware that an optimal point may not always be the globally optimal point (most of the time it will be, but you have to make sure).
Exercises: 1. For the graph below, determine which points are local maxima/minima and global maxima/minima.

25

50

90

Any rational person would aim to sell 50 units. Any other quantity, such as 25 or 90 units, does not give maximum profit, so these are not optimal points. The maximum above is both a local and global maximum. Theory: a global optimum is a point that is the optimal point over the entire number range (i.e. ). A local optimum is an optimal point only over a small range around that point. 6.2 mathematical optimisation Finding optimal points graphically is quite simple, however most of the time only the original function is given, which may be difficult to draw. This is where differentiation becomes very useful. Below is a graph where the gradients of optimal point have been drawn in.

118

2 = 2 2 2 = 9

8 2 1

Thus 2, 9 is an optimal point. Example 2: find the optimal point(s) for the function Theory: the gradient at any maximum or any minimum is always zero. This feature allows the original function to be differentiated to obtain the gradient function; the gradient function is set equal to zero to solve for the optimal point(s). Theory: the First Order Condition (FOC) is found by setting the first derivative equal to zero: =0 That is, differentiate the function and set it equal to zero. Solve for the unknown(s). Example 1: Find the optimal point(s) of the quadratic = 2 2 8 1 Plan: use the FOC to find the of the optimal point(s) =0 Solution: differentiate the original function: = 4 8 Set it equal to zero: = 4 8 = 0 Rearrange to solve for : 4 = 8 = 2 There is an optimal point at = 2. A point also requires a which comes from the original function:
119

= 3 + 3 2 24 + 5 Plan: use the FOC to find the optimal point(s). =0 Solution: differentiate the original function and set it to zero (i.e. FOC): = 3 2 + 6 24 = 0 Solving for requires solving this quadratic. To solve the quadratic, the Quadratic Formula must be used: = = = 2 4 2 6 62 4 3 (24) 2(3) 6 324 6 OR = 2

= 4

This gives two optimal points, but they also require which come from the original function: 4 = 4 4 = 85 2 = 2
3 3

+ 3 4
2

24 4 + 5

+3 2

24 2 + 5

2 = 23 Both 4,85 and 2, 23 are optimal points. From the cubics section in Chapter 4, there should be one local maximum and one local minimum. Determining which value corresponds to the maximum and which to the minimum is left to the next section.

Example 3: find the optimal points of the function = 2 2+3 + 7 Plan: differentiate using the product rule as the base rule:

) ) ) ) ) ) ) )

= 1 2 + 2 1
Use the rule within the product rule: = Then apply the FOC: =0 Solution: define the two functions: = 2 2+3 + 7 Find the derivative of each of the two parts: 1 = 2 2 = 2 2+3 Substitute into the product rule: = 2 2+3 + 2 2+3 2 Simplify and factorise: = 2 2+3 1 + Apply the FOC: 2
2+3

= 2 13 + 15 = 3 3 + 2 2 5 + 15 7 3 = + 12 1 8 = 3 2 41 2 + 1 = 3 = 3+1 + 2 2+1 6 = 2 + 3 + 5 +5 = 2 3
2

6.3 the nature of an optimal point After finding an optimal point, it is important to determine if that point is a minimum or maximum. Profit is something which is usually maximised and if an optimal point was chosen using the FOC without checking it is a maximum, profit might in fact be minimised. The nature of an optimal point is found (i.e. if an optimal point is a maximum or minimum) using the second derivative. Theory: the Second Order Condition (SOC) is used to find the nature of an optimal point. The point in question is: A minimum if the second derivative evaluated at the optimal point is greater than zero. 2 Minimum if >0 2 A maximum if the second derivative evaluated at the optimal point is less than zero. Maximum if 2 <0 2

1 + = 0

For the solution, one of the products on the left side must equal zero. There are three options: 1. 2. 2 = 0, so = 0; 2+3 = 0, but this will never occur as this never crosses the ; or 3. 1 + = 0, giving = 1. There are two optimal points with = 0 and = 1. For the : 0 = 0 2 2 0 = 7 1 = 1 2 2
1 +3 0 +3

A stationary inflection point if the second derivative evaluated at the optimal point is equal to zero. 2 Stationary inflection point if =0 2

+7 +7

1 = 1 + 7 = + 7 Thus 0,0 and 1, + 7 are optimal points.

Exercises: 1. Find any stationary point(s) for the functions:

The process is quite simple and is easily demonstrated in an example.

120

Example 1: find the optimal point and the nature of this optimal point for the function = 2 + 2 + 15 Plan: use the FOC to find any stationary points =0 Find the second derivative and evaluate at the optimal point. Then apply the SOC to determine if it is a maximum or minimum. Solution: to find any stationary points: = 2 + 2 = 0 2 = 2 = 1 The is obtained from the original function: 1 = 1 1 = 16 The second derivative is: 2 = 2 2 Apply the SOC: = 2 < 0 maximum 2 Thus there is a maximum at 1,16 . From Chapter 4, since the value of in the quadratic is negative, a maximum is expected. Example 2: find any optimal points and their nature for the function = 3 12 2 + 36 + 24 Plan: use the FOC to find any optimal points. Then find the second derivative, and evaluate it at any optimal points; apply the SOC to the results. Solution: find the optimal points = 3 2 24 + 36 = 0 Solve using the Quadratic Formula: = 2 4 2
2 2

= =

(24) (24)2 4 3 (36) 2(3)

24 576 432 6 24 12 = 6 = 2 = 6 The two optimal points have of = 2 and = 6. The corresponding are: 2 = 2 2 = 56 6 = 6 6 = 24 Thus the two points are (2,56) and (6,24). Find the second derivative: 2 = 6 24 2 Evaluate the second derivative at = 2: 2 2 = 6 2 24 = 12 < 0 2 maximum at = 2 Evaluate the second derivative at = 6: 2 6 = 6 6 24 = 12 > 0 2 minimum at = 6 Thus 2,56 is a maximum, and 6,24 is a minimum. To summarise the process: 1. Find the optimal from the FOC and their corresponding . 2. Determined if the point(s) are maxima or minima by substituting those from the FOC into the second derivative, 3. Applying the SOC. Example 3: find and define any optimal points for =
2 3

12 2 12 6

+ 36 2 + 24 + 36 6 + 24

+ 2 1 + 15

+ ln 4 2

Plan: find any optimal points using the FOC =0

121

The rule and power rule need to be used. Then find and evaluate the second derivative at the optimal points, and apply the SOC. Solution: find the optimal points using the FOC: 2 = 2 3 2 = 0 2
2 3

all that is required is to evaluate the second derivative at each of the three optimal points: 1. For = 0: 2 (0) = 2 03 + 4(0)2 03 2 2 = 2 3 2 1.9 < 0 maximum The 1.9 can be obtained from a calculator. 2. For = 3:
3)2 3

2 = 0 1) = 0
2 3

2(

2 3

So either 2 = 0 or If 2 = 0, then = 0. If
2 3

1=0

2 ( 3) = 2 ( 2

+ 4( 3)2 (

3)2 3

1 = 0 then
2 3

= 2 0 + 12 0 2 = 12 > 0 minimum 3. For = 3:

+ 3 3
2

=1

The only time when an exponential is equal to 1 is when the exponent is equal to zero. So 2 3 = 0 is required: 2 = 3 2 = 3 = 3 and = + 3 There are three solutions for optimal points: = 0, = 3 and = + 3 For the : 0 =
0 2 3 2

2 + 3 = 2 2

+4 + 3

+ 3 3

= 2 0 + 12 0 2 = 12 > 0 minimum Thus 3, ln 4 2 and 3, ln 4 2 are minima, and 0, 3 + ln 4 is a maxima. The two minimums are flanking a maximum (the shape of a W). Note: a good way of remembering the SOC is that it is not what is intuitively expected. If the second derivative at the point in question is greater than

+ ln 4 0
2

zero, it is a minimum (see, its not what is intuitively expected). Similarly, if the second

= 3 + ln 4 3 =
3 3

+ ln 4 3
2

derivative at the point in question is less than zero, it is a maximum (again, not what is intuitively

= ln 4 2 3 =
3 3
2

+ ln 4

expected).
Exercises: 1. Find any stationary points for the functions below, then determine the nature of these stationary points. ) = 3 2 11 + 10 ) = 3 + 4 2 5 + 1 2 3 ) = + 2 19 9 ) = 5 2 7+4 4 2 + 3 ) = 5 5 ) = 36 + 7+1 5 6 ) 3 2 + 5 + 12 +4 ) = 3 2 2 8
2

= ln 4 2 Giving points 3, ln 4 2 , 0, 3 + ln 4 . Use the second derivative to find the nature of the three points: 2 2 2 = 2 3 + 2 3 2 2 2 = 2
2 3

3, ln 4 2 and

+ 4 2

2 3

The product rule was used to evaluate the second derivative however simplification is not needed as

122

6.4 inflection points Theory: Inflection points are points of a function where a function changes from concave to convex (or vice versa). Concave means that the curve looks like part of a cave when drawn on a set of axes; and convex is when a cave cannot be drawn (for a technical definition, consult a second year mathematics for economists text book). Below, the red lines are concave, as they could be drawn into a smooth cave shape, whereas the blue lines cannot, so they are convex.

Theory: There are two main types of inflection points: 1. Stationary inflection points have a gradient of zero at the inflection point, but are not maxima nor minima. 2. Non-stationary inflection points do not have a gradient of zero at the inflection point.

stationary inflection point

non-stationary inflection point

The blue function has a non-stationary inflection point, whereas the red function has a stationary inflection point. The mathematical way of finding inflection points is a continuation of the SOC.

Theory: an inflection point is where a function changes from convex to concave (or concave to convex). But a much easier way of understanding this is to draw an inflection point.

Theory: if the SOC is evaluated for a stationary point and is found to be zero, that point is a stationary inflection point. A generic way of finding any inflection point (not just a stationary inflection point) is a continuation of the SOC: 2 =0 2

inflection point

SOC for any inflection point:

That is, set the second derivative equal to zero, then solve for . This finds all inflection points. Notice that the function is initially concave (red) and then changes to convex (blue). The point at which this change occurs is the inflection point.

Example 1: find any inflection point(s) (if they exist) for the function = 3 32 28 + 60 Plan: find the second derivative, set it to zero then solve for . Solution: differentiate the function twice:
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 = 3 2 6 28 = 6 6 2 Set the second derivative equal to zero. 6 6 = 0 = 1 There is an inflection point at = 1. To find the corresponding use the original function. (1) = 1
3
2

To find any stationary points: 2 = 6 1 = 0 2 Again, for the left side to be equal to zero ( 1) must equal zero. This means = 1. Since = 1 is a stationary point (from the FOC) and at that same point it is also an inflection point (from the SOC), then it must be a stationary inflection point. Finally, to find the at = 1, substitute = 1 in to the original function: 1 = 1 1
3

3 1

28(1) + 60

= 1 3 28 + 60 = 30 There is an inflection point at (1,30). Theory: if the FOC and SOC (inflection point) have the same , then that inflection point is a stationary inflection point. Example 2: prove the following function has one inflection point, and that it is a stationary inflection point = 1 =0 Then find any inflection points by setting the second derivative equal to zero 2 =0 2 If a single is both an inflection and stationary point, then it must be a stationary inflection point. Solution: find any stationary points using the FOC: = 3 1 zero, as then 3 0
2 2 3

+2=2

There is a stationary inflection point at (1,2).

Exercises: 1. Determine any inflection points for the functions below (Note: some functions do not have inflection points). ) = 3 + 5 2 2 + 1 ) = 3 3 + 7 13 13 3 ) = + 12 2 54 + 4 ) = 2 4 + 13 3 12 ) = 0.25 4 3 10 2 + 12 71 2 + 1 ) = 3 ) = 2 2 + 4 + 10 +3 ) = ln 2 9

+2

Plan: find any stationary points using the FOC

6.5 combining all theory Theory summary: The FOC finds the stationary point(s) of a function. : =0

Evaluating the second derivative at any stationary points, then applying the SOC finds the nature: 2 > 0 is a minimum 2 2 < 0 is a maximum 2 2 = 0 is a stationary inflection point 2 To find any inflection points, set the second derivative to zero and solve for :

=0

For the left side to equal zero, ( 1) must equal = 0. So if 1 = 0, = 1. There is only one stationary point at = 1. Expanding the brackets and applying the Quadratic Formula will give the same solution.

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2 =0 2 To find , substitute the respective into the original function.

A maximum at = 0 is flanked by minima at = 6 and = 6. To find the inflection points: 2 = 3 2 36 = 0 2 3 2 = 36 2 = 12 = 12 There are two inflection points; one at = 12 and another at = + 12. Having figured out the of all the important points, the can now be found using the original function (see if you get the same ): minimum at (6, 293)

Example 1: find the nature of all stationary and inflection points for the function = 0.254 182 + 31 Plan: use the FOC to find any stationary points: =0 Then evaluate the second derivative at these points, and apply the SOC. Finally, set the second derivative equal to zero to find any inflection points. Solution: use the FOC to find any stationary points: = 3 36 = 0 3 36 = 0 ( 2 36) = 0 So either = 0 2 36 = 0 Separate the second part into two answers: 2 36 = 0 2 = 36 = 6 The stationary points have = 0, = 6 and = 6. Find the nature of these points: 2 = 3 2 36 2 1. 2 0 =3 0 2 maximum 2. 2 6 = 3 6 2 minimum 2 3. 6 =3 6 2 minimum
2 2 2

inflection point at 12, 149 maximum at 0,31 inflection point at ( 12, 149) minimum at (6, 293) Sketching this function is quite simple; plot these 5 points, and at each minimum draw a small happy face, and then at each maximum draw a small sad face:
(0,31)

( 12, 149) ( 12, 149)

36 = 36 < 0
(6, 293) (6, 293)

36 = 72 > 0

Then simply extend the lines to form a curve. Obviously, this sketch is not to scale, but as long as the general shape is correct and the important

36 = 72 > 0

points labelled, that is all that matters. The

125

 could also be found, but they are beyond the scope of this book. Example 2: determine the nature of any stationary points, as well as any inflection points for = 3 4 Plan: use the FOC and SOC to find the nature and location of any stationary point(s), then set the second derivative equal to zero to find any inflection points. Solution: the FOC using the product and rules: 1 = 3 2

the case, or 2 = 0 which is true when = 2. Thus there is an inflection point at = 2. Finally, the of the two points are obtained from the original function: 1 = 3 1 14 = 2 = 3 2 24 3 5 6 = 6

Remember index rules; that is why the s become denominators. There is a maximum at (1, 5 ) and an inflection point at (2, 6 ). The inflection point is not a stationary inflection point as there is no corresponding in the FOC.
Exercises: 1. Determine the nature of any stationary points for the following functions, then determine if there are any inflection points. ) = 3 4 + 5 3 2 2 14 ) = 4 3 4 ) = ln 5 + 3 + 2 3 ) = ln 8 + 7 + 1.5 0.5 2.75 ) = 4 2 + 4 + 12 5+ 2. Sketch the following functions after the nature of all stationary points and inflection points have been found. ) = 3 + 7 ) = 5 3 2 + 5 ) = 5 4 3 3 + 12 2 8 + 18
6 3

= 1

Substituting into the product rule: = 3 4 + 3 1 4 = 3 4 1 = 0 There are two possibilities: 1. 3 4 = 0, which is not possible, as this exponential never crosses the . 2. 1 = 0 therefore = 1.

There is only one stationary point. To determine the nature of this point, find the second derivative (using the product rule on above): = 3 1 4 1 + 1 3 4 Simplify this to the extreme (easier to work with): = 3 4 1 3 4 = 3 4 1 + 1 = 3 4 2 Evaluate the second derivative at the = 1: 1 = 3 14 2 1 0.0202 0.0202 < 0 maximum To find any inflection points, set the second derivative equal to zero: = 0 3 4 2 = 0 For this to be true, either 3 4 = 0 which we know from our work with exponentials is never

6.6 applications profit Intro example: you have just finished your business degree and all you want to do is lie on the beach all day and not work. But you need to make money, so you open a small shop on the sand and you sell surfboards. You obviously want to minimise your time in the shop and also maximise your profits. Youve done a business degree so you sit down one day and determine the approximate demand function for surfboards to be = 350 5

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You purchase the surfboards from a supplier for $50 each, and it costs you $400/month to rent the sand from the local government. What price should you set to maximise your profits? This is a very common application of optimisation. Theory: the general form of profit is: = = Total revenue can also be simplified: = = If you sold 10 surfboards at $200 each, total revenue would be 10 $200 = $2000. But there is another layer: the quantity of goods sold depends on the demand for the goods. Thus depends on the demand function. To find profits, costs need to be defined. Theory: in general, total costs are represented by: = + = + Variable costs are usually represented by: = Where the constant is how much a single item costs from the supplier. Above, the $400/month to rent the area on the sand is a fixed cost, because it does not matter how many surfboards are sold, that $400 still needs to be paid to the local government. The variable costs are those costs which are affected when a good is sold. When a surfboard is sold at the beach, you as the owner would have bought that from a supplier. Theory summary: = =

= +

All functions are in terms of as profits are directly determined by the quantity of goods sold. To solve the above example: = Insert the demand function into the function to substitute away the and have in terms of : = 350 5 Simplify: = 350 5 2 are: = + = 400 + 50 The 400 is the rent, and the 50 is the cost of buying surfboards from the supplier (i.e. $50 for each surfboard multiplied by the quantity of surfboards sold, ). Now that both and have been found, the profit function can be determined. = = 350 5 2 400 + 50 = 350 5 2 400 50 = 52 + 300 400 Note: the function was written in brackets, to emphasise the negative sign goes into all terms inside that bracket. This is where many students screw up, so dont be one of them. The quantity of surfboards to be sold to maximise profit is found by determining the maximum of this profit function using the FOC and SOC: = 10 + 300 = 0 10 = 300 = 30 To make sure this is a maximum: 2 = 10 2

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2 30 = 10 < 0 maximum 2 Thus 30 surfboards need to be sold to maximise profit. However, as a supplier, you can never control how many surfboards you sell, but you can control the price. The demand function gives the price required to sell 30 surfboards per month, which maximises profit. = 350 5 30 = 350 5 30 30 = 200 The surfboards should be priced at $200 each. Lastly, how much profit will be made per month if 30 boards are sold? Using the profit function, because as its name implies, it determines profit: = 5 + 300 400 (30) = 5 30 (30) = 5 30 30 = 4100 Example 1: Mr Watkins opens a cake store called Sugar Overload, and he specialises in wedding cakes. He figures out his monthly demand is = 80 5 The rent for the bakery he works in is $500/month, and one cakes costs him approximately $100 to make. Find the number of cakes he needs to sell to maximise profit, the price per cake, and the profit he will make at this price. Plan: use the profit equation = Replace with where is the rearranged demand function ( in terms of ). Apply the FOC to find any optimal points, then apply the SOC to determine if it is a maximum. Substitute the optimal quantity back into the profit function to determine the maximum profit, then
2 2 2

into the rearranged demand function to get the price. Solution: the demand function needs to be rearranged to isolate : = 80 5 5

