Mathematics for Economic Analysis, 4ECON007C Semester 1, 2017-2018

Tutorial 2 Mathematics of Finance

1) a) y = 2; b) x = 4; c) a = 3; d) x = 1.5; e) x = log637 = 2.0153

2H) (P, Q) = (9.97, 2.3)

3) a) S = P(1 + r)t = 2,500(1 + 0.05)8 = $3,693.64; b) S = P(1 + r/2)2t = 2,500(1 + 0.025)16 = $3,711.26;
c) S = P(1 + r/4)4t = 2,500(1 + 0.0125)32 = $3,720.33; d) S = Pert = 2,500e0.4 = $3,730.5

4H) a) S = P(1 + r/4)4t = 10,000(1 + 0.03)8 = $12,667.7; b) S = P(1 + r/12)12t = 10,000(1 + 0.01)24 =
$12,697.35; c) S = Pert = 10,000e0.24 = $12,714.42

5) 1st account: S = P(1 + 0.04/4)(4)(3) = 1.1268P;

2nd account: S = P(1 + 0.036/12)(12)(2)(1 + 0.048/12)(12)(1) = 1.1273P;
Choose 2nd account because 1.1273P > 1.1268P

6H) a) Return(MB) = P(1 + 0.05)2 = 1.1025P

Return(BFB) = P(1 + 0.03)(1 + 0.07) = 1.1021P
Choose MB because 1.1025P > 1.1021P

b) Return(MB) = P(1 + 0.05)3 = 1.1576P

Return(BFB) = P(1 + 0.03)(1 + 0.07)2 = 1.1792P
Choose BFB because 1.1792P > 1.1576P

7) S = P(1 r)t = 50,000(1 0.05)3 = $42,868.75

8H) a) V = $22,000(0.875)t; V (3) = $14,738.28; b) 7.58 years

9) a) S = P(1 + r)t = 15,000(1 + 0.04)5 = $12,328.43; b) S = P(1 + r/2)2t = 15,000(1 + 0.02)10 =

$12,305.17; c) S = Pert = 15,000e0.2 = $12,278.98

10H) If the store charges interest of 2% monthly, then nominal interest rate will be 24% annually
(122%). However, effective interest rate will be 26.82% annually: (1 + r/m)m 1 = (1 + 0.24/12)12 1
= 0.2682
ln(1.26
11) APR = re = er 1 = e0.07 1 = 0.0726 = 7.26%

12) a) Let C = Consumption, S = Supply = 104. Then, C = Pert = 78e0.058t = (78)(1.0598)t

104 ln(104 / 78) 0.2877
S= C 104 = 781.0598t t = log1.0598 = = = 4.95 years
78 ln1.0598 0.0581
Note: It is better to model supply of and demand for energy with natural base exponential function or
continuous compounding formula rather than ordinary exponential function or annual compounding
formula.
b) According to the consumption function, in the 50th year the consumption will be C = Pert =
78e(0.058)(50) = 1,420.18; Therefore, the supply should also grow at the rate, which ensures enough
supply in the 50th year. So, 1,420.18 = Sert = 104e50r. From this equation, we find r = 0.0523 = 5.23%

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Mathematics for Economic Analysis, 4ECON007C Semester 1, 2017-2018

13H) Lets say P is the current number of population and we want to find after how many years it will
become 2P. If we consider P as a principal, 2P as a future sum and the fact that population grows
continuously, natural base exponential function is set up as follows: 2P = Pe0.026t. So, t = 26.66 years.

14) a) 32.27 = 23.2e6r; r = 0.055; S = 23.2e0.055t; b) 5.5%

15H) 1st method: P = Sert; 26.1 = 20.7e14r; e14r=1.26; 14r = 0.23; r = 0.0164; 40 = 20.7e0.0164t; e0.0164t =
1.9324; 0.0164t = 0.6588; t = 40.1707; 40.1707 14 = 26.1707 years
2nd method: P = Sert; 26.1 = 20.7e14r; e14r=1.26; 14r = 0.23; r = 0.0164; 40 = 26.1e0.0164t; e0.0164t =
1.5326; 0.0164t = 0.4270; t = 26.0366 years

16) a) 6; bH) 3; c) no limit; d) no limit; e) 0; fH) 8; g) 10; h) 2/3; i) 0; jH) 1; kH) 4; lH) no limit.

17H) 40,000. The population in the long run.

x 1
x 1

18) a) Yes, 1) f (1) defined; 2) lim 5 x 2 8 x 9 exists; 3) lim 5 x 2 8 x 9 = f (1) = 6; b) No, 1) f (3) is
x 3 x 3
not defined; 2) lim exists; 3) lim 2 f (3)
x 3 x 9
2 x 3 x 9

19) a) Continuous; bH) Continuous; c) Discontinuous at x = 0; dH) Discontinuous at x = 0

20) find maturity value of the note - the amount that Asaka bank must pay to Anvar: S1=P(1+rt)=
6500(1+0.06*1)=6890.
In four months, Karim will receive 6890, since Karim wants a 9% return,
P2=S1/(1+rt)=6890/(1+0.09*4/12)=6689.32

21) 1) , 2) 21.5786

22) 1) $119625.61 2h) $23 242.87 3h) $72 482.38

23) 1) about $205,490 2) about $310 831

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