80 =

(5)( 80) = = 5 + 400 Substitute this into the equation: = . = (5 + 400). = 5 2 + 400 Find the function: = + = 500 + 100 Set up the profit function: = = 52 + 400 500 + 100 = 52 + 400 500 100 = 52 + 300 500 Apply the FOC to find any stationary points: = 10 + 300 = 0 10 = 300 = 30 Mr Watkins needs to make 30 cakes per month. To make sure this quantity will give maximum profit, the SOC must be used: 2 = 10 2 2 30 = 10 < 0 maximum 2 What price should Mr Watkins charge for each of these cakes? Using the (rearranged) demand function: = 5 + 400 (30) = 5(30) + 400

+ 300(30) 400 + 300(30) 400

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 30 = 150 + 400 = 250 Looking back to what the question is asking, if Mr Watkins sells 30 cakes at $250 each, the profit he will make is: = 52 + 300 500 (30) = 5 30
2

This is very similar to the previous section, except that instead of maximising profit, the profit function is simply set equal to zero. Example 1: find the break-even quantities for a firm with a profit function = 2 + 200 7500 Plan: set the profit function equal to zero and solve. Solution: set = 0: 0 = 2 + 200 7500 Use the Quadratic Formula: = = = = 2 4 2 200 (200)2 4 1 (7500) 2(1) 200 (200)2 4 1 (7500) 2(1) 200 10000 200 100 = 2 2 = 50

+ 300(30) 500

30 = 5 900 + 9000 500 = 4000 Thus Mr Watkins should sell 30 cakes per month at $250 each and he will make a maximum profit of $4000 per month.
Exercises (remember to prove they are optimal points): 1. A company manufacturing mining truck trays has a yearly demand of: = 0.05 + 200 200 + 20,000 If the costs labour and capital which average out to $15,500/ and fixed costs of $7,500/, determine: a) The yearly revenue function b) The annual cost function c) The annual profit function d) The maximum yearly profit attainable 2. A manufacturer of surfboards faces a monthly demand function of form: = 0.2 2 + 110 If costs of making a board are $60 and the factory has fixed costs of $745/, determine: a) The revenue function b) The cost function c) The profit function d) The maximum profit attainable 3. A company imports motorbikes from China and sells them onto consumers at an inflated price. If they purchase each motorbike for $5,000, and when on-selling the motorbikes, they face a domestic demand function of: = 0.1 + 15 2 0.1 + 13 ( 22) If there are no other costs, determine: a) The profit function b) The profit maximising quantity.

= 150 or

Thus the two break-even quantities are 150 and 50. Mathematically, these are simply the roots of the profit function:

2
(50,0) (100,0) (150,0)

6.7 applications break-even When a business breaks even, it means the revenues just meet the costs. This implies that at break-even, profit is zero. Theory: break even is when equals , which implies profit is zero. = 0

Example 2: A firm produces wide-screen TVs and their estimated demand is = 440 4 2

If they faces the increasing cost function = 0.5 2 + 1800 find the break-even output levels for this firm.
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Plan: find in terms of , then replace the profit equation = to find the profit function. Set this equal to zero and solve for break-even output levels. Solution: rearrange the function to isolate : = 440 4 2

2.

2 = 440 4 2 440 = 4 = 0.5 + 110 Replace the equation: = . = 0.5 + 110 = 0.52 + 110 Having and , the function can be formed: = = 0.5 2 + 110 0.5 2 + 1800 = 0.5 + 110 0.5 1800 = + 110 1800 To find the break even quantities, set = 0: = 0 2 + 110 1800 = 0 Use the quadratic formula to solve this quadratic: = = = 2 2 110 (110)2 4 1 (1800) 2(1) 4
2 2 2

3.

A manufacturer of mobile phones faces a monthly demand function of form: = 5 0.5+6 If costs of making a single mobile phone are $10 and the factory has fixed costs of $1412/, determine: a) The revenue function b) The cost function c) The profit function d) The break-even profit e) The maximum profit attainable A company imports cheap golf-clubs from China and sells them onto consumers at an inflated price. If they purchase the golf-clubs for $5 each, and when on-selling the clubs, they face a domestic demand function of: = + 800 700 If there are no other costs, determine: a) The profit function b) The break-even quantities. c) The profit maximising quantity.

6.8 applications marginal and average values Theory: the average of a group of variables (e.g. cost) is the sum of all the individual variables (e.g. sum all the costs) divided by the number of units (e.g. the number of units sold). The marginal value of a variable is the addition to the total from an extra (marginal) unit. In mathematical terms: =

It is easier to remember that whenever you read the word marginal, it means the derivative. For example, the average output of labour is the total output divided by the number of workers. Similarly, marginal productivity of labour is the additional output obtained from an extra (marginal) person being employed (which is found using the first derivative). Intro example: a firm manufactures wooden cabinets in a small factory. When the firm hires the first worker, that worker produces three cabinets per day. The firm then hires another worker, and

110 4900 110 70 = 2 2

Thus the firm breaks even at = 90 or = 20.

Exercises (remember to prove they are optimal points): 1. A company selling financial services (e.g. financial planning) has a monthly demand for the services (on a per minute basis) according to the function: = ln 7 + 130 If the costs are commissions ($100/) and fixed costs of $500/, determine: a) The revenue function b) The cost function c) The profit function d) The break-even profit e) The maximum profit attainable 130

these two workers, together, produce eight cabinets (as they are specialising: one cuts the timber, the other sands it etc.). The firm hires another person, and now the three employees produce 12 cabinets. When one worker wants to use the saw, another worker is using it. After hiring yet another worker, all four people make 14 cabinets. Hiring any more workers will not at all increase production, as some of them are always waiting to use the equipment. In summary: Worker 1:
o o = = 3
1 3

1.

2.

3.

There are three distinct regions: 1. When output is increasing at an increasing rate (i.e. convex). 2. When output is increasing at a decreasing rate (i.e. concave) 3. When output begins to fall. The point at which it changes from convex to concave is the inflection point. This theory is

= 3

Worker 2:
o o = = 4
2 8

known, in general terms, as the Law of Diminishing Marginal Returns. The theory of marginal and average values can be

= 8 3 = 5

Worker 3:
o o =
12 3

=4

applied to mathematical functions. Example 1: find the average cost and marginal cost functions if the total cost function is 1 5 = 3 + 2 + 50 3 2 Plan: divide the function by to get average cost, and differentiate with respect to to get marginal cost. Solution: for average costs: =

= 12 8 = 4

Worker 4:
o o
14 12 8

14 4

= 3.5

= 14 12 = 2

3 1 2 3 4

1 3 5 2 + 2 + 50 = 3 1 5 50 = 2 + + 3 2 For marginal costs: =

Economic theory: as more labour (or other input) is added to a production process, output initially increases greatly. However, past some point, additional labour adds less and less to total output. Eventually, no additional output can be obtained from additional labour (and in theory, output may start to fall).

= 2 + 5

131

Example 2: for the given function, find 1. the point where marginal costs are at a minimum. 2. an expression for average cost. = Plan: 1. differentiate to get . Then find the minimum of the marginal cost function using FOC; make sure it is a minimum using the SOC. 2. Average cost
is

= 3 + 4 + 102 + 20 Plan: remember is the independent variable and the dependent variable. The inflection point needs to be found (as it is at this point where the function changes from increasing at an increasing rate to increasing at a decreasing rate). We know from Section 6.4 that this is done by setting the second derivative equal to zero. Solution: differentiate the function = = 32 + 4 + 20

3 3 2 + + 3 + 7 100 10

Solution: differentiating : 3 2 6 = = + 3 100 10 To find where marginal cost is at a minimum, the FOC must be applied to the marginal cost function: 6 6 = =0 100 10 Solve this for : 6 6 = 100 10 = 10 To prove this is a minimum: 2 6 = > 0 mimimum 2 100 The at this point is: 10 3 3 10 = + 10 100 10 An expression of average costs is: 3 3 2 100 + 10 + 3 + 7 = = = 3 7 + 3 + 100 10
2 2

Finding the inflection point of an original function is the same as finding the maximum/minimum for the first derivative (Chapter 5). So using the FOC on the function: 2 = 2 = 6 + 20 = 0 Solving this gives: 6 = 20 = 20 3.33 6

Thus between the third and forth unit of labour, the productivity of labour changes from increasing at an increasing rate to increasing at a decreasing rate. Example 4: find the point where average costs are equal to marginal costs, for the cost function: = 0.02 3 36 2 + 432 Plan: find and , then set them equal to each other. Solution: = = = = 0.06 2 1.44 + 8.64 0.02 3 0.72 2 + 8.64

+ 3 10 + 7

10 = 10 30 + 30 + 7 = 17

Example 3: find the level of output when productivity of labour changes from increasing at an increasing rate to increasing at a decreasing rate, for the production function:

= 0.02 2 0.72 + 8.64

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Set = :
0.062 1.44 + 8.64 = 0.02 2 0.72 + 8.64

6.9 differentiation and elasticity Before reading this section, revise the concept of elasticity in Chapter 2. Remember that the formula for elasticity is either: = 0.04 0.72 = 0 % % =

Bring everything onto one side: 0.04 2 0.72 = 0 Either factorise out or use the quadratic formula to solve for :

The formula on the right can be rewritten as: =

So either: 1. = 0, or 2. 0.04 0.72 = 0 0.04 = 0.72 = 18 Marginal cost is equal to average cost when = 0 and when = 18.
Exercises: 1. Sketch the function of marginal productivity of an extra lawn mower (i.e. capital) for a lawn mowing firm with four employees. Justify your interpretation. Initially the firm has no lawnmowers. 2. Find expressions for the marginal and average costs of the following functions. ) = 152 ) = 163 + 122 + 5 ) = 0.05 0.1+4 3. Find the marginal productivity of capital in the following production functions: ) = 14 1.5 ) = 0.01 41 ) = ln + 1 4. For the revenue and cost functions: = 2 257 + 12,222 = 5,000 + 180 a) Determine when marginal revenue and marginal costs are equal. b) Find the profit function, and find the quantity where profit is maximised. c) Compare the answers from a) and b) above. 5. For the following functions, find where the average product of labour is equal to the marginal product or labour. ) = + 5 2 ) = 3 202 + 125 ) = 5 2

This makes finding elasticities a great deal easier and allows us to find elasticities of non-linear functions. Example 1: find and interpret the elasticity of supply for the supply function = 2 + 6 when output is 50 units. Plan: use the elasticity formula: =

Differentiate the supply equation, then substitute into the elasticity equation. Find by substituting = 50 into the supply equation. Solution: differentiate the supply equation: = 2 + 1 Substitute this into the elasticity formula: = 2 + 1 [2 + 1] =

Find when = 50 from the supply equation: = 2 + 6 50 = 2 + 6 0 = 2 + 56 Solve for using the quadratic formula: = = = 2 4 2 1 12 4 1 56 2 1 1 225 2

= 8 = 7

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Price can never be negative so disregard = 8. Price is therefore = 7. Substitute = 7 and = 50, into the elasticity formula: = = [2 + 1] 2 7 + 1 (7) (50)

Differentiate with respect to (the opposite of what is required, as the derivative of with respect to is needed for the elasticity formula): = 0.005 2 + 5 = 0.01 0.05 Inverting the whole of both sides of this last equation gives the derivative that is required: 1 = 0.01 0.05 Substitute everything into the elasticity formula: = 1 0.01 0.05

= 2.1 Take the absolute value of 2.1 (it is still 2.1) and apply the elasticity rules; the interpretation is that this good is elastic in supply. That is, if price was to increase by, say 10%, supply would increase by 21%.

Having been given = 480, is obtained from the rearranged demand equation: = 0.005 + 5 = 823.875 Substitute = 823.875 and = 480 into the elasticity formula above: = 1 823.875 0.01 480 0.05 480
2

Example 2: you have just got a new job at a big finance firm, and your boss gives you the following demand function of one of his clients products (a type of computer): 200 + 400,000 = + 5
2

+ 2000
2

= 0.005 480 + 5

+ 2000

He wants to test your skills so asks you to find the elasticity of demand at the current sales of 480 computers/month, and what it means. Plan: use the elasticity formula: =

0.354 This means demand is inelastic. That is, if price is increased by a certain percentage, quantity demanded would be reduced by only 0.354 of that percentage.
Exercises: 1. Determine the elasticity of the following demand functions at the shown output. Interpret the result. 1 ) = + 48 = 20 4 2 ) = + 71 = 23 7 ) = 0.27 + 77 = 13 ) = 2 + 4 + 54 = 5 2 ) = 0.25 + 4 + 121 = 28 2. Determine the elasticity of the following supply functions at the price indicated. Interpret the result. 3 ) = = 2 0.7 2 ) = + 5 = 13 ) = 7 ln + 5 + 3 = 6

Differentiate the demand function, then substitute it into the above equation. Find when = 480 from the demand function. Solution: rearranging this demand function to have by itself is very difficult (try for yourself using the reverse of BIMDAS). To make things simpler, isolate the other variable (which is a lot easier): 200 = + 5 =
2

400,000

+ 5 2 400,000 200
2

= 0.005 + 5

+ 2000

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) )

= 3+4 + 19 = + 5 2 + 4 + 4

= 14 = 15

% = 20 + 13.8 = 6.2% For a 20% price increase, total revenue will increase by 6.2%. Even though the price has increased, demand is inelastic so this means that for a given price increase, quantity demanded will be reduced less than the increase in price so overall revenue will increase. But this is not always the case. Example 2: determine the percentage change in total revenue if the demand function for a retail good is = 0.5 + 54 when initial quantity sold is 20, and the owner wants to raise prices by 5%. Plan: find the elasticity of demand at = 20 using =

6.10 elasticity and total revenue Most retail businesses have a relatively constant supply curve (especially when they import goods). Such firms focus mainly on maximising total revenue, which is determined by the quantity of goods sold, which in turn comes from the demand function. The elasticity concept can be used to determine if changes in price will lead to an increase (or decrease) in total revenue. Theory: given the definition of total revenue: = Take the log of the whole of both sides: log = log log = log + log Taking the logs of an equation is a good approximation to the percentage change of the two sides, so: % = % + % Since from elasticity, % and % can be found easily, then the % can also be determined. Example 1: given the elasticity of demand is 0.69, and prices rise by 20%, by what percentage will total revenue change? Plan: find % from the elasticity formula, then applying the % formula. Solution: % % % 0.69 = 20 = % = 20 0.69 = 13.8% Then applying the percentage change in total revenue formula: % = % + %

Then use the original definition of elasticity to determine % = % %

which can then be used in the % formula % = % + % Solution: find the elasticity: = 0.5 20

To find , use the demand equation: 20 = 0.5 + 54 = 20 54 = 68 0.5 68 = 1.7 20

This gives an elasticity of: = 0.5

This means that demand is elastic at this point (why?). Find the %: 1.7 = % 5

% = 1.7 5 = 8.5% Finally, apply the % formula:

135

% = 5 + 8.5 = 3.5% So for a 5% price increase, there would be a fall of 3.5% in total revenue. These last two examples show that for a price increase, total revenue can either increase or decrease. It all depends on the elasticity of demand. In Example 2, the percentage change could have been found using the original demand equation, however this is difficult. Theory: for an inelastic demand function: A price increase will increase total revenue (the diagram below shows that as price rises from 1 to 2 , the area , which is also , increases. Initially, it is the red and green area, then after the price rise, it is the green and blue area. Since the blue area is larger than the red area, must increase). A price decrease will decrease total revenue (work through the same logic as above, but backwards).

2 1 2 1

When elasticity is equal to 1 (in absolute terms), a change in price will leave total revenue unchanged. Example 3: given the demand function = 0.42 + 77 and current sales of = 37, how will a 15% decrease in prices affect total revenue? Plan: find the elasticity of demand at = 37 using = % %

then use the original definition of elasticity =

to determine %, which can then be used in the % formula: % = % + %. Solution: find the derivative of the demand function: = 0.8 Find the value of when = 37 by rearranging

1 2 1

the demand equation: 37 77 = 0.42 40 = 2 = 100 0.4 = 10 Price must be positive, so = 10. Substitute this in to find the elasticity: = 0.8 10 37

For an elastic demand function: A price increase will decrease total revenue (in the diagram below, as price increases from 1 to 2 , the rectangle changes from the green and red, to the green and blue. Since the red rectangle is larger than the blue one, must decrease). A price decrease will increase total revenue (using the same diagram, work the other way to make clear that a decrease in price will increase ).
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= 0.8 10 =

80 2.162 37

To find % when price decreases by 15%, use the original elasticity formula: 80 % = 37 15 80 37

1.

% = 15

1200 % = 32.43% 37 Finally, apply the % formula: % 15% + 32.43% = 17.43% Thus, total revenue will increase by approximately 17.43% for a 15% price decrease.

2.

3.

4.

Exercises:

Given the following elasticities, determine how will change for a 17% price decrease. ) = 0.4 ) = 1.9 ) = 0.9 ) = 1.01 ) = 1 For the weekly demand function 1000 2 = 3 0.6 and sales of 55 units per week, determine how a 5% price decrease will affect total revenue. For the demand function = 2 + 10 3000 and sales of 33 units per week, determine how a 24% price increase will affect total revenue. For the monthly demand function = 5 ln 2 + 5 + 20 And sales of 5 units per week, determine how a 15% price increase will affect total revenue.

chapter six summary

Optimisation is the process of finding an optimal point, with that point usually being a maximum or minimum. A global optimum is a point that is the optimal point over the entire number range (i.e. ). A local optimum is an optimal point only over a small range around that point. The gradient at any maximum or any minimum is always zero. The First Order Condition (FOC): =0 Then solving for the unknowns. The nature of an optimal point is found using the Second Order Condition (SOC): 2 >0 2 2 <0 2 2 =0 2 Any inflection point is using the SOC: 2 any : =0 2 Inflection points are points of a function where a function changes from concave to convex (or vice versa). The two types of inflection points: 1. Stationary inflection points have a gradient of zero at the inflection point. 2. Non-stationary inflection points do not have a gradient of zero at the inflection point. The general form of profit is: = Total revenue can also be simplified: = In general, total costs are represented by: = + Variable costs are usually represented by: = All functions are in terms of as profits are directly determined by the quantity of goods sold. Break even is when equals , which implies profit is zero. = 0 = = As more labour is added to a production process, output initially increases greatly. However, past some point, additional labour adds less and less to total output. Eventually, no additional output can be obtained from additional labour (and in theory, output may start to fall). The point at which it changes from convex to concave is the inflection point. This theory is known, in general terms, as the Law of Diminishing Marginal Returns. % = % + % For an inelastic demand function: A price increase will increase total revenue A price decrease will reduce total revenue. For an elastic demand function: A price increase will reduce total . A price decrease will increase total . When elasticity is equal to 1 (in absolute terms), a change in price will leave total revenue unchanged.

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chapter six questions

1. Determine which of the following points are local/global maxima/minima: And a total cost function of the form: = 0.2 0.01+4 Determine: a) The total revenue function. b) The profit function. c) The output for maximum profit. d) The price corresponding to maximum profit. e) The maximum profit attainable. Determine the average and marginal values for the following functions: ) = 2 + 20 ) = 0.1 + 20 + 5 ) = 0.5 + 1 ) = 0.01 2 ln + 1 ) = 0.1 5 + 5 + 10 ) = +1 For the profit function = 33 + 752 Determine the values of where average profit is equal to marginal profit. Determine when the average product of labour is equal to the marginal product of labour, for the function: = 50.5 + 2 + 4 A firm manufacturing microwave dishes determines its profit functions to be = 1.53 + 502 Determine: a) An expression for average and marginal profit. b) The break-even quantities. c) The quantity corresponding to maximum profit. d) The maximum profit attainable. e) The output level where average profit and marginal profit are equal. A production function has the form: 1 = 153 + 32 + 4 Determine the levels of labour where the marginal productivity of labour is double the average productivity of labour. Given the demand function 2 = 0.01 0.05+3 + 180 Determine and interpret the elasticity at = 8. Determine and interpret the elasticity for the following supply function, at output of 20 units: = 100 ln 0.1 + 4 + 0.9 The owner of a firm producing car rims wants to increase price by 5% from a level of = 20. Given the demand function is 100 = + 1 Determine if total revenue will increase or decrease with the 5% increase in price. For the following demand function = + 50 2 40 If output is at 4, and the owner of the factory wants to increase price by 25%. How will total revenue be affected? Give a numerical answer, and relate it

2.

8.

3.

4.

5.

6.

7.

Determine the FOC for the following functions: ) = 2 + 3 1 ) = 15 3 + 1 4 2 ) = 12 2 1 2 ) = 2 1 3 1 2 1 ) = + 1 Determine the nature of any stationary points for the following functions: ) = 1 + 3 ) = 3 + 3 2 45 + 18 ) = 2 +3 ) = 4 3 2 1 2 ) = +3 + 19 14.5 1 ) = 2 + 1 Find all stationary and inflection points for the following functions, and determine their nature where applicable: ) = 3 2 + 15 79 ) = 1 5 + 4 ) = + 3 2 1 ) = 4 ) = 2 1 2 ) = ln 4 3+2 A company has determined their profit function to be: = 1002 + 10,000 47,500 Find: a) The break-even quantities. b) The quantity that maximises profit. c) The maximum profit. A factory manufactures music players and sells them at $350. The factory faces a cost function of the form: = 0.22 + 40 Determine: a) The total revenue function. b) The profit function. c) The break-even quantities. d) The quantity for profit maximisation. e) The maximum profit. Sketch the profit function, and plot all the important points. A company faces a demand function of the form 1 = + 0.25 0.1

9.

10.

11.

12.

13.

14.

15.

16.

138

back to the elasticity obtained. Hint: to differentiate this function, the product rule has to be used within the product rule. 17. A firm produces top quality surfboards and has a demand function of the form: = 0.5 + 2500 Each surfboard costs $250 to make, and the factory in which they are manufactured has a rent of $1500. Determine: a) The total cost function b) The total revenue function. c) The profit function. d) The break-even quantities. e) The quantity for maximum profit. f) The maximum profit. g) The price per surfboard to attain this profit. h) The marginal profit function. i) The average profit function. j) Where the marginal and average profit functions are equal. If output is initially 1000, and the owner is thinking of raising prices by 10%, determine: k) The elasticity at = 20, and its interpretation. l) The extent to which total revenue would change, if the 10% price rise went ahead.

18. A firm produces sandstone sculptures, and has a demand function of the form: = 0.4 + 4276 Each sandstone sculpture costs $80 to make, and the factory in which they are manufactured has a rent of $200. Determine: a) The total cost function b) The total revenue function. c) The profit function. d) The break-even quantities. e) The quantity for maximum profit. f) The maximum profit. g) The price each sculpture is sold at, to attain this profit. h) The marginal profit function. i) The average profit function. j) Where the marginal and average profit functions are equal. If output is initially 4000, and the owner is thinking of raising prices by 25%, determine: k) The elasticity at = 24, and its interpretation. l) The extent to which total revenue would change, if the 25% price rise went ahead.

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Chapter 7

Multiple Variable Differentiation

Differentiation with more than one variable
7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.7 Additional Variables Simple Partial Differentiation Complex Partial Differentiation Second Order Partial Derivatives Application of Partial Differentiation Total Differentiation Optimisation with Many Variables Economic Applications 141 142 144 146 147 148 151 155 158 158

Chapter Seven Summary Chapter Seven Questions

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7.1 additional variables Theory: multivariable or multivariate simply means more than one variable. Multivariable functions means that a dependent variable is determined by two or more other variables. All the previous chapters have only had a single independent variable determining the dependent variable through a certain function: = The function could be quadratic, cubic, etc. Theory: the simplest multivariable functions have the form: = (, ) Where is a dependent variable, and it depends on two independent variables and . That is, is a function of and , and can also be written as: (, ) This is now a three-dimensional function (i.e. it is drawn on three axes):

Similar to a quadratic, the function above has a minimum which can be visually determined. Multivariable functions are very useful as they represent the real world much better. Most goods require many different inputs. For example, a block of chocolate needs cocoa powder, sugar, water, milk, heat to melt it, paper to wrap it, ink to print on the paper etc. Each one of these inputs has its own market; paper prices change up and down, cocoa prices might be high from low rainfall in South America etc. A very common economic function is called the Cobb-Douglas Production Function which is an

approximation for production of a good from the inputs of capital equipment (e.g. a factory) and labour. Theory: the Cobb-Douglas Production Function has the general form: = where the values of , and are all positive

Mathematically, an example of a multivariable function is: = 2 + 2 This is a multivariable equation ( is a function of and ). Because there are now three variables, these graphs are three dimensional in nature. The above multivariable function is the shape of a cup.

constants. A numerical example could be: = 50.4 3 0.6 Which specifies that the production of a certain good (e.g.
)

is a function of capital

(: tractors, storage sheds etc.) and labour (: people driving the tractors, fixing the sheds etc.). Obviously, there are other factors, such as rainfall, soil condition etc., but they are ignored for now.

141

Exercises: 1. List all the different variables that a baker needs to take into account when baking a cake. 2. Think of a few goods that that do not require many different types of inputs. What do they have in common? 3. Which of these are not Cobb-Douglas Production Functions? ) = 50.2 0.4 ) = 50.4 50.7 ) = 0.4

aircraft. This is the indirect effect of Boeing using more electricity. ELECTRICITY
direct effect
(cost of extra electricity)

indirect effect
(increase in metal costs)

BOEING

METAL MANUFACTURER

When talking about partial differentiation, any possible indirect effects are ignored, and assumed not to exist. This is a big assumption, and later in this chapter it will be removed. Theory: partial differentiation is finding the rate at which the dependent variable changes when an independent variable changes assuming all other variables are held constant. That is, it is assumed that the other independent variables do not affect the independent variable that is changing (even though in reality, they might). Partial differentiation is written in one of two ways: 1.

) )

50.7 0.4 = 30.4 0.6 =

7.2 simple partial differentiation An intuitive explanation of partial differentiation is best to get your head around this concept. Intro example 1: two factories, an aircraft manufacturer (such as Boeing) and a metal manufacturing company (such as Metalex), are located close to one another; Metalex supplies Boeing with the metal sheeting to cover the aircraft. Both companies require electricity to run their large production factories (Boeing to build the planes, and Metalex to create the highest quality metal) but the electricity system cannot handle any more current (electrical flow). Say Boeing wanted to introduce electrical heating to their factory. That would mean more electricity would need to flow to Boeing, costing them more. Assuming prices of electricity are constant, this is the direct effect of increasing the use of electricity (that is, the extra cost of using more electricity for heating). What is not being taken into account is that when Boeing increases their use of electricity, this will reduce the amount of electricity available for Metalex, making the metal more expensive. Metalex must then charge Boeing more for the metal, making it more expensive to produce

This is read as the derivative of with respect to holding everything else constant. The curvy dees are deltas and are not the same as normal s used in differentiation. 2.

In this method of defining a partial derivative, the subscript is the variable being differentiated, and it is assumed that all other variables are constant. Intro example 2: partially differentiate with respect to for the function = + 5 7 The has to be treated as if it were a constant, even though it obviously is not:

142

 = 1 + 5 The 1 comes from differentiating with respect to treating as if it were a constant; if 3 had to be differentiated, the answer would be 3 1 = 3. Similarly above, the is treated as if it were a 3, but in fact it is still . An absurd example might help. Intro example 3: find the partial derivative of with respect to for the function: = This equation has lots of variables, all multiplying one another, but all that is relevant is the , as everything else is held constant. = You may be wondering why the answer is not zero, as everything else is a constant? The reason is that these constants are multiplying . If they were added to , then the derivative would be zero. Theory: to partially differentiate a multivariable function with respect to a single variable, differentiate the function with respect to that variable while treating all other variables as constants. Example 1: find the partial derivative with respect to for the function = + + 3 Plan: differentiate using the normal rules, but assume everything other than is a constant. Solution: = 2 2 + 3 The first part of the original equation has 2 and all the other variables 2 are assumed to be constant. Thus 2 is differentiated and then multiplied by the remaining constants. The
2 2

second part of the original equation is and since there are no s and differentiating a constant (remember, everything other than an is assumed to be a constant), gives zero. The last part of the original equation is 3, so it is differentiated to give the constant 3. Example 2: find the partial derivative with respect to in the following equation = 2 9 4 5 + 4 8 7 + 3 Plan: simplify the numbers then differentiate using the normal rules, but assume everything other than is a constant. Solution: simplify the numbers: = 180 2 + 224 + 3 Differentiate using the normal rules: = 2 180 + 3 = 360 + 3 Look back at the last two examples. The second example is identical to the first, except the variables (other than ) are replaced with actual numbers. If Example 2 was done without simplifying first, the answer would be: = 2 9 4 5 + 3 Which is very similar to the answer in Example 1. It is very important you understand that the other variables are held constant when partially differentiating. Example 3: partially differentiate with respect to and then with respect to for the function = 2 3 3 2 + 5 7 Plan: for / differentiate the function holding constant. Then for / differentiate the function holding constant. Solution: finding /: = 2 3 3 2 + 5 In the original function:

143

The first red section: differentiate 2 then multiply by the rest of the red section (i.e. ) giving: 2

= 4 3 + 2 + 2 It is vital you understand this simple partial differentiation before moving on.
Exercises: 1. Find both first order partial derivatives for the functions: ) = 2 + 3 2 + 7 ) = 3 2 + 3 2 + 3 7 ) = 5 + 2 + 11 ) = 2 2 2 3 + 1 3 ) = 2 2 + 2 2. Differentiate the following with respect to both and (each individually): ) = 3 7 3 + 5 + 5 3 ) = 2 2 + 7 2 ) = 15 2 3 15 2 3

The first blue section: differentiate 2 then multiply by everything else in that section (i.e. 3 3 ) giving: 3 3 2

The second red section: differentiate the , then multiply by everything else in that section (i.e. 5) giving: 5.

The second blue section: there are no s so the derivative of a constant is zero.

Put these together and simplify: = 2 6 3 + 5 Now for /, differentiate the original equation holding as a constant: = 2 9 2 2 7 Figure out how this last answer was obtained, one section at a time. In the above example, you may have noticed that when looking at each section, was isolated and differentiated, then everything else was brought back in. This is a good technique to use, but only use it where there are no division signs. Example 4: find both partial derivatives of = 2 + 2 3 + 2 + 15 Plan: for / differentiate the function holding constant. Then for / differentiate the function holding constant. Solution: for /: = 3 2 2 2 + 2 3 = 6 2 2 + 2 3 And for /: = 2 2 3 + 2 + 2
3 2

7.3 complex partial differentiation This section applies the more complex rules (product, chain etc.) to partial differentiation. Example 1: find both partial derivatives of = 2 + 3 3 4 + 3
2

Plan: for / differentiate the function holding constant. Then for / differentiate the function holding constant. Use the product rule as the base rule, with the chain rule within it. Solution: for /: = 1 2 + 2 1 1 = 2 2 = 2 3 4 + 3 1 . 3 4 3 = 24 3 3 4 + 3 The 2 was obtained by using the chain rule, and treating as a constant. The is still there as due to the chain rule, the bracketed terms are rewritten with the power reduced by one. For the solution, substitute into the base (product) rule:

144

 =
2 3 4 + 3
2

2 + =
+ 24 3 3 4 + 3 2 + 3

6 2 + 2

Further simplify the square brackets: 2 + 2 5 2 6 = 2 For /: = []2 = 3 2 + = 3 2 + = 1

2 2

And for /: = 1 2 + 2 1 1 2

= 3

2 4 1

= 2 3 + 3 (1) = 2 3 4 + 3

Substitute this back into the base function: =

3 2 3 4 + 3
2

+ 2 3 4 + 3 2 + 3

Substitute into the base (quotient) rule:

3 2 + =
2

Both the solutions above can be simplified by factorisation (see Chapter 1 and 5). Example 2: find both partial derivatives of = 2 +
3

(1) 2 + 2

Factorise and simplify the top (do it yourself!): 2 + 2 3 2 + 2 = 2 Make sure you fully understand the last two examples before trying the following exercises.
Exercises: 1. Differentiate with respect to both and (individually) using the Chain Rule: ) = + 3 ) = 3 2 + 4 ) = 7 2 + 7 2 5 ) = 2 2 + 2 4 ) = 3 + 2 2 3 3 2. Differentiate with respect to both and (individually) using the Product Rule: ) = 2 + 5 3 + 7 2 ) = 2 + 2 + ) = 3 2 3 + 1 1 ) = 3 2 + 4 3 3 4 4 ) = + 2 3. Differentiate with respect to both and (individually) using the Quotient Rule: + ) = 3 2 2 3 ) = 2 2 2 2 ) = 15 + 1 4 4 ) = 1 1 + 2 ) = 1 2

Plan: for / differentiate the function holding constant. Then for / differentiate the function holding constant. Use the quotient rule as the base rule, and the chain rule within the quotient rule. Solution: for /: = []2 = 3 2 + = 1 The chain rule was used to obtain the derivative of the top. Remember the chain rule: bring the power out front of the brackets, take one off the power, then multiply by the derivative of the inside of the brackets. Substitute everything into the Quotient Rule: 6 2 + = Factorise 2 +
2 2 2

2
2

= 6 2 +

(1) 2 + 2

out of the top:

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4.

Differentiate with respect to both and (individually) using the and ln rules: 2 ) = ) ) ) = = ln 2 = ln 1
3 3 2 2 2

= 7 6 3 3 2 Differentiate this equation with respect to again: 2 = 42 5 3 2 2 This is very similar to what was learnt in Chapter 5, however there are two more second order partial derivatives. These are called mixed partial derivatives. Theory: mixed partial derivatives are found by differentiating with respect to one variable first, then differentiating with respect to the other variable. They are denoted in a similar way to the straight second order partial derivatives: 2 2 , ,

5.

) = ln +3 1 Differentiate with respect to both and (individually) using any rules: 2 ) = 1 + 3 1 3 ) = 5 2 ln 15 + ) ) ) = ln 15 + + 2 = ln 3 2 4 = 1

1
2

7.4 second order partial derivatives This is a very simple concept. In theory it is the same as a normal second derivative. Theory: the second order partial derivative is simply partially differentiating the original function twice. The second order partial derivative is denoted in one of two ways: 2 2 , 2 2 ,

Example 1 cont: finding both mixed partial derivatives: 1. Differentiate with respect to first: = 3 2 7 3 + 2 Then differentiate with respect to : 2 = 3 7 2 6 3 = 21 2 6 3 2. Differentiate with respect to first: = 7 6 3 3 2 Then differentiate with respect to : 2 = 7(3) 6 2 3 = 21 2 6 3 Notice that the two mixed partial derivatives are the same. This is always the case, however it is a good idea to always write out the theory. Theory: mixed partial derivatives are the same, no matter which way they are found. =

Example 1: find all second order partial derivatives for the function = 3 7 3 + 2 2 Plan: differentiate the function with respect to twice, then differentiate the function with respect to twice. Solution: differentiate with respect to : = 3 2 7 3 + 2 Differentiate with respect to again: 2 = 6 7 2 For the second order partial derivative of :

146

The following example has minimal narration so use scrap paper to see if you can get the same answers. Example 2: find all second order partial derivates for the function 1 = ln + 3 + 5
2 4

48 2 12 48 + 8+ 5 5 = 2 1 2 + 3 + 5 24 4 2 + 1 +5 3
2

For the mixed second order partial derivative: = =

Plan: find the first order partial derivatives, then differentiate again to find the straight second order partial derivatives. Then find the mixed second order partial derivatives. Solution: for the first order partial derivatives, the ln rule is used, with the chain rule within it: 1 4 2 + 3 + 5 = 4 1 2 + 3 + 5
2 3

Exercises: 1. Determine all four second order partial derivatives for the following functions (and make sure = ): ) = 5 + 3 3 ) = 12 2 + 2 + 2 2 + ) = ) = +4 ) = ln 7 2 + 4 Determine all four second order straight partial derivatives, and make sure that the mixed second order partial derivatives are the same. ) = 5 + 4 3 ) = ln =
2 2 +5 2

2.

8 1 2 + 3 + 5
3

1 3 4 4 2 + 3 + 5 = 4 1 2 + 3 + 5 12 4 = 1 2 + 3 + 5

1 1 +

3 2 + 1

7.5 application of partial differentiation

The Cobb-Douglas Production Function is a very common application of partial derivatives. Theory: the partial derivative of the Cobb-Douglas Production Function gives the marginal product of labour (/) and the marginal product of capital (/). The higher the value of the marginal product, the greater the increase in output from an extra unit of that input. Economic Theory: returns to scale are defined as the extent output changes when inputs are changed by a certain ratio. For the Cobb-Douglas Production Function =

For the straight second order partial derivatives (using the quotient and chain rules): 1 8 + 3 + 5 2 8 = 2 1 2 + 3 + 5
2

8 8 + 3 + 40 = 2 1 2 + 3 + 5
2
5

48 =

1 + 3 + 5 3 4 12 4 2 1 2 + 3 + 5
2

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If: 1. + < 1 then there are decreasing returns to scale; if inputs are doubled, output will less than double. 2. + = 1 then there are constant returns to scale; if inputs double, output will double. 3. + > 1 then there are increasing returns to scale; if inputs double, output will more than double. Example 1: find the marginal productivity of labour for the function = 40.3 0.7 when = 30 and = 46. Also determine the returns to scale. Plan: partially differentiate with respect to . Add the indices to determine the returns to scale. Solution: = 4 0.3 0.7 0.7 = 1.20.7 0.7 Substitute = 30 and = 46: = 1.2 30 unit of labour. Since the addition of the indices is 0.3 + 0.7 = 1, there are constant returns to scale. Example 2: find the marginal productivities of labour and capital for the following production function = 12
0.5 0.75 0.7

= 60.5 0.75 = 6 460.5 710.75 21.64 2. . And for marginal productivity of capital: = 90.5 0.25 = 9 460.5 710.25 21.03 2. . Thus for an extra unit of labour, output would increase by approximately 21.64 units, and for an extra unit of capital, output would increase by approximately 21.06 units. In this last example, if the cost of a unit of labour and a unit of capital were the same, it would be better to employ more labour, as they will add (slightly) more to output than capital.
Exercises: 1. Determine the marginal productivity of labour and capital in the following Cobb-Douglas Production Functions and also the returns to scale. ) = 40.5 0.5 ) = 130.6 0.4 ) = 12.50.7 0.4 ) = 750.8 0.5 ) = 0.80.6 0.3 ) = 1000.2 0.9 ) = 5.730.79 0.41 ) = 2.1180.812 0.417 If you had the option of increasing either labour or capital by one unit in each of the above questions, which one would you increase? Why?

46

0.7

1.619 3.

Output will increase by 1.619 units for an extra

7.6 total differentiation At the beginning of the chapter, the electricity example was used to demonstrate the theory of partial differentiation. Boeing had installed electric heaters in their plant, which reduced the amount of electricity available for the metal manufacturer Metalex. Boeing assumed that their decision would not affect costs other than the use of electricity (i.e. direct effect). However, Metalex will not produce as much metal, so will charge Boeing more per sheet of metal. This is the indirect

at a labour level of 46 and a capital level of 71. Plan: differentiate with respect to then substitute in = 46, = 71 to find the marginal productivity of labour. Similarly for . Solution: for marginal productivity of labour:

148

effect of using more electricity. Adding the direct and indirect effects gives the total effect; this is what total differentiation finds. As a manager, better decisions are made when variables are not assumed to be constant. Knowing the total effect is better than pretending variables are constant, when in reality, they are not. Theory: the following is a formula that allows us to move from partial differentiation to total differentiation. The total derivative equation is: = +

electricity and metal into the total derivative function. Solution: the partial derivatives are: = 10 + 10 6 = 5 2 4 + 3 The small change in is = 5 and the small change in is = 3. It is negative because it is a decrease. Substitute the partial derivatives into the total derivative equation: = +

It is much simpler than it seems.

Partial derivative with respect to very small change in

= 10 + 10 6 + 52 4 + 3

Further substitution of = 5 and = 3:

= 10 + 10 6 (5) + 5 2 4 + 3 (3)

=
very small change in

+
very small change in

Finally, substitute the original values of = 150 and = 400: = 10 150 400 + 10 150 6 5 + 5 150
2

Partial derivative with respect to

In the Boeing example, the variables are: total costs (), cost of electricity () and the cost of metal (). Note: this equation finds the gradient function of a multivariable equation. For small changes in either or both of the input variables, this equation is a good approximation. When the changes are large, then the approximation will be less accurate. For the reason, consult a second year text book dealing with linear approximations and errors. Example 1: for the following function, determine the extent total production will change if electricity use increases by 5 units from 150, and metal prices decrease by 3 units from 400. = 5 2 + 5 2 22 + 3 6 + 550 Plan: partially differentiate the function , then substitute the partial derivatives, the changes in electricity and metal, and the original levels of

4 400 + 3 3

= 3,007,470 332,709 = 2,674,761 Production will increase by approximately two and a half million units. This is still an approximation. To get the actual change in production, find the production at the original input level of = 150, = 400 and then the production at the new input level of = 155, = 397 (these numbers come from the original plus the change in the inputs; = 150 + 5, = 400 3). Finding the difference between these two production levels gives the precise change in production (actually do it and you should get 2.702million units (3d.p.)). The total derivative approximation method is used because often, the function (the cost in this example) cannot be isolated easily, but the partial derivatives can easily be found with other

149

techniques. You will learn this in second year, if you continue with economics. Theory: to get the actual change in a multivariable function, find the value of the function at the New variable level then subtract the value of the function at the Original variable level: = , , Example 2: find the approximate change in output for the production function = 50.6 0.5 when the original levels of the inputs are = 500, = 700 and when increases by 2 units, and decreases by 3 units. Also, find the exact change in . Plan: find the partial derivatives of , then substitute everything into the total derivative function to solve for . To find the actual change in , find the difference between the values of = 502, = 697 and = 500, = 700 . Solution: the partial derivatives are: = 30.4 0.5 = 2.50.6 0.5 Substitute these into the total derivative equation: = +

5508.1863
= = 502, = 697 = 500, = 700

= 5508.1863 5506.8219 = 1.364 (3. . ) Example 3: using the following Cobb-Douglas Production Function = 400.7 0.6 with the current use of labour at 400 units, and the current use of capital at 300 units, find an approximation for the change in production when labour is increased by 1% and capital is reduced by 0.5%. Plan: use the percentage changes in and to find the actual changes (in units). Partially differentiate the function, then substitute everything into the total derivative equation. Solution: The actual changes in and are: 1 400 = 4 100 0.5 = 300 = 1.5 100 = the partial derivatives are: = 40 0.7 0.3 0.6 = 280.3 0.6 = 40 0.6 0.7 0.4 = 240.7 0.4 Substitute these along with = 400, = 300, = 4 and = 1.5 into the total derivative equation: =

= 30.4 0.5 + 2.50.6 0.5 Then substitute = 500, = 700, = 2 and = 3: = 3 500
0.4

= 280.3 0.6 4 + 240.7 0.4 1.5 700

0.6 0.5

2
0.5

= 28(400)0.3 (300)0.6 4 3 + 24(400)0.7 (300)0.4 1.5 = 324.96 (2. . ) This is the approximate change in quantity from

+ 2.5 500 = 1.416 3. . For the actual change:

700

= 500, = 700 = 5 500 = 502, = 697 = 5 502

0.6

700 697

0.5

changes in both inputs. To determine the exact change, find ( = 400, = 300) then subtract it from = 404, = 298.5 . Do this

5506.8219
0.6 0.5

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calculation, and see if you get = 322.16 2. . .

Plan: use the FOC by setting both partial derivatives equal to zero, then solving for and . Solution: using the FOC: = + 2 3 = 0 = + 1 = 0 : = 2 + 3 Substitute : 2 + 3 + 1 = 0 2 + 3 + 1 = 0 = 2 Substitute back into : = 2 2 + 3 = 1 There is one stationary point at = 2, = 1. A point in a three dimensional graph also requires the value of the dependent variable (i.e. the ). This is found from the original function: 2, 1 = 0.5 2 + + 2 3 + 5 = 0.5 1 = 2.5 Thus there is a stationary point at = 2, = 1, = 2.5 or in coordinate form , , = 2, 1, 2.5 . The question now becomes: is this stationary point a maximum or a minimum (or something called a saddle point)? This is unknown yet, but firstly, what is a saddle point? Theory: a saddle point is a stationary point that is neither an overall maximum nor an overall minimum. It looks like a saddle:
2

Exercises: 1. For the function = 0.3 2 + 0.5 2 Determine an expression for the total derivative (leaving any unknowns as variables). 2. The following production function approximates the output of a farm: = 4.75 0.7 0.3 Determine: a) An expression for the total derivative. b) An expression for the total derivative when = 50, = 70. c) The approximate change in output when increases by 1unit and increases by 2 units. d) Find the actual change in output. (Hint: find the output at the two different , combinations) e) The returns to scale. 3. The following is a production function which approximates the production of a cabinet maker: = 53.50.71 0.32 Determine: a) An expression for the total derivative. b) An expression for the total derivative when = 300, = 140 c) The approximate change in output when decreases by 2 units and increases by 1 unit. d) Find the actual change in output. (Hint: find the output at the two different , combinations) e) The returns to scale.

Use simultaneous equations to solve for and :

+ 2 1 + 2

3 2 +5

7.7 optimisation with many variables Partial derivatives play an important role in finding the optimal points of functions. Similar to optimisation in Chapter 5, optimisation for multivariable function has first and second order conditions, but with some modifications. Theory: the First Order Condition (FOC) is to set all first order partial derivatives to zero. = 0 and =0

Then solve for and using simultaneous equations, to find any stationary points. Example 1: find the stationary point(s) for = 0.5 2 + + 2 3 + 5

151

Plan: evaluate the straight second order partial derivatives at = 2, = 1. Solution: straight second order partial derivatives: 2 =2>0 2 2 =1>0 2

Look closely: in one direction there is a minimum, but it the other direction, there is a maximum. This is a stationary point, but it is not an optimal point. Theory: to find out whether a stationary point is a maximum, a minimum or a saddle point, the Second Order Condition (SOC) is used: Find the value of all straight second order partial derivatives at the point(s) obtained from the FOC, then apply the following: 1. The point is a possible maximum if: 2 2 < 0 <0 2 2 That is, if both second order straight partial derivatives are less than zero, it is a possible maximum. 2. The point is a possible minimum if: > 0 >0 2 2 That is, if both second order straight partial derivatives are greater than zero, it is a possible minimum. 3. The point is a saddle point if the signs of the two straight first order partial derivatives do not match, or if one is equal to zero. Example 2: for the function from Example 1 = 0.5 2 + + 2 3 + 5 determine the possible nature of the stationary point at 2, 1, 2.5 .
2 2

Both straight second order partial derivatives are greater than zero, so this is a possible minimum. The process used up to now has been similar to that in Chapter 5, but the following is a new rule. Theory: once the straight second order partial derivatives have been evaluated, and a possible minimum or possible maximum has been established, to make sure it is a minimum or maximum, the delta test must be used: = 2 2 2 2 2
2

The delta test is: the two straight second partial derivatives multiplied together with the mixed partial second derivative squared, subtracted. > 0, the point is what was suspected. < 0, ignore everything, the point is a saddle. Written simpler: =
2

Example 2 cont: confirm the nature of the point at 2, 7, 34.5 . Solution: the mixed partial second derivative: 2 =1 Apply the delta test: = 2 1 1
2

=1>0

Thus the point is what it was thought to be. Since it was thought to be a minimum in this example, the delta test confirms this.

152

Theory: the delta test does NOT tell us whether a point is a maximum or a minimum, the SOC determines this. The delta test just proves or disproves what was suspected from the SOC. Example 3: determine the nature of all stationary points for the function 1 1 3 = 3 2 2 20 5 10 3 2 2 Plan: using the FOC, find the partial derivatives and set them to zero. Solve for the variables. Next, find the straight second order partial derivatives and evaluate them at the stationary point(s). From their signs, determine the possible nature of the stationary point. Find the mixed second order partial derivative, and apply the delta test to confirm the nature. Solution: find the FOC: = 2 3 20 = 0 = 5 = 0 Use simultaneous equations: : = 5 Substitute : 2 3 ( 5) 20 = 0 2 3 + + 5 20 = 0 2 2 15 = 0 Solve for using the Quadratic Formula: (2) (2)2 4 1 (15) = 2(1) = 2 64 2

Thus the two stationary points are: Point 1: = 5, = 10 Point 2: = 3, = 2 Lastly, get the for these two points (see if you get these same values): 5, 10 = 55 5 6

3, 2 = 29.5 The SOC needs to be used to determine the nature of these two points: 2 = 2 3 2 2 = 1 2 Look at each of the two points individually: Point 1: 5, 10, 55
5 6

2 = 5, = 10 = 2 5 3 = 7 > 0 2 2 = 5, = 10 = 1 < 0 2 The two signs do not match, so this is a saddle point. Point 2: 3, 2,29.5 2 = 3, = 2 = 2 3 3 = 9 < 0 2 2 = 3, = 2 = 1 < 0 2 Both signs are less than zero, so this point is a possible maximum. To confirm this, the delta test is used: 2 = 2 2 2 2
2

The mixed second order partial derivative is: 2 = 1 Put everything into the delta formula: = 9 1 1
2

= 5 = 3 These are the of two stationary points. The s are obtained from . For = 5: For = 3: = 5 5 = 10 = 3 5 = 2

=91=8>0

Since > 0, this confirms what was suspected from the SOC; since the SOC gave a possible

153

maximum, the delta test confirms this. 1: 5, 10, 55

5 6

= = =

( )

2 4 2 2 22 4 1 (0.25) 2(1) 2 5 2

2: 3, 2,29.5 () Example 4: determine the nature of any stationary points for the function = 2 + 2 0.5 ( is the number, not a variable). Plan: use the FOC to find any stationary points: find both partial derivatives, set them equal to zero and solve using simultaneous equations. The rule will have to be used. To find the nature of these: find the straight second order partial derivatives and evaluate them at the points found using the FOC. Determine if any of the stationary points are possible maxima/minima. Use the delta test to make sure of their nature. Solution: the partial derivatives are: = 2 + 2 0.5 0.5 = 0 = 2 0.5 = 0 Solve these simultaneously: : =

1 = 1 5/2 2 = 1 + 5/2 This gives two stationary points at the two above with approximations 1 2.118 and 2 0.118. But each of these points also needs a which is found from either of the simultaneous equations ( is easiest as is already isolated): 5 1 = 1 = 2 5 = 2
0.5 1 5 2

2
0.5 1+ 5 2

0.1734

2 = 1 +

0.5304

So the two stationary points are: Point 1: = 1 5/2, = Point 2: = 1 +

5 , 2
0.5 1 5 2

2
5 2

0.5 1+

To obtain the , substitute each of these pairs of and into the original equation and simplify. Do it and you should get: 0.5 =0 2 5 , 2
0.5 1 5 2

0.5 2

Substitute : 2 + 2 0.5 0.5 Simplify: 2 + 0.25 = 0 Factorise: 2 + 2 0.25 = 0 For the left side to be equal to zero, either: 1. = 0 which is impossible, or 2. 2 + 2 0.25 = 0 Solve using quadratics:
2

1 1

2
0.5 1+ 5 2

= 1 2 2 + 5

2 1 +

5 , 2

= 1+ 2 2 5

To find the nature of these points, use the SOC: 2 = 2 + 2 + 2 + 2 0.25 0.5 2 2 =2 2

154

Evaluate each of the stationary points at each of the two partial derivatives (approximate values are used as it is very difficult to work with the exact values; the reason will be clear later): Point 1: 1 2.118, 1 0.1734 2 2 2.118 + 2 2.118 2.118 2 + 2 2.118 2.118 + 2.118 2 2.118 0.25 0.5
2.118

Saddle point: 1

5 2

5 0.5 1 2

, 1 2 2 + 5

Minimum: 1 +

5 , 2

0.5 1+

5 2

, 1+ 2 2 5

Note: the only reason approximations were used (to at least three decimal places!) when evaluating the SOC and the delta test was that the sign of the value was needed, not the precise value at that point. If the approximation gives a SOC result quite a bit above/below zero, then that positive/negative sign can be taken with certainty. However, if the SOC was close to zero (around 0.01), then more decimal places or the exact answer would have to be used to be 100% sure that the SOC is really positive/negative. This was a very difficult example, but look over it again and write out what is being found and why in each of the steps before trying the following exercises.
Exercises: 1. Determine if the following functions have any stationary points, and determine their nature. ) = 4 3 2 5 2 + 7 ) = 4 + 5 3 2 2 2 ) = 3 + 3 + 18 ) , = 2.5 + 3.5 2.2 2 1.8 2 ) = 4 4 5 4 + 32 + 40 ) , = 3 + + 2 + 2. Given the profit function: = 0.4 0.5 0.3 0.4 Determine any stationary points, and if there is a maximum.

0.1734

0.254 < 0 2 =2>0 2 The signs do not match up so this is a saddle point. Point 2: (2 0.118, 2 0.5304) 2 2 0.118 + 2 0.118 0.118 + 2 0.118 0.118 2 + 0.118 2 0.118 0.25 0.5 2.657 > 0 2 =2>0 2 Since the signs match up and both are greater than zero, this point is a possible minimum. To prove that this point is a minimum, the delta test needs to be evaluated at this point. The mixed partial derivative is: 2 = 0.5 0.5 Evaluated at Point 2 (2 0.118, 2 0.5304): 2 0.5 0.5(0.118) 0.5304 Apply the delta test: 2 = 2 2 2 2
2 2 0.118

0.5304

7.8 economic applications Theory: the total revenue from two different goods is simply the sum of the revenues of the individual goods. Example 1: a direct computer manufacturer/retailer sells two different types of

2.657 2 0.5304

5.033 > 0

This proves what was suspected from the SOC. Since the SOC gave a possible minimum, the delta test proves this is true. Thus:

155

computers; laptops () and desktops (). They sell these computers at the prices: = $1197.00 = $864.00 The company pays $560 in rent and face a variable cost function: = 0.32 + 0.452 + 0.3 Determine: a) The profit function b) The optimal levels of and (prove this). c) The maximum profit possible. Plan: find the function using = + Then find the function (which just comes from for each of the two computers). Determine the profit function using: = Find any stationary points using the FOC then prove their nature using the SOC and the delta test. Substitute the (, ) combination back into the profit function to determine the maximum profit. Solution: the function is: = 0.32 + 0.452 + 0.3 + 560 The function is the sum of for each of the two goods: = 1197 + 863.10 Thus the profit function is:
= 1197 + 864 0.32 0.452 0.3 560

= 1818 Substitute this into to give: = 3990 2 1818 = 354 To determine the nature of this stationary point, the SOC must be used: = 0.6 < 0 = 0.9 < 0 Both straight second order partial derivatives are negative so this is a possible maximum. To prove it, the delta test must be used: = 0.3 =
2 2

= 0.6 0.9 0.3

= 0.54 0.09 = 0.45 > 0 Since the delta test is positive, it confirms what was suspected from the SOC (i.e. the point is a maximum). To determine the actual profit attainable, substitute = 1458 and = 1074 into the profit function: 1818,354 = 1197 1818 + 864 354 0.3 1818 1818,354 = 1,240,441 Thus to attain a maximum profit of approximately $1.24million, output should be set at 1818 laptops and 354 desktops. Example 2: a company faces a demand function of the form = 1000 + 20
2

0.45 354

0.3 1818 354 560

To find stationary points, use the FOC: = 1197 0.6 0.3 = 0 = 864 0.9 0.3 = 0 : 0.3 = 1197 0.6 : = 3990 2 Substitute : 864 0.9 3990 2 0.3 = 0 864 3591 + 1.8 0.3 = 0

and a production function of the form: = 2 2 2 + + 5 + 10 If each labour unit costs $20 and each capital unit costs $30, and fixed costs are $600, determine the profit maximising level of capital and labour, and also find the maximum profit.

156

Plan: find the function using the fixed costs and variable costs. Then find the function, using the demand function and the production function. Use = to determine the maximum profit levels of and , then substitute back to get the maximum profit. Solution: to find total revenue: = = 1000 + 20

Use the SOC to determine the nature of this stationary point: = 40 < 0 = 80 < 0 Since both are less than zero, this stationary point is a possible maximum. To make sure it is a maximum, use the delta test. The mixed second order partial derivative: = 20 =
2 2

= 1000 + 20 To find in terms of labour and capital, substitute in for : = 1000 + 20 2 + + 5 + 10

= 1000 20 40 + 20 + 100 + 200
2 2

= 40 80 20

= 2800 > 0

This proves that what was suspected from the SOC

2 2

is actually correct. The SOC gave a possible maximum, and the delta test confirmed this. To find the profit at = 14 and = into the profit equation: = 400 202 40 2 + 20 + 70 + 180 = 400 20 79 14
2 79 16 7

Total costs come from the cost per unit costs and the fixed costs: = 20 + 30 + 600 The profit function is: =
= 1000 202 40 2 + 20 + 100 + 200 20 + 30 + 600

substitute

40

16 7

+ 20

79 14

16 7

+ 70

= 400 202 40 2 + 20 + 70 + 180 To find any stationary point, use the FOC: = 40 + 20 + 180 = 0 = 80 + 20 + 70 = 0 Rearrange to isolate : = 40 180 = 2 9 20

16 79 + 180 7 14

6 = 987 987.86 2. . 7
Exercises: 1. A farmer in a perfectly competitive industry grows wheat and barley. If the rent on the farm is $4,000 per year, and the prices for the two crops are: = $225/ = $190/ With variable costs being approximated by: = 0.5 2 + 0.42 + 0.6 Determine: a) The profit function b) The optimal levels of production c) The maximum profit attainable. 2. A shipyard uses two inputs, and . If the demand for their services are approximated by 2500 = + 50 0.5 And the firm has a service production function of the form = 0.52 2 2 + 2 + 8 + 12 If each costs $25 and each costs $40, determine: a) The profit function in terms of and . b) The optimal levels of and . c) The maximum profit attainable.

Substitute into : 80 2 9 + 20 + 70 = 0 160 + 720 + 20 + 70 = 0 = 79 14 79 16 9= 14 7

Substitute this into the isolated equation: = 2 9 = 2

Thus there is a stationary point at = 16 79 , = 7 14

157

3.

chapter seven summary

A firm imports two types of televisions from Malaysia [plasma () and LED ()] at a cost of: ; = $300 ; = $500 If the domestic demand functions for each of the two types is approximated by: 22 = + + 1300 2 5 = + 2 + 1000 3.

If the cost to rent the shop is $500,000, determine: a) The two total revenue functions b) The total cost function c) The profit function d) The optimal sales of the two types of televisions. e) The two domestic prices of the televisions. f) The maximum profit attainable.

Multivariable functions means that a dependent variable is determined by two or more other variables. = (, ) (, ) The Cobb-Douglas Production Function has the general form: = where the values of , and are all positive constants. Partial differentiation is finding the rate at which the dependent variable changes when an independent variable changes assuming all other variables are held constant. , , To partially differentiate a multivariable function with respect to a single variable, differentiate the function with respect to that variable while treating all other variables as constants. The second order partial derivative is simply partially differentiating the original function twice. 2 2 , , 2 2 Mixed partial derivatives are found by differentiating with respect to one variable first, then differentiating with respect to the other variable. 2 2 , , Mixed partial derivatives are the same, no matter which way they are found. The higher the value of the marginal product, the greater the increase in output from an extra unit of that input. Returns to scale are defined as the extent output changes when inputs are changed by a certain amount. For the Cobb-Douglas Production Function = 1. + < 1 then there are decreasing returns to scale. 2. + = 1 then there are constant returns to scale.

+ > 1 then there are increasing returns to scale. The total derivative equation is: = + To find the actual change in a function: = , , To find an optimal point: 1. The First Order Condition (FOC) is: = 0 =0 Then solve for and using simultaneous equations, to find any stationary points. A saddle point is a stationary point that is neither an overall maximum nor an overall minimum. It looks like a saddle. 2. To find out whether a stationary point is a maximum, a minimum or a saddle point, the Second Order Condition (SOC) is used: a) The point is a possible maximum if: 2 2 < 0 <0 2 2 b) The point is a possible minimum if: 2 2 > 0 >0 2 2 c) The point is a saddle point if the signs of the two straight first order partial derivatives do not match, or if one is equal to zero. Use the delta test to make sure the point is what is suspected: 2 2 2 2 = 2 2 > 0, the point is what was suspected. < 0, ignore everything, the point is a saddle. The total revenue from two different goods is simply the sum of the revenues of the individual goods.

chapter seven questions

1. Find both first order partial derivatives for: ) = 2 + 3 + 4 2 3 ) , = 12 4 + 12 ) = 15 0.3 0.7 + 15 ) = 18 0.4 0.8 2 4 3 + 2 ) = + 4 , = 3 4 2 2 3 ) = 1 12 2 ) = 1 ) = ln 1 2 2 + )
5

158

2.

) = 4 3 + 4 3 ) = 2 2 1 4 9 ) = + ln 15 + 15 ln 4 2 1 1 ln 1 + ) = 1 Find all four second order partial derivatives for: ) = 2 + 2 3 + 4 + 12 ) = 2 2 + 2 3 ) = 3 4 + 2 4 6 + 8 ) , = 2 2 4 + 18 2 13 ) = 2

2 + 2

= 8 0.4 0.5 Find a) an expression for the approximate change in output if is decreased by 0.4% and is increased by 0.2% (i.e. only in terms of and ). b) the exact change in output, given was originally 200 and was 180. 9. A profit function has the form = 4 + 7 12 2 142 0.01 Determine the level of utilisation of the two inputs at maximum profit, and also the maximum profit. 10. A firm imports two goods from China, televisions () and radios (), and sells them on the domestic market. The costs to the firm are related to the amount they import, and the approximate cost function is = 3 2 + 42 + 400 + The two goods sell on the domestic market at the following prices: = 300 = 150 Determine: a) The total revenue function. b) The profit function. c) The levels of and for profit maximisation. d) The maximum profit attainable. 11. A factory producing portable music players has a demand function of the form 1100 = + 45 with a production function of the form: = 22 3 2 + 2.5 + 8 + 12 If labour costs $50 and capital costs $35, and if fixed costs are $550, determine: a) The total revenue function in terms of and . b) The total cost function in terms of and . c) The profit function. d) The levels of and for maximum profit. e) The maximum profit attainable. 12. A firm imports two similar products from Brazil at fixed costs: refrigerators () cost $650 and air conditioners () cost $350. Given the domestic demand for refrigerators is: 42 = + + 1400 And the domestic demand for air conditioners is: 62 = + 3 + 1200 With fixed costs amounting to $10,000, determine: a) The two revenue functions. b) The total cost function. c) The profit function. d) The number of and that need to be sold to maximise profit. e) The domestic prices of the two goods. f) The maximum attainable profit. g) Do these prices make sense?

3.

) = + 2 2 ) , = ln 2 2 + 3 ) = ln 13 + 2 + 15 2 For the following functions, find any stationary points and determine their nature: ) = 2.2 3.3 2 5.5 2 + 1 ) = 2 + 2 3 2 3 2 + 2 ) = 8 3 + 3 3 + 500
) , = 1.2 + 2.4 2.4 2 1.8 2 + 1.2

4.

5.

6.

7.

8.

) = 2 4 3 4 + 10 + 20 ) , = 5 + 3 8 A pharmaceutical company uses capital equipment and labour as inputs into the manufacture of paracetamol. If the company has a demand function for the final product as: 1 = + 20 The firm also has a production function of the form: = 0.5 0.4 And the cost function is approximated by: = 5 + 10 + 20 Determine in terms of and : a) The total revenue function b) The profit function c) When profit is at a maximum. d) The price at the maximum (if the maximum exists). e) The quantity sold at the maximum. Given the profit function: = 0.4 0.5 0.3 0.4 Determine any stationary points and their nature. Is maximum profit a possibility? Use the total derivative function to find the approximate change in for the function = 0.7 0.4 + 0.02 0.3 0.4 when is increased by 0.2 from 154 and is increased by 0.1 from 310. Also determine the exact change in , and compare the two answers. Approximate the change in the objective function , = 0.12 + 0.3 2 4 + 15 when is decreased by 0.5 and is increased by 0.9, given the original levels of and being 78 and 104 respectively. Also determine the exact change in . For the production function

159

Chapter 8

Financial Mathematics
Mathematics and money
8.1 8.2 8.3 8.4 8.5 8.6 8.7 Index Numbers and Averages Series and Sums Simple Interest Compound Interest Annual Interest Rates Net Present Value Internal Rate of Return 161 163 167 168 170 172 174 177 177

Chapter Eight Summary Chapter Eight Questions

160

8.1 index numbers and averages In this context, index numbers are not related to indices learnt in Chapter 1. Theory: in a finance sense, index numbers represent values in terms of a base value. For example, the Consumer Price Index provides a value of the price level of a basket of goods in a certain year in terms of that same basket of goods in a given base year (e.g. the year 2000). Theory: to find the indexed value of a given commodity, use the formula: = 100 0

You might be thinking why not just take the two indices from one another as they are already in percentage form. This is correct but the difference between two index entries gives the percentage difference between the two years in terms of the base year, which in most cases, is useless. Example 2: given the following data, determine the percentage change in crude oil prices between 2002 and 2003 2000 2001 2002 2003 100 105.6 112.3 119.2 2003 2002 100 2002 119.2 112.3 100 112.3

This is very similar to finding a percentage, except that it is always to a base year. The base year is given an index value of 100. Example 1: an index is to be constructed with the year 2000 as the base year (with a value of 100). If gold prices in 2000 were $731.53 and in 2009 were $1091.20, determine the value of the index in 2009. Plan: use the index formula = 100 0 1091.20 100 731.53

Plan: use the percentage change formula %20022003 =

Solution: substitute the index values: %20022003 =

%20022003 = 6.14% If the difference between the two years was taken, the value would be 6.9%, but this is in terms of the price in 2000, which is irrelevant. Example 3: given the following Consumer Price Index values, determine the percentage change in prices between: a) 2005 and 2006 b) 2008 and 2009 2005 2006 2007 2008 2009 149.1 154.4 157.9 164.8 168.1

Solution: substitute all the known values: 2009 =

2009 = 149.17 This is not a difficult idea. However, in finance, usually you will only have access to an index and not the raw data. You will have to know how to manipulate an index to extract useful information. Theory: to obtain the percentage difference between two time periods in an index, use the formula: %+1 = +1 100 %+1 =

Plan: use the percentage change formula +1 100

161

Solution: a) Substitute +1 = 154.4 and = 149.1 %20052006 = 154.4 149.1 100 149.1

relative to the most recent year, rather than the first year. Example 5: Find the arithmetic and geometric average percentage change per year in the CPI given the percentage change over four years was 21%. Plan: apply the two formulae for averages. Solution: for the arithmetic average: 21 = 5.25% 4

= 3.55% 2. . b) Substitute +1 = 168.1 and = 164.8 168.1 164.8 %20082009 = 100 164.8 = 2.00% 2. . Example 4: determine the percentage change in the growth of gold prices from 2005 to 2009, given the following index entries for the two years: 2005 = 123.2 2009 = 141.3 Plan: use the percentage change formula: %+ = + 100

= For the geometric average: =

21 +1 1 100

= 1.048809 1 = 0.048809 Thus a geometric average of about 4.88% p.a. The concept of the arithmetic average in this last example is the simplest kind of average, so will not be explained in depth. The concept of the geometric average in this last example, however, will be. In the first year, the CPI grew by 4.88% from some base amount, say 100. So after one year, it is 104.88. During the second year, the CPI grows another 4.88%, however, it is now growing from a base of 104.88, and this gives, at the end of the second year, a value of 110. During the third year, the CPI grows again at 4.88% relative to the previous year (i.e. 1.10), so at the end of the third year, it has a value of 115.4. At the end of the fourth year, the value of the CPI is 121, or 21% higher over the four years. The geometric average is similar to compound interest, but in reverse. Compare the geometric average to the arithmetic average, where the arithmetic average is finding only the average percentage relative to the first year.

Solution: substitute + = 141.3 and = 123.2, and solve: 141.3 123.2 %= 100 = 14.69% 2. . 123.2 In the example above, there was growth of 14.69% over the four years from 2005 to 2009. The average growth rate in gold prices over these four years can be found in one of two ways. Theory: the arithmetic average is the traditional method of finding an average: =

The geometric average is a concept similar to compound interest (see later in Chapter). It assumes that the percentage change is compounded, thus to reverse the compounding: =

+1 1 100

With being the number of years. The geometric average is more realistic as it assumes growth is

162

Example 6: the consumer price index table is shown below with some entries missing (which is common in data sets). 1993 1994 1995 1996 1997 1998 1999 Determine a) the percentage change in the CPI from 1994 to 1999. b) The arithmetic average percentage change per annum from 1994 to 1999. c) The geometric average percentage change per annum from 1994 to 1999. Plan: use the percentage change formula: +1 %+1 = 100 Then use the arithmetic average formula: = 109.5 111.6 119.8 121.1 122.9

Exercises: 1. Given the following data table: 1960 13.8 1961 14.1 1962 1963 1964 14.5 1965 15.1 1966 15.5 1967 1968 16.7 1969 17.1 Determine: a) The percentage change from 1960 to 1961. b) The percentage change from 1961 to 1964. c) The percentage change from 1960 to 1969. d) The percentage change from 1966 to 1968. e) The arithmetic average from 1961 to 1964. f) The geometric average from 1961 to 1964. g) The arithmetic average from 1960 to 1969. h) The geometric average from 1960 to 1969.

8.2 series and sums Series are extremely common in business (especially accounting and investments) and simply put, they are the repetition of a certain mathematical function. Theory: a series is list of numbers with a constant pattern. Each individual entry of a series is important but so is the sum of the series. Each of the following is a series; try find the

then the geometric average formula:

=

100

+1

pattern. 2, 4, 6, 8, 10, 12 3, 10, 17, 24, 31, 38, 45 2, 4, 8, 16, 32, 64 100, 50, 25, 12.5, 6.75 Theory: An arithmetic series has a constant difference between terms. A geometric series has a constant ratio between terms. Looking at each of the following arithmetic progressions, you will see a common feature: , 11, 17, 23, 29, 35, 41 +6

Solution: for the percentage change: 122.9 111.6 %= 100 = 10.13% 2. . 111.6 For the arithmetic average over the five years: = 10.13% = 2.03% 5

For the geometric average over the five years:

=
5

10.13 100

+1

= 0.0195 4. . Thus a percentage growth per year of approximately 1.95%.

163

, 1.5, 2, 2.5, 3, 3.5, 4 , 490, 480, 470

+0.5 (10)

= 7.5, and = 27. Substitute this into the formula: 27 = 3 + 27 1 7.5 = 198 Example 3: find the 13 term of the sequence: 100, 97, 94, 91, 88 Solution: the first term is = 100, the difference is: 3 3 3 3 100, 97, 94, 91, 88 So = 3, and = 13. Substituting this into the equation: 13 = 100 + 13 1 3 = 64 Summing a sequence is important in many business disciplines. For example, the revenue of a company might grow at a certain amount each month, so to find out how much revenue the company will earn over the whole year requires summing a series. Theory: the sum of an arithmetic series is found using the formula: = 2 + 1 2

Each of these sequences has an initial number (bolded) and also a constant addition/subtraction between terms (in brackets). Theory: the term of a sequence is given by the formula: = + 1 Where is the initial number, the term you want to find, and the difference between terms in a sequence. Example 1: find the 6 term of the following arithmetic progression: 8, 17, 26, 35 Plan: determine the first term and the difference between each term, then apply the formula = + 1 Solution: the initial number is = 8, the difference between all the numbers is:

9 9 9
8, 17, 26, 35 = 9, and the 6 term is = 6. Substitute into the equation: 6 = 8 + 6 1 9 = 8 + 5 9 = 53 Add two more 9s to 35 to see if it is correct. Example 2: find the 27 term of the following progression: 3, 10.5, 18, 25.5, 33 Plan: determine the first term and the difference between terms, then apply the formula: = + 1 Solution: the first term is = 3, the difference is: 7.5 7.5 7.5 7.5 3, 10.5, 18, 25.5, 33

Example 4: find the sum of the sequence: 4, 9, 14, 19, 24, 29 Plan: determine the values of and , then substitute into the formula: = 2 + 1 2 Solution: the first term is = 4, the difference is +5 (make sure of this) and there are = 6 terms. Substitute into the formula: 6 = 6 2 4 + 5 5 = 99 2

Use your calculator to actually sum up the sequence and makes sure 99 is correct. Example 5: find the sum of the first 15 terms of the sequence

164

200,179,158,137, Plan: determine the values of , and then substitute into the summation formula. Solution: = 200, = 21 and = 15. Substitute into the summation formula: 15 = 15 400 + 14 21 2 = 795

2, 6, 18, 54, 162 Plan: determine the values of , and then substitute into = 1 Solution: = 2. To find the ratio, divide one term by the one before it: 162 54 18 6 = = = =3 54 18 6 2 So = 3, and = 8. Substitute this into the formula: 8 = 2 37 = 4374 Sometimes, the ratio will need to be determined, but consecutive terms will be unavailable. Theory: for two terms with terms missing between them, the ratio is determined by: =
+1

Example 6: Bentley, a luxury car manufacturer, increases production by ten cars each year, relative to the previous year. If Bentley manufactured 316 cars this year, what is the total number of cars Bentley will make in two decades (including this year)? Solution: = 316, = 10, = 20, applying the sum formula: 20 20 = 2 316 + 19 10 = 8220 2

Moving on to geometric progressions; the following three progressions are all geometric: , 6,12,24,48,96,192,384 , 35,245,1715,12005 , 256,64,16,4,1,0.25 ( = 2) ( = 7) = 0.25 Example 7: determine the ratio of the GP: 2, , , 54, Plan: use the ratio formula above. Solution: the later term is 54, and the earlier term is 2. The two terms are separated by 2 terms, so: =
3

Remember that a geometric progression has a constant ratio between terms. Above, all three progressions have an initial term (in bold) and a constant ratio between each term (in brackets). Theory: the term of a geometric progression is found using the formula: = 1 Where is the first term, the ratio between terms and the term being found. To find the ratio, divide a term by the one before it: = 1

54 = 2

27 = 3

Example 8: find the 12 term of: 256, , 64, Plan: find and substitute the constant ratio , the first term and into the formula: = 1 Solution: the constant ratio is: =
2

64 = 256

1 = 0.5 4

Example 6: find the 8 term of the geometric progression:

is 256 and is 12: 12 = 256 0.5 = 0.125

121

165

Scheme 1: has an initial return of $1000 which Theory: the sum of a geometric progression is found by applying the formula: 1 = 1 Example 9: find the sum of the geometric progression 4, 8, 16, 32, 64, 128, 256, 512 Plan: find , and , then apply the sum formula: = 1 1 grows at 5% per year. Scheme 2: has an initial return of $1100 which grows at $45 per year. Determine: a) Which of these two schemes has a better overall return over the fifteen years. b) Which of the schemes has a higher return in the tenth year. Plan: a) determine the sum of both series over the fifteen years using the two sum formulas. b) determine the tenth term of both schemes using the two term formulae. Solution: since Scheme 1 increases by 5% each 4 2 81 = 1020 21 year, the Geometric Progression formula is used. For scheme 1, = 1000, and = 1.05. Similarly, since Scheme 2 increases by a constant $45 each year, the Arithmetic Progression formula is used. For scheme 2, = 1100 and = 45. a) Applying the sum formulae for = 15: Scheme 1: 15 = 1000 1.05 15 1 1.05 1

Solution: the constant ratio is: 8 16 = = 2 = 4 8 And = 4, = 8, so substitute this into the formula: =

Example 10: if sales of computers this year are 400, and sales are expected to increase by 20% each year for the next 9 years, how many computers will be sold in the tenth year, and how many computers will be sold in total over the next ten years (including the base year). Plan: find , and , then apply the geometric progression term formula, then the sum formula. Solution: the ratio is 1.2 (as it is a 20% increase over the previous year), the first term is = 400, and = 10 (as the base year is included). Apply the term formula: 10 = 400 1.2 Apply the sum formula: 10 400 1.2 10 1 = 1.2 1
9

= $21,578.56 Scheme 2: 15 = 15 2 1100 + 15 1 45 2

= $21,225 Thus Scheme 1 is better overall. b) Applying the term formulae for = 10: Scheme 1: 10 = 1000 1.05 = $1,551.33 Scheme 2: 10 = 1100 + 10 1 45 = 1,505.00 Thus Scheme 1 is better in the tenth year.
101

= 2064

= 10,383 Example 11: a financial services firm can invest in one of two schemes which run for 15 years;

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Exercises: 1. Given the sequence: 3.1,11.9,20.7,29.5, Determine: a) The 15 term. b) The 25 term. c) The sum of the first 19 terms. 2. Given the sequence: 10,15,22.5,33.75, Determine: a) The 12 term. b) The sum of the first 10 terms. c) The sum of the first 20 terms. 3. A firm can invest money into one of two projects each which runs for 12 years and each which has a return of: Project 1: 3500 in the first year, and this increases by 9% every subsequent year. Project 2: 4000 in the first year, and this increase by 300 every subsequent year. Determine a) which project has a larger overall income. b) Which project has a larger return in the 5 year.

Example 1: find the interest earned, and also the total amount of money in the bank when $1000 is saved for 4 years at 7% p.a. Plan: use the simple interest formula. Solution: the principal 0 = 1000, = 4 and = 0.07. The rate must be in decimal form. 4 = 1000 0.07 4 = 280 This is the interest earned, but the total amount is the interest earned plus the principal: 4 = 0 + 4 = 1000 + 280 = 1280 Theory: the total value of an investment is the principal plus the interest earned over the given time. = 0 + Example 2: a $4000 savings account is opened with a bank which offers an interest rate of 9.3% p.a., with a minimum period of 5 years. Using simple interest, determine: a) the interest earned over five years. b) the total amount available after five years. Plan: use the simple interest formula to calculate the interest over the five years. Then add the principal amount to determine the total amount in the account. Solution: to determine the interest earned: = 0 5 = 4000 0.093 5 = $1860 Add this amount to the principal to determine the total amount available: 5 = 0 + 5 5 = 4000 + 1860 = $5860
Exercises: 1. A bank offers an interest rate of 4.6%, and you invest $100. Using simple interest, determine the amount of interest you will have earned over 2.5 years, and also the total amount you will have available.

8.3 simple interest When working with interest rate calculations, some basic theory is required. Theory: The principal is the initial amount of money invested. The interest rate is the rate at which this money increases in value per time period. In simple interest, the amount of money which the interest rate applies to does not change, so the extra money earned from interest each year is constant. This is similar to arithmetic progressions in that a constant amount is earned each year. Theory: the simple interest formula is: = 0 In words, the interest earned after years from today ( ) is equal to the principal (0 ) times the per annum interest rate () times the number of years it has been invested for ().

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8.4 compound interest Simple interest is not realistic in most situations. Intro example 1: you win $1000 from a lottery and decide to save it until you finish university. The interest rate at which you save it is 20% p.a. How much will you have at the end of the three years? Solution: break the three year period into three shorter periods, each a year in length: Year 1: at the end of the year, the amount in the bank will be: 1000 1.20 = 1200 The 1.20 comes from the original principal (the 1) plus the interest rate (0.20). Year 2: at the beginning of this year, the initial amount available is the final amount of the previous year. This amount is 1200, which is the new principal. The value of this amount at the end of the second year will be: 1200 1.20 = 1440 The 1200 can be rewritten in the way it was originally found: 1000 1.20 1000 1.20
2

Theory: the value of an investment after years is given by: = 0 1 +

Where is the value of the investment after years, 0 is the initial investment amount, and is the interest rate. The interest rate must be written as a decimal. Example 1: find the value of $2000 invested at an interest rate of 5% for 10 years. Plan: determine the values of 0 , and , then substitute into the compound formula. The interest rate, , must be written as a decimal. Solution: substituting 0 = 2000, = 0.05, = 10 into the compounding formula: 10 = 2000 1 + 0.05 10 = 3257.79 It should become evident that compound interest is similar in theory to a geometric progression and also a geometric average. Example 2: a finance firm invests $1million for five years in a Dubai construction project, which has an expected return of 8% p.a. compounded annually. Determine the value of the investment after 5 years, and also the interest earned over this time. Plan: use the compound interest rate formula to find the total value of the investment. Then to find the interest earned, take the principal away from the total value of the investment. Solution: substitute 0 = 1, = 0.08 and = 5: = 0 1 +
5 10

= 2000 1.05

10

1.20 = 1440 = 1440

The left side can be simplified to:

Year 3: the initial amount in the third year is the amount at the end of the year before: 1440 1.20 = 1728 This can be re-written as: 1000 1.20 1.20 1.20 = 1728 1000 1.20 investment is 1728. This example was to show what is meant by compounding the principal each year. Notice that to find the value after three years, the rate was to the power of 3.
3

= 1728

After three years, the value of the 1000

5 = 0 1 + 0.08

5 = $1.469million The interest earned is the total value take the principal: 5 = 5 0 5 = 1.469 1 = $0.469million

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Solution: having = 2000, 0 = 1000, = 4 Theory: the interest earned from compound interest is the total value of the investment subtract the principal amount: = 0 Compounding every year is not what many banks do with savings accounts. Rather, they set an annual interest rate but compound monthly. Theory: for an annual interest rate compounding times per year gives the formula: = 0 1 +

and = 0.09, substitute into the compound formula: = 0 1 +

2000 = 1000 1 + Simplify: 2 = 1.0075

4

0.09 12

Take the log of both sides: log 2 = 4 log 1.0075 Rearrange and solve: 4 = log 2 log 1.0075

This is simpler than it looks. Example 3: find the value of a $5000 investment if it is invested at 6% p.a. for three years, compounded monthly. Plan: find the values of 0 , and , as with normal compounding, but then determine the number of times, , per time period, , compounding is occurring. Solution: the initial amount is $5000 (0 = 5000), the yearly interest rate is 6% (or = 0.06), the time the investment lasts is = 3, and it is compounded = 12 times per year. Substitute into the formula: 0.06 3 = 5000 1 + 12 3 = 5983.40 Example 4: find the number of years (to the nearest month) when an investment of $1000 will reach $2000 at an interest rate of 9% p.a. compounded every quarter. Plan: use the compound formula ( times per year) and substitute all known variables. Rearrange to isolate to find the solution.
12 3

log 2 log 1.0075 = 23.19 4 Rounding up to the nearest quarter as that is what the question is asking. Therefore the answer is 23 years and 1 quarter. Theory: whenever finding when an investment will exceed a certain amount, always round UP to the nearest given time period. If it was to be rounded down, the investment would not exceed the given amount.

= 5000 1.005

36

Example 5: a company can save $4000 in one of two banks for a five year period. The two banks offer the following returns: Bank 1: 15% p.a. compounded weekly. Bank 2: 15.5% p.a. compounded semi-annually. Determine which of the projects is a better investment. Plan: use the compound formula ( times per year) to determine which of the investments will give the largest return after five years.

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Solution: Bank 1: = 0.15, = 52, 0 = 4000 and = 5: 0.15 = 4000 1 + 52 $8,458.86 Bank 2: = 0.155, = 2, 0 = 4000 and = 5: = 4000 1 + = $8,437.87 Notice that just because Bank 2 offers a higher advertised interest rate, Bank 1 has a better actual return due to the number of compounding periods per year. Theory: the more times an investment gets compounded, the closer it is to being continuously compounded, in which case the number is used: = 0 Which is identical to exponential growth from Chapter 4. Example 6: an investment offers an interest rate of 10%, compounded every minute of every day. The investment has an initial value of $4000, and is invested for one year. Find the value of the investment using the compound interest formula, then use the exponential formula. Compare the answers. Plan: find the number of minutes in a year, then set this as . Substitute this and all other known variables into the compound interest formula, to find . Then, substitute all the known variables into the exponential formula, to find . Solution: number of minutes in a year=minuteshoursdays = 60 24 365 = 525,600, 0 = 4000, = 0.10, then: 0.155 2
2 5 5 52

= 4000 1 +

0.10 525600

525600 1

4420.68363 Now use the continuous formula above: = 4000 0.101 = 4420.68367 The two are very close, and the continuous formula can be used as an accurate approximation to very short time period compounding. Example 7: find the value of a $4,000 savings account which is compounded every second, if the savings account is left for 5 years at 4.65% p.a. Plan: use the continuous compounding formula. Solution: 0 = 4000, = 0.0465, = 5 is substituted into the continuous compound formula: = 0 5 = 4000 0.0465 5 5 = 5047.00 2. .
Exercises: 1. A bank offers an interest rate of 4.75% p.a., and you decide to save $4,300 for four years. Determine: a) The interest earned after four years. b) The total value of the savings account. 2. A conservative company decides to save a cashflow of $12,391 in a term deposit account which has a return of 8.2% p.a., compounded weekly. If the term deposit is for 10 years, determine: a) The value of the term deposit account after ten years. b) The interest earned over the ten years. 3. You have purchased new car worth $12,000. If the interest rate is 7.25% p.a. and is compounded monthly, determine the amount you would owe after a three year loan, assuming you made no repayments. 4. A disreputable agent loans you $10,500 at 5.5% p.a. compounded continuously. Determine the amount you would have to pay back after two years.

8.5 annual interest rates Example 5 from the previous section is a good indicator that the advertised interest rate is not always the realised interest rate.

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Theory: the annual interest rate is lower than the realised interest rate if the principal is compounded more than once per year.

Thus the realised interest rate is 4.85%, which is higher than the advertised rate. Example 2: a company has a cash inflow from its

Intro example 1: for an advertised interest rate of 5%, $100 is invested for a year, compounded semi-annually (every half year). Find the value of the investment after one year. Solution: 0 = 100, = 1, = 2, = 0.05: 0.05 1 = 100 1 + 2 1 = 105.06 From this, we can also see that the realised annual interest rate is 5.06% rather than the advertised 5%. If this was simple interest, the value of the total investment would be: 1 = 0 + 1 = 100 + 5 = 105 It is obvious that with compound interest, the realised interest rate (5.06%) is larger than the advertised 5%. This makes a big difference with large sums of money, such as home loans. Theory: the realised interest rate is found using: = 1+
21

customers tomorrow morning, the precise amount is yet unknown. This company has two savings accounts at two different banks. The offered interest rates are: Bank 1: 7% compounded quarterly Bank 2: 6.9% compounded weekly Which is a better investment? Plan: use the realised interest rate formula to determine the realised interest rates of the two banks. = 1 + Solution: Bank 1: given = 0.07 and = 4: 0.07 = 1+ 4
4

= 100 1.025

= 0.07186 5. . Thus a realised rate of approximately 7.186%. Bank 2: given = 6.9% and = 52: = 1 + 0.069 52
52

This is very similar to the compound interest formula except that there is no nor are there any amounts (s). The 1 gets rid of the original amount, and just leaves the realised interest rate. Example 1: find the realised annual interest rate for an investment where the advertised interest rate is 4.75%, and is compounded monthly. Plan: apply the realised interest rate formula. Solution: = 1 + 0.0475 12
12

= 0.07139 5. . Thus a realised rate of approximately 7.139%. Given the realised rates, Bank 1 is a better option.
Exercises: 1. A bank advertises an interest rate of 5.45% p.a. compounded monthly. Determine the realised annual interest rate. 2. An investment promises a return of 6.24% p.a. compounded once every 4 months. Determine the realised interest rate. 3. Two banks are in competition, one with an advertised interest rate of 3.45% p.a. compounded monthly, and the other with an interest rate of 5.1% p.a. compounded once every six months. If you are borrowing money, which bank is a better choice?

1 0.0485(4 . . )

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8.6 net present value Theory: Net Present Value is a way of finding the value of income in the future, in terms of todays dollars. It is similar to the concept of compounding, except backwards. That is, $1000 today has a higher value than $1000 some time in the future. The reason is that if that $1000 dollars was invested at the given interest rate, the value of the $1000 would grow (through earning interest). Intro example 1: for an investment of $1000 at an interest rate of 10% per annum, compounded at the end of each year, how much is that investment worth in a years time? Solution: 1 = 1000 1 + 0.1
1

Theory: the formula for the net present value of a single future cash flow is: = 1 +

The is the same as 0 from the rearranged annual compound formula. Example 1: find the net present value of $5000 in three years time at an interest rate of 4.25% p.a. Plan: apply the NPV formula. Solution: 3 = 5000, = 0.0425, = 3: = 5000 1 + 0.0425
3

5000 1.04253

= 4413.08 This means that $5000 in three years time has the same value as $4413.08 today. Theory: if there are multiple cash-flows at

= 1100

different years, the NPV of all the cash flows is the sum of the NPVs of the individual cash flows. =

This means that getting $1000 today is the same as getting $1100 dollars in one years time. Intro example 2: if you need to repay a loan worth $2000 in one years time, how much do you need to invest today at 7% p.a. compounded only once, at the end of the year? Solution: 0 is unknown but 1 is known (= 2000), = 0.07, = 1: = 0 1 + 1 +

The overall NPV is simply the sum of all individual net present values. Example 2: find the NPV of the two cash-flows: Cash-inflow 1: $4000 in 3 years Cash-inflow 2: $2400 in 7 years The interest rate is assumed constant at 5.25%. Plan: find the NPV of each of the two cash-inflows individually, then sum them to find the overall NPV. Solution: discount each of the cash-inflows:

Rearranging to isolate 0 gives:

= 0

Substitute in to get: 0 = 2000 1 + 0.07

1

= 1869.16

Cash-inflow 1: 1 = Cash-inflow 2: 2 = 2400 1 + 0.0525

7

So $1869.16 would need to be invested today to have $2000 in one years time. This means that $1869.16 today has the same value as $2000 in one year.

4000 1 + 0.0525

3430.79

1677.48

The NPV of both cash-inflows is:

172

 = 1 + 2 = 3430.79 + 1677.48 = $5108.26 Theory: any project with a positive net present value is accepted, as it is profitable. Example 3: find the Net Present Value of the project which has the following cash flows:

0 1 2 3

$983.00 0 0 0

0 $267.30 $532.40 $399.30

Assuming the interest rate is a constant 10%. Plan: find the NPV of the individual cash-flows, then sum them. Solution: Year 0: 0 = 983 Year 1: 1 = Year 2: 2 = Year 3: 3 = 399.3 1 + 0.1
3

0 1 2

4000 0 0

0 4000 500

Assume that the interest rate is 6.25%. Plan: find the NPV of each of the cash flows, then sum them to find the overall NPV. Solution: Year 0: the NPV of a cash-flow at year 0 is the value of the cash-flow. Since it is an outflow, the NPV is: 0 = 4000 Year 1: 4000 1 = 1 + 0.0625 1 = $3764.71 Year 2: 500 2 = 1 + 0.0625 2 = $442.91 Thus the overall NPV is the sum of all the individual NPV: = 0 + 1 + 2 = 4000 + 3764.71 + 442.91 = $207.62 Since the overall NPV is positive, this project is worthwhile. Example 4: determine the Net Present Value for the following investment opportunity:
2 1

267.3 1 + 0.1 532.4 1 + 0.1

= 243

= 440

= 300

Thus the overall NPV is: = 0 + 1 + 2 + 3 = 983 + 243 + 440 + 300 = 0 Thus the NPV of the project is zero, so there is no point going ahead with the project, as the same return could be obtained by saving the initial cash outflow in a bank at an interest rate of 10%.
Exercises: 1. Given the following cash-flow data, determine the NPV of the project and if it is worthwhile. Assume the interest rate is 4.5%. 0 $6000 0 1 0 $4000 2 0 $1000 3 0 $1500 2. Your supervisor gives you the following data on a project introducing a new advertising campaign. They want you to find out the NPV of this project, and if it is worthwhile to go ahead with it. Assume that the bank is offering an interest rate of 6.1% p.a.

173

3.

4.

0 $10,000 0 1 0 $3000 2 0 $4000 3 0 $5000 4 $2000 $2500 5 0 $3000 Given the following data about cash-flows from customers and suppliers, and an interest rate of 7.25%, determine the NPV of all the cash-flows. 0 $1500 $2000 1 $2500 $1000 2 0 $3000 3 0 $800 4 $4000 $1000 Describe, in your own words, the meaning of net present value.

Then solve for : 3000 = 3500 1 +

3000 1 + = 3500 3000 + 3000 = 3500 = 1 = 0.1667 6

Thus the rate of return of the project is 16.67%, and this is unrelated to the market rate. When the number of years increases, the ability to isolate becomes more and more difficult. Intro example 2: find an expression for the internal rate of return of the following project, and then attempt to isolate .
0 1 2 3 $10,000 0 0 0 0 $3000 $4000 $5000

8.7 internal rate of return In the last example of the previous section, there was a NPV of zero. This is the definition of internal rate of return. Theory: the internal rate of return is the interest rate that would give a net present value of zero. The internal rate of return is the rate of return of the project, and is unrelated to the market interest rate. Intro example 1: determine the internal rate of return of the following project:

Solution: = 10000 + 3000 4000 5000 + + 1 2 1 + 1 + 1 + 3

Set this equal to zero to find an expression for the internal rate of return: 0 = 10000 + 3000 4000 5000 + + 1 + 1 1 + 2 1 + 3

Now, to isolate , the 10000 will be first moved to the other side: 10000 = 3000 4000 5000 + + 1 2 1 + 1 + 1 + 3

0 $3000 0 1 0 $3500 Solution: the market rate has not been given, so there is no way the NPV can be found. However, the internal return of the project is unrelated to the market rate. To find the IRR of the project, use the NPV formula and set the overall NPV equal to zero. Also, instead of using a number for the interest rate, use the letter : = 3000 + Set this equal to zero: 0 = 3000 + 3500 1 + 1 3500 1 + 1

Then to be able to add the fractions on the right, a common denominator is needed. The common denominator is 1 + 3 , so change the form of the other fractions: 10000 = 3000 1 + 1 + 3 3000 1 +
2

4000 1 + 5000 + 3 1 + 1 + 3

Simplifying:
2

10000 =

+ 4000 1 + + 5000 1 + 3

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Rearranging and expanding the brackets would take a long time, and in the end, a cubic function would need to be solved. Try this for yourself and see if you can get: 0 = 10000 3 + 27000 2 + 20000 2000 Solving this is difficult, but a program can be used. This above example is an exact method of finding the internal rate of return. However, as the number of years increases to 4, the exact solution will involve solving something with 4 which is difficult; for 5 years, the solution will involve 5 , so it gets more and more difficult. However, there is a much easier method which gives an approximate answer. Theory: the method of finding the approximate internal rate of return is split into two stages: STAGE 1: find two interest rates; one which gives a positive NPV, and one which gives a negative NPV. This step is a trial-and-error method. The thought process is: Try a random (low) interest rate and find the NPV. If it is positive, use another (higher) interest rate to get a negative NPV. If the initial (low) interest rate had a negative NPV, use another (lower) interest rate to find a positive NPV. This theory is demonstrated in the following example. Example 1: find two interest rates, one with a positive NPV and one with a negative NPV, given the following investment project:
0 1 2 3 $8000 0 0 0 0 $5000 $2000 $2000

Solution: use a low interest rate to begin with. This can be anything you choose, so lets use 3%. 3% = 8000 + 3% = $569.84 The low interest rate should give a positive NPV. If it does not, lower the interest rate further. Now, since the 3% gave a positive NPV, to get a negative NPV, we use a higher interest rate, say 5%: 5% = 8000 + 5% = $303.64 This is still a positive NPV, so increase the interest rate to say 10%: 10% = 8000 + 10% = 299.02 Both 3% and 5% gave a positive NPV, but for part two of this approximations, the interest rate that gives a NPV closest to zero is used, so in this case, the 5% has a NPV closer to zero, than the 3%. Theory: STAGE 2: having two interest rates (relatively close to one another) with one giving a positive NPV and the other giving a negative NPV, apply the formula: 2 1 1 2 1 2 5000 2000 2000 + + 1 2 1.10 1.10 1.10 3 5000 2000 2000 + + 1 2 1.05 1.05 1.05 3 5000 2000 2000 + + 1 2 1.03 1.03 1.03 3

It does not matter which interest rate-NPV combination you define with a subscript as 1 or 2, as the formula works either way. This method is a linear approximation of a curve. The closer the positive and negative NPVs are to being zero, the better the approximation. Example 1 cont: given the following pairs of NPV and , find the approximate IRR: 1 = 5%, 2 = 10%, 1 = 303.64 2 = 299.02

Plan: find the NPV of the project using a relatively low interest rate, then increase the interest rate by, say 2%, to find one with a negative NPV.

Plan: apply the IRR formula.

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Solution: substitute this into the formula: 0.10 303.64 0.05 299.02 303.64 299.02 45.31 0.0752 602.66

Since this is a positive NPV, a higher interest rate will give a negative NPV. So try 10%:
10% = 7000 + 3000 2500 1500 1500 + + + 1.1 1.12 1.13 1.14

10% = 55.12 Having two interest rates, one which gives a positive NPV and one which gives a negative NPV, apply the IRR formula: 2 1 1 2 1 2

Thus the internal rate of return of this project is approximately 7.52%. Theory: the IRR will always be between the two interest rates which gave the positive and negative NPVs, and will be closer to the interest rate which has its NPV closer to zero. An internal rate of return higher than the market interest rate means the project is worthwhile. Conversely, an internal rate of return lower than the market interest rate means the project is not worthwhile. Example 2: determine the internal rate of return for the project shown below.
0 1 2 3 4 $7000 0 0 0 0 0 $3000 $2500 $1500 $1500

Many students screw up with the substitution, so it is best to rewrite the known variables, with appropriate subscripts: 1 = 0.05, 2 = 0.10, 1 = 654.53 2 = 55.12

Substitute this into the formula: 0.10 654.53 0.05 55.12 654.53 55.12

0.0961 Thus the internal rate of return is 9.61%. Since the IRR is greater than the market rate of 9%, the project is worthwhile. Note that the IRR is closer to 10% than to 5%, as the NPV of the 10% is closer to zero (i.e. 55.12) than the NPV of the 5% (i.e. 654.53).
Exercises: 1. For the following data, find an approximation for the internal rate of return. 0 $7,000 0 1 0 $3000 2 0 $2500 3 0 $2800 2. Given a market interest rate of 8.5%, determine if the following project is worthwhile using the IRR method. 0 $12,430 0 1 0 $7800 2 0 $5100 3 0 $1100 3. In your own words, describe what internal rate of return measures.

If the market rate is 9%, is the project worthwhile? Plan: use a low interest rate to find the NPV; then if that gives a positive NPV, use another higher interest rate to find a negative NPV. If the first interest rate gives a negative NPV, use a lower interest rate to find a positive NPV. Apply the results to the IRR formula, and compare it to the market rate. Solution: finding the NPV at, say, 5%:
5% = 7000 + 3000 2500 1500 1500 + + + 1.05 1.052 1.053 1.054

5% = 654.53

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chapter eight summary

Index numbers represent values in terms of a base value: = 100 0 The base year is given an index value of 100. The percentage difference between two time periods in an index is found using: +1 %+1 = 100 =
=

+1 1 100

A series is list of numbers with a constant pattern. Each individual entry of a series is important but so is the sum of the series. An arithmetic series has a constant difference between terms. A geometric series has a constant ratio between terms. The term of a sequence is given by: = + 1 The sum of an arithmetic series is given by: = 2 + 1 2 The term of a geometric progression is found using the formula: = 1 To find the ratio, divide a term by the one before it: = 1 When terms are missing, the ratio is found by: =
+1

= 0 For an annual interest rate , compounding times per year: = 0 1 + Whenever finding when an investment will exceed a certain amount, always round UP to the nearest given time period. For continuous compounding (or very short time period compounding) the formula is used: = 0 The annual interest rate is lower than the realised interest rate if the principal is compounded more than once per year. The realised interest rate is found using: = 1 + 1 Net Present Value is a way of finding the value of income in the future, in terms of todays dollars. The formula for the NPV of a single future cash flow is: = 1 + If there are multiple cash-flows at different years, the NPV of all the cash flows is the sum of the NPVs of the individual cash flows. =

The sum of a geometric progression is given by: 1 = 1 The simple interest formula is: = 0 The total value of an investment is: = 0 + For compound interest, the value of an investment after years is given by: = 0 1 + The interest earned from compound interest is:

Any project with a positive net present value is accepted, as it is profitable. The internal rate of return (IRR) is the interest rate that would give a net present value of zero, and is unrelated to the market interest rate. To find an approximation to the IRR: STAGE 1: find two interest rates; one which gives a positive NPV, and one which gives a negative NPV. This step is a trial-and-error method. STAGE 2: having these two interest rates, apply the formula: 2 1 1 2 1 2 The IRR will always be between the two interest rates which gave the positive and negative NPVs, and will be closer to the interest rate which has its NPV closer to zero. An internal rate of return higher than the market interest rate means the project is worthwhile. An internal rate of return lower than the market interest rate means the project is not worthwhile.

chapter eight questions

1. Given the following Consumer Price Index table:
1980 1981 1982 1983 1984 1985 1986 89.9 92.4 93.5 100 103.1 107.2 1987

Determine: a) The percentage change from 1980 to 1981. b) The percentage change from 1982 to 1984. c) The arithmetic average from 1982 to 1984. d) The geometric average from 1982 to 1984. e) If the geometric average from 1982 to the missing value of 1987 is 3.32%, determine the

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2.

missing index entry. Hint: find + then substitute into the geometric average formula. The gold index has the following historic data:
1971 1972 1973 1974 1975 1976 1977 150.2 168.4 172.3 163.0 154.0 142.3 133.1

8.

3.

4.

5.

6.

7.

Determine: a) The percentage change from 1971 to 1973. b) The percentage change from 1971 to 1977. c) The arithmetic average from 1971 to 1973. d) The geometric average from 1971 to 1973. e) The arithmetic average from 1971 to 1977. f) The geometric average from 1971 to 1977. g) Explain how the average percentage change over the years 1971 to 1973 is positive, however if the time period is extended slightly from 1971 to 1977, the average percentage change is negative. Given the following series: 3,3.75,4.5,5.25,6,6.75, Determine: a) The 13 term. b) The 21 term. c) The sum of the first 9 terms. d) The sum of the first 16 terms. Given the following series: 1331,484,176,64, Determine: a) The 15 term. b) The 27 term. c) The sum of the first 11 terms. d) The sum of the first 16 terms. An investment firm is offered one of two investments, each which has the following returns: Investment 1: $6000 in the first year, and this increases by $250 every year after. Investment 2: $4350 in the first year, and this increases by 13% every year after. If the investment is for 8 years, determine: a) Which of the two investments has a higher return in the fifth year. b) Which of the two investments has a higher return up to the fifth year. c) Which of the investments has a higher overall return. Mark lends David $1430 for an airfare home. The deal is that David pays 3% simple interest per month, for the four months it takes to earn the money. Assuming David repays Mark in a lump-sum, determine: a) The interest Mark has earned over the four months. b) The total amount David has to repay Mark after the four months. A father opens a savings account for his son, and deposits $20,000. If the interest rate is 5% p.a.

9.

10.

11.

12.

13.

(compounded annually), but the son takes out the interest at the beginning of each year, determine: a) How much money the son has taken out after 7 years. b) How much money the son has taken out after 11 years. A firm saves $5600 at an interest rate of 4.65% p.a. compounded monthly. Determine: a) The value of the account after 4 months. b) The value of the account after 5.5years. c) When the value of the account will first exceed $10,000. d) The value of the account after 6 years, given that after 3years, the firm withdrew $2000. Having won $11,457 in the lottery, you save the total amount at 7.1% p.a. compounded monthly. Determine: a) The value of the account in 5 years. b) When the value of the account will first exceed $20,000. c) When the value of the account will first exceed $20,000 given that after 2 years, you withdraw $5,000. A student needs to have $5000 to pay his university fees in three years time. If the prevailing interest rate is set at 6.6%p.a. compounded semi-annually, determine how much the student needs to save today to be able to pay the university bill. A firm wanting to save a future cash-flow has the option of two bank accounts: Bank A: 5.1% p.a. compounded yearly Bank B: 5% p.a. compounded weekly Determine which of the banks is the better deal. A firm is looking to borrow money from one of three banks: Universal Bank: 8.1%p.a. compounded quarterly Sun Bank: 8%p.a. compounded weekly Bank of Vark: 8.2% compounded semi-annually Determine which of the banks is the better deal. Given the following investment project:
0 1 2 3 $60,000 0 0 0 0 $48,200 $21,500 $9,100

For a market rate of 4%, determine: a) The NPV b) The internal rate of return c) If the project is worthwhile. 14. Given the following potential project:
0 1 2 3 4 5 $12,000 0 0 0 $4000 0 0 $5000 $5000 $2000 $2500 $4000

For a market rate of 9%, determine: a) The NPV and the IRR b) If the project is worthwhile.

178

179

chapter one solutions

Question 1: a) 15 b) 4 c) 50 d) 6 Question 2: 1 a) b) 12 c) 1.5 8 d) e) f) g)

21 49 6 1

d) e)
9

5 6

f) 12 g) 7 3+2 h)
3

10 25+12

15

Question 5: a) 3 6 b) 216 9 1.5 1 c) 4 8 d) 3 2 e) 243 4 8 f) 1024 2 0.125 g)

7/6 2

g) 3 2 6 + 4 h) 2 2 4 Question 8: a) = 5 b) = 2 c) = 1 11 d) = e) f) g) i) = =
3 13 2 1 21 9 10 3

= =

27
36 13 40

h) = 3
+1

1 3 d) 4 + 1 = 0 = 0 = 1 e) 2 1 = 0 = 0 = 1 f) 3 3 5 = 0 5 = 0 = 3 Question 11: a) 4 2 + 3 + 3 b) 6 2 1 c) 7 2 + 2 = 0 = d) 2.25 + 16 2 e) 2 4 2 1

f)
2

h) 9 Question 3: 5 a) b) c) e) f) g)
6 19 24 25 12 23 65 5 12 187 210 68 5

2
7 22

1 12

d)

h) 3 21 21 Question 4: 25 a) b) c)
11 42 30 3+ 3

h) 25 Question 6: a) 34 b) 24 c) 9 d) 33 e) 186 f) 38 g) 64 h) 2 + 2 + 6 Question 7: a) 2 + 4 + 4 b) 2 6 + 9 c) 4 2 + 4 + 1 d) 1 2 + 2 e) 2 + 8 + 5 f) 4 2 + 7 1 Question 4: 6 a) = 6 5 b) = 3 3 Question 5: a) = 6 3 b) = 5 9 4 c) = 3 d) = + 6 5 1 e) = 8 4 4 Question 6: a) = 2 1 b) = 3 + 2 c) = d) = 2 12 e) = 2.5 6.6 Question 7: a) 6, 9 b) 6,15 c) 1,12 1 5 d) 33 , 36
7 7

6 9/2 0.125

j) = 4 Question 9: a) 2 + + 1 b) 2 + 3 4 2 c) 13 12 + 1 d) 3 2 1 + 3 + 4 3 e) 4 + 1 f) 2 2 + 2 4 + 1 6 g) 5 3 2 + 5 10 3 1 1 1 h) 1 + 2 1 2 + 1 3 Question 10: a) 1 = 0 = 0 = 1 b) + 3 = 0 = 0 = 3 c) 2 1 3 = 0 e) 9,4.25 Question 8: = 18, = 80 Question 9: = 5, = 22 Question 10: 62 = meaning this 27 good is elastic in demand, as | | > 1. Question 11: 25.8 129 = = meaning this 21 105 good is elastic in supply, as > 1. Question 12: 8 a) = 2 , 30 182 = 22 22.61 300 3391 b) = 49.72 68 meaning this good is very elastic in demand.

2 3 9

5 4 + 3 2 5 + 3

Question 12: a) = 3 = 2 b) = 7 = 4 c) = 2 = 3 1 15 d) = = 3 6 e) = 0 = 2 f) = 1 Question 13: a) 3 b) 4 c) 1 d) 15 e) 0.1 f) 1

chapter two solutions

Question 1: a) = 1 3 b) = + 2 2 c) = + 1 d) = 2 4 5 14+3 e) = 7 70 + 15 = 7 1 f) = 2 3 5 60 = 3 5 = 20 3 h) = 5 12 5 i) = 9 3 Question 2: a) , , , , , b) , , , , , c) , , , , , g) =

2 5 12

= 3.22 which 1054 means this good is elastic in supply. Question 13: c)
a) =
732 155

3391

4.723

3592 = 23.17 155 8980 b) = 2.89 3111 which is elastic. 898 c) = 14.72 61 meaning this good is elastic in supply. Note; the supply curve is backward bending in this case.

180

chapter three solutions

h) 0.5,8.5 c) 10 Question 1: i) 0.5,8.5 d) 8 a) 3 + = 1 j) 0.5,2 e) 0 2 + = 17 k) 2.4,4.2 f) 6.25 b) + = 3 l) 4.4,7.6 g) 3.4 3 + = 15 3 m) 7.1, 1.9 c) + 17 = 14 h) 7 Question 5: 3 + 2 = 1 34 i) a) = 45.5 = 8.5 315 d) 11 1.4 = 3 5 19 j) 2.79 11 1.5 = 3 b) = 46 = 8 11 22 k) 0 e) 3 3 = 4 c) = 46 = 19 l) 0 15 + 4 = 13 1 d) = 7 = 1 Question 10: + 1.4 = 0 3 a) 8 e) = 7.21 = 8.43 f) + = 4 b) 30 Question 6: = 1 c) 42 a) 1,1,3 3 3 = 1 d) 56 b) 3,4,7 Question 2: e) 280 c) 2,1,12 a) 3, 1 f) 2294 d) 1,2, 3 b) 2,2 Question 11: Question 7: c) 3.75,2.75 1 13 17 a) 2,2,2 d) 13, 11,1 a) , 3 , 3 6 18 18 b) 2,8,4 e) 2,1,5 b) 1.5,3.5,2 c) 1,3,7 Question 3: c) 1.75,1.25,3.25 d) 0.2,0.4,0.6 a) 1,1 d) 3.1,4.4,5.9 Question 12: b) 2,1 e) 5, 1.5,2.5 a) : 2853 = 7 + 19 + 14 c) 3, 3 f) 3.1,2,1.6 : 2873 = 9 + 21 + 11 d) 2, 1 g) 2.1, 2.2, 2.3 : 3594 = 4 + 20 + 25 e) 13,19 h) 2,4,6 b) = 111, = 40 = 94 f) 8,12 Question 8: Question 13: g) 1.75,1.75 a) Unique solution = 4860, = 540 = 6000 h) 3.25,18.75 b) Infinite solutions Question 14: Question 4: c) Unique solution = 1827.91, = 180.78 a) 3,2 d) Unique solution = 2608.70 b) 1,7 e) Infinite solutions Question 15: c) Infinite solutions f) No solutions = 800 800 , = 800 d) 1,3 Question 9: = 1000 e) 1, 3 a) 11 f) 20,4 b) 52 g) 0.5,8.5 chapter four questions 1 69 Question 1: = 2 log 2 + 5: red Question 13: g) = ln 15 2 Functions: , , Question 11: a) = Question 6: ln 2 2 Not Functions: , 18 = + 5: red ln 4 a) Two solutions 5 Question 2: b) = 1 ln 3 b) Two solutions = 6: blue ln 1 +4 a) = 5, = 4, = 3 c) = +1 1 c) No solutions ln 4 = 4: black b) = 1, = 1, = 6 2 4 24 d) Two solutions c) = 1, = 0, = 4 d) = Question 12: 2 12 d) = 1, = 2, = 2 e) Two solutions 2 ln 3+ln 2 a) = e) = f) One solution log 4 ln 2+3 ln 3 Question 3: 13 ln 18 2 + 27 54: black Question 7: = 3 b) = = 2 log 3 3 ln 54 = 2 + 18 45: blue = 3 3: blue 7 3 c) = 3 f) No solutions = 2 3: red log 2 = 2 6: red ln 14 2 = 3 + 5 2 g) = = 2 25 + 150: green = 3 + 12 2 ++ 48 252:grey d) = 14 ln 2 11 168: black log 24 Question 4: Question 14: Question 8: e) = 4 14 3 33 18 ln = 1.5 : blue a) = f) = a) 140 = 12 14.01 2 4 ln 2 0.011 = 3 2 :red log 8 b) = 1.5 = 1.5 b) 10 = $828.75 g) = = 2 + 2: black 182 +log 8 100 c) = 1 = 3 ln 8 Question 10: c) 1000 = 55 14.58 h) = d) = 4 0.041 1+log 2 120 36 396 = 4 log : black 25ln 3 ln e) = i) = +1 2 d) = 55 = 26.01 18 = log : blue ln 6 0.03 f) 181

Question 15: a) 5 = 1.457 b) =

ln

ln 1.525 5.39 ln 1.0815

ln 2.05 ln 1.0815

61 + ln 1.05 42

ln 1.03+ln 1.05

c)

9.16

chapter five solutions Question 1: , , , , , , , Question 2: a) = 18 b) = 2 c) = 2 + 7 d) = 3 2 + 8 5 e) = 2 f) = 3 Question 3: a) = 6 b) = 30 + 1 c) = 2 + 3 2 51 d) = 2 + 10 2 e) = 32 5 + 3 2 f) = 24 3 3 4 + 3 2 2 g) = 3 h) =

10 2

Question 16: a) 472.16 b) 15,170.89 c) $17.918 b) c) d) e) f) g)

d) 13

= 5 51 = 4 14 2 = 2 1 2 = 13 2 13 4 3 = 2 4 3 3 4 1+ 48 = 2 4/
2

h) = 7 Question 8: 1 a) = b) = c) = d) = e) =
2 10

3 4

1 2

3 2

51 3 21 2 4 3 +1 3 4 3 +

i) = 2 3 + 4 Question 4: a) = 2 + 1 b) = 15 3 4 4 c) = 12 + 5 5 d) = 144 1 4 2 e) = 300 2 + 1 2 + 3 48 f) = 4 1 3 5 Question 5: a) = 3 2 15 + 2 + 15 3 b) = 3 2 9 + 1 + 9 8 3 1 c) = 60 3 1 3 45 6 = 60 3 105 6 d) 28 8 2 + 4 + 2 + 4 3 4 7 1 e) = 2 + 4 3 15 + 15 14 3 + 4 f) = 1.5 7 + 2 1 3 + 3

3 4 6 4 6

3 1

+ 2
2 3

f)

4 4 4+ = 3 3 + 2 2+3 4 2 = 2 3 1
+ 0.04 8+4 3

g) = 82 2 Question 9:
a)

= 12 2 2 3 1 3 + 5
3

b) c)

= 2 1 3 + 5 54 + 60 9 = 5 51 1 4 + 4 1 3 1 51 = 1 3 5 51 9 51 + 4 = 0.6 2 + 1
4
2

+ 9 3 + 5
3

2 3 1
2

d) = e) f) g) = =

1+ 180

2 2

4 12 3 5 4 1+ln 5 1 2 31

1 5 1 2 31

= 10 + 15 = 5 31 2 + 3
2

+ 2 6

h) =
2 2

2 3 4 + 6 4 +4 3 +1 3 2 3 4 2

g) = 36 7 6 6 + 6 6 5 6 Question 6: 2 a) = 2 b) = c) =
1 4 12 2 3 2 4+3 1 2 2 4

i) = 42 2 3 1
+1
2

1 + ln + 1

2 3 1

7
6

21 1 + ln + 1
2

= 2 2 3 1

d) = e) f) g) = = =

2 1 2 130 3 +39 2 +1 5 2 4 4+6 2 2 2 2 39 4 3 2 +13 8 7 2 1+ 4 2 2 +1 2 +118 3 2 +1 2 +3 2 +6 2 +1 3 6 13 2 2

2 3 1 + 1
5 5 + 7 2
2

j) =
7 6

7 71 +4 3 ln 5 + 7 7 8 71 + 4 ln

h) =

Question 7: a) = 2 2

7 1 Question 10: a) = 4 3 + 45 2 = 12 2 + 90

72 3

182

b) = 68 5 + 1 = 340 6 2 c) = 0.27 8 + 8 2 1 3 = 2.16 7 + 8 2 1 3 + 48 2 2 1 2 2 d) = 2 4 3 + 2 1 1 2 1 2 +

21
= 2 4 3 + 2 1 + 4 4 2 2 1 1 2 + 2 1 2 2 = 2 12 2 + 2 1 + 4 2 1 + 16 3 2 2 6 1 4 3 1 + 2 e) =
=
3 2 172 3 2 +1 2
2
2 2

Question 11: 0.25 0.75 + 4 = 0.25 + 4 10 = 0.0968 4. . 35 = 0.0282 4. . Question 14: a) = = 32 30 + 75 b) = 5 c) 15 = 60 Question 15: 30 a) = = 2 b) =
0.1 2 +2 2

0.1 +2 603 2

+ 15

6 72 3 2 + 1
10+1 5 2 +

12 3 2 + 1 3 2 1 72 3 2 + 1 4

30 = 0.312 3. . 60 = 0.082 3. .

f)

= =

10 5 2 + 10 + 1 2 5 2 + 2 chapter six solutions Question 1: Local minima: , Local maxima: , Global minimum: Global maximum: Question 2: a) 2 + 3 = 0 b) 45 2 4 1 3 = 0 2 2 c) 24 1 24 3 1 = 0 2 24 1 1 2 = 0 d) 4 1 3 1 2 + 4 3 1 1 4 1 3 1 3 + 2 = 0 2 e) 2 = 0
+1

c)

d)
2

= 0

e)

Question 3: a) 1, 4 b) 2, 52 5,193 c) 1, 2 4 d) 3,0 4 5, e)

1 2

4 244 , 41.127 6 1 13 , 13 3 27 3,0 1 4 , 28 3 9 10 2 , 14 6 9 3 1, 2, 2 2 0,0 4 2, 2 + 2, 6 + 4 2 1 2 2 2, 6 4 2 1+ 2

3 23 8 16

f)

1 14.5
1 2

3.5 + 19 1

1 , 2

No inflection point Question 5: a) = 5 = 95 b) = 50 c) = 202,500 Question 6: a) = 350 b) = 350 0.22 40 = 875 0.4 0 1750 d) = 875 e) = 153,085 Question 7: a) = 10 + 0.25 b) = 10 + 0.25 0.2 0.01+4 ln 125 4 c) = 82.8314 0.01 d) = 0.371 3. . e) = 5.708 3. . Question 8: a) = + 20 = 2 + 20 c)
122468

14.5
2

1 2

3.5 + 19

f)

1 + 2, 1 2,

4+2 2

2 42 2

Question 4: a) No stationary points 1 25 , 83 3 27 4+ 244 b) , 27.719

6

183

b) = 0.1 + 2.5 + c) = 0.2 + 2.5 +1 = 0.5

10

0.5 0.5 d) = 0.01 ln + 1 = 1.50.5 + = 0.02 ln + 1 + e) =

0.1 5 + 5 +10

0.01 2 + 1

= 0.1 5 + 0.1 5 f) = +1 = +1 1 Question 9: = 0 = 12.5 Question 10: 5 3 = 1.842 3. . 2 Question 11: a) = 1.52 + 50 = 4.52 + 100 1 b) = 0 = 33 c) = 22 9 d) = 8230.45 2. . 2 e) = 16 3 Question 12: =
4

% = 0.25 so will decrease if the owner Question 16: 27 = 0.252 107 33 % = 6 % 107 74 % = 18 % 107 Since demand is inelastic, the increase in price will outweigh the decrease in quantity sold, so total revenue will increase. Question 17: a) = 2500 + 1500 b) = 0.52 + 2500 c) = 0.52 + 2250 1500 d) 1 4499 e) = 2250 f) = 2,529,750 g) = 1375 h) = + 2250 1500 i) = 0.5 + 2250 j) = 30003 208.01 k) = 4 l) % = 30% Question 18: a) = 80 + 200 b) = 0.42 + 4276 c) = 0.42 + 4196 200 d) 0 10489 e) = 5245 f) = 11,003,810 g) = 2178 h) = 0.8 + 4196 200 i) = 0.4 + 4196 j) k) l) = 5003 63.00 269 = 1 which is elastic in demand.
400
2 2

1 0.473 3. . 20

Question 13: 1.96 + 180 = 15.69 1.68 1.96 Since > 1 the good is elastic at this price. Question 14: 3 100 ln 6 + 18 = 3.84 154 Since > 1 this good must be elastic in supply. Question 15: chapter seven solutions Question 1: a) = 2 + 3 + 8 3 = 2 1 + 12 2 2 b) = 48 3 + = c) = 4.5 0.7 0.7 + 15 = 10.5 0.3 0.3 + 15 d) = 43.2 1.4 4.8 3 + 2 = 86.4 2.4 3.8 3 e) = + 4 + 4 + 3 = + 3 5 3 = + 4 + 4 + 3 = + 3 3 5 f) = 3 4 2 4 18 4 2 = 3 4 2 4 44 2 + 3 g) = =
2 2 2 3 1 2 2 2

% = 16

13 16

h) =

11 2 1 2

24 1 12 2 2 = 1 2 i) = = j) k) l)
2 2 +1

2 2 1 2 2 + = 4 4 3 + 4 + 3 2 + 4 4 = 4 3 + 4 + 4 4 = 2 2 4 + 4 4 2 2 1 = 2 2 4 + 4 4 2 2 1
9 1 1 2

1 2 2 +

= =

1 15

9 1 9 1 2

1+

3 3 + 2 3 + 2 1 2

m) =

1 + 1ln 1+ 1 2

184

d) = 20.08 e) = 13.107 = 1 2 Question 5: Question 2: There is a stationary point at = 12.8601, = 12.0563. a) = 2, = 2, = = 3 The SOC gives a possible maximum, and the delta test b) = 2, = 4, = = 4 + 2 confirms this. c) = 6 4 , = 12 3 2 , = = 12 2 3 + 2 Question 6: d) = 192 2 8 , = 896 4 5 + 36, 1.7579 and the actual change in is = = 512 3 7 + 36 13 1.7583 4. . 2 2 + 2 2 2 + Question 7: e) = 4 + 16 = 2421.64 however the actual change in is 2 2 + = 2409.80. 2 + = = 4 2 Question 8: 2 2 2 2 f) = 2 + + 4 2 + a) = 0.016 0.4 0.5 + 0.00640.5 0.4 2 + 2 2 2 + 2 = 2 + 4 4 b) Exact change in output is 1.0874 4. . 2 + 2 Question 9: = = 4 4 1 1 8 2 +4 3 Maximum profit is obtained at = , = . The SOC g) = 2 3 2 4 6 2 + indicates a maximum, and the delta test proves this. The 2 4 12 3 maximum profit attainable is 1.198 3. . . = 2 2 + 3 2 Question 10: 2 12 a) = 300 + 150 = = 2 2 + 3 2 b) = 300 + 150 3 2 42 400 26+2 2 2 2 41 36 h) = + 30 c) = 47 = 12 with the SOC indicating a 13 + 2 2 47 47 2 maximum, and the delta test proving this. = + 30 d) = 7738.30 13 + 2 2 2 Question 11: 13 + = = 30 a) = 1100 902 135 2 + 112.5 + 360 + 2 2 13 + 540 Question 3: b) = 50 + 35 + 550 a) Stationary point at 0,0 . SOC gives a possible c) = 550 902 135 2 + 112.5 + 310 + maximum. Delta test confirms this. 505 b) Stationary point at 1.75, 0.25 . SOC gives 581 319 d) = 3 = 3 for maximum profit. SOC possible maximum. Delta test confirms this. 639 639 indicates a possible maximum, and delta test c) Two stationary points: 1: 0,0 2 confirms this. 3 1 1 3 2: , 24 . SOC says the first point e) = 2039.48 2. . 5184 5184 Question 12: is a saddle point. SOC says the second point is a a) = 2 42 + + 1400 possible minimum. Delta test confirms this. = 2 62 + 3 + 1200 5 9 d) Stationary point at , . SOC gives a possible b) = 650 + 350 + 10,000 11 11 maximum. Delta test confirms this. c) = 750 + 850 52 32 + 4 10000 6 4 3 5 3 5 d) = 179 = 261 with the SOC giving a 11 11 e) Stationary point at , . SOC gives possible 4 3 possible maximum, and the delta test confirming this. maximum. Delta test confirms this. e) = 1259.96 = 319.04 8 8 f) = 168,409.09 f) Stationary point at , . SOC says it is an inflection 5 5 g) The prices dont make sense as the cost of the point. refrigerator is greater than the sales price, however Question 4: due to the interdependence of the two goods, then it 0.5 0.6 a) = 1 + 20 does make sense. That is take a small loss on one 0.5 0.6 b) = 20 5 50 399 good to make a big profit on another. c) Maximum profit at = 10.486, = 26.214. SOC provides a possible maximum, delta test confirms this. The profit is 7.2144. chapter eight solutions Question 1: Question 2: a) 2.781% a) 14.714% b) 6.952% b) 11.385% c) 3.476% c) 7.357% d) 3.418% d) 7.105% e) 110.1 e) 1.897% 1 + 1 ln 1 +

1 +

185

f) 1.994% g) A big drop in price in between. Question 3: a) 12 b) 18 c) 54 d) 138 Question 4: a) 15 = 1331

4 14 11 4 26 11

b) 21 = 1331 c) d) 11 = 16 =
1331

4 11 1 11 7 11 4 16 1331 1 11 7 11

2091.54 2091.57

Question 5: a) Investment 2 (7092.56) is better than investment 1 (7000) in the fifth year. b) Investment 1 (32,500) is better than investment 2 (28,189.18) up to the fifth year. c) Investment 2 has a return of 55,494.09 whilst investment 1 has a return of 55,000. Question 6: a) 171.60 b) 1601.60 Question 7: a) 6000

b) 10,000 Question 8: a) 5687.31 b) 7228.43 c) 12 6 d) 5099.35 Question 9: a) 16322.67 b) 7 11 c) 14 8 Question 10: 4114.98 Question 11: Bank 2 is a better deal at the effective rate 5.125% is better than the 5.1% offered by Bank 1. Question 12: Bank of Vark has the best effective rate of 8.368%, which is better than Sun Bank (8.322%) and Universal Bank (8.349%). Question 13: a) = 14,313.98 b) 20.5% c) The project is worthwhile as > 0 and > Question 14: a) = 122.99 and 8.51% b) The project is not worthwhile, as more could be earned from the market interest rate.

186

Index A
Absolute values (26) Adding fractions (8) Annual interest rates (170) Arithmetic average (162) Arithmetic series (163) Averages arithmetic (162) geometric (162) standard (130)

G
Geometric average (162) Geometric series (165) Gradients function (112) negative (33)

O
Optimal point, nature (120) Optimisation single variable application (124) graphical (118) mathematical (118) multiple variable (151)

H
Hyperbolic functions (90)

I
Index numbers (161) Indices (14) Inequalities (26) Inflection point (123) Interest rates annual (170) compound (168) simple (167) Internal rate of return (174) Intersecting lines (38)

P
Partial differentiation Profit (126)

B
BIMDAS (18) Break-even (129)

Q
Quadratic Functions defining (75) graph (76) sketching (77)

C
Compound interest (168) Cubic functions (80)

D
Determinant (65-66) Differentiation multiple variable (140) partial applications (147,155) complex (144) simple (142) second order (146) rules Chain (104) (109) ln (110) power (103) product (105) quotient (108) single variable elasticity (133) first principles (99) introduction (97) second derivative (111) total (148) Dividing fractions (7)

S
Simple interest (167) Simultaneous equations introduction (50) two (50) three (52)

J
Jacobian Determinant (68)

L
Linear Equations, graphing (34) introduction (31) macroeconomic applications (40) main features (32) obtaining equations (36) Logarithm applications (91) functions (84) graphs (88) rules (84)

T
Total Revenue definition (127) elasticity (135)

V
Variables, defining (13)

Z
Zero (27)

M
Marginal value (130) Matrix applications (62) determinant (65-66) introduction (54) notes (61) solving 2 2 (55) solving 3 3 (59) Multiple variable differentiation (140) Multiplying fractions (7)

E
(85) Elasticity differentiation (133) interpreting (44) introduction (42) total revenue (135) Equations (21) Exponential functions (82)

N
Negative numbers (6) Net present value (172) Non-linear function (74)

F
Factorisation (25) Fractions (7-12)

187