Instructors Manual

Essential Mathematics for

Economic Analysis
rd
3 edition

Knut Sydster
Arne Strm
Peter Hammond

For further instructor material please visit:

www.pearsoned.co.uk/sydsaeter
 Preface
This instructors manual accompanies Essential Mathematics for Economic Analysis, 3rd Edition, FT/Prentice
Hall, 2008. Its main purpose is to provide instructors with a collection of problems that might be used for
tutorials and exams. Most of the problems are taken from previous exams and problem sets at the Department
of Economics, University of Oslo, and at Stanford University. We have endeavoured to select problems of
varying difculty. Many of them are very routine, but we have also included some problems that might
challenge even the best students. The number in parentheses after each problem indicates the appropriate
section of the text that should be covered before attempting the (whole) problem.
The chapters before Chapter 10 in this manual do not follow the chapters in the book, but are rather ordered
according to popular areas in which exams are given. For each chapter we offer some comments on the text.
Sometimes we explain why certain topics are included and others are excluded. There are also occasional hints
based on our experience of teaching the material. In some cases, we also comment on alternative approaches,
sometimes with mild criticism of other ways of dealing with the material that we believe to be less suitable.
Chapters 1 and 2 in the main text review elementary algebra. This manual includes a Test I (page 100),
designed for the students themselves to see if they need to review particular sections of Chapters 1 and 2.
Many students using our text will probably have some background in calculus. The accompanying Test II
(page 102) is designed to give information to both the students and the instructors about what students actually
know about single variable calculus, and about what needs to be studied more closely, perhaps in Chapters 6
to 9 of the text.
Oslo and Coventry, July 2008

Knut Sydster, Arne Strm, and Peter Hammond

Contact addresses:
knut.sydsater@econ.uio.no
arne.strom@econ.uio.no
hammond@stanford.edu

Version 1.0
21072008 1394

Knut Sydster, Arne Strm, and Peter Hammond 2008

 Contents
1 Elementary Algebra. Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Functions of One Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3 Implicit Differentiation. Linear and Quadratic Approximation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4 Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5 Single-Variable Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7 Differential Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8 Difference Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9 Sums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10 Interest Rates and Present Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11 Functions of Many Variables. Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12 Tools for Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
13 Multivariable Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
14 Constrained Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15 Matrix Algebra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
16 Determinants and Inverses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
17 Linear Programming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Answers to the problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Test I (Elementary Algebra) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Test II (Elementary Mathematics) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Answers to Test I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Answers to Test II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Knut Sydster, Arne Strm, and Peter Hammond 2008

 CHAPTER 1 ELEMENTARY ALGEBRA. EQUATIONS 1

Chapter 1 Elementary Algebra. Equations

The main purpose of Chapters 1 and 2 in the text is to help those students who need to review elementary
algebra. (Those who never learned it will need more intensive help than a text of this kind can provide.)
We highly recommend instructors to test the elementary algebra level of the students at the outset of the
course, using Test 1 on page 100, or something simpler. Reports we have received suggest that instructors
who are not used to giving such tests, sometimes have been shocked by the results when they do, and have had
to adjust the start of their course accordingly. (In a short test in a basic course in mathematics for economists
in Oslo, among 180 students there were 30 different answers to (a + 2b)2 = ?.) But we do feel that reviewing
elementary algebra should primarily be left to the individual students. Thats why the text supplies a rather
extensive review with many problems.
We recommend illustrating power rules (also with negative exponents) with compound interest calcula-
tions (as in Sections 1.2 in the text), which are needed by economics students anyway.
We often encounter students who have a purely memory based, mechanistic approach to the algebraic
rules reviewed in Section 1.3. A surprisingly large number of students seem unaware of how algebraic rules
can be illustrated in the way we do in Fig. 1.3.1.
We nd the sign diagrams introduced in Section 1.6 to be useful devices for seeing when certain products
or quotients are positive, and when they are negative. Alternative ways of solving such problems can be used,
of course.
Mathematics for economic analysis often involves solving equations, which is the topic of Chapter 2. In
particular, it is important to train the students in handling equations with parameters, which arise in so many
economic applications. (We often see that students being used to equations involving x and y have problems
when the variables are Y , C etc.) The examples and problems in Section 2.5 dealing with some types of
nonlinear equation which frequently occur in optimization problems, can be postponed until the techniques
for solving them are needed.
In Chapter 3 we discuss some miscellaneous topics that are not so often featured in exam papers. However,
in Chapter 9 of this Manual we give some problems involving sums. Set theory, in our opinion, is not crucial
for economics students, except when the need for it arises in their statistics courses.

Problem 1-1 (1.2)

Find the solution x of the following equations: (a) 52 5x = 57 (b) 10x = 1 (c) 10x 105 = 102
(d) (25)2 = 5x (e) 210 22 2x = 0 (f) (x + 3)2 = x 2 + 32

Problem 1-2 (1.2)

(a) A person buys x1 , x2 , and x3 units of three goods whose prices per unit are p1 , p2 , and p3 respectively.
What is the total expenditure?
(b) A rental car costs F dollars per day in xed charges and b dollars per mile. How much must a customer
pay to drive x miles in 1 day?
(c) A company has xed costs of F dollars per year and variable costs of c dollars per unit produced. Find
an expression for the total cost per unit (total average cost) incurred by the company if it produces x units
in one year.
(d) A person has an annual salary of $L and then receives a raise of p% followed by a further increase of
q%. What is the persons new yearly salary?

Knut Sydster, Arne Strm, and Peter Hammond 2008

2 CHAPTER 1 ELEMENTARY ALGEBRA. EQUATIONS

Problem 1-3 (1.3)

3
Which of the following equalities are correct? (a) 35 = 53 (b) (52 )3 = 52 (c) (33 )4 = (34 )3
2x + 4
(d) (5 + 7)2 = 52 + 72 (e) = x + 4 (f) 2(x y) = x 2 y 2
2

Problem 1-4 (1.5)

 1
5562 5552 1252/3 2 1 x /2 y /3 z
Simplify: (a) (b) (c) (d)
1111 53 32 6 (x y 8/3 z2 )1/2

Problem 1-5 (1.5)

896 897 897 1 1 1 (p q /2 )2
Simplify: (a) (b) + + (c)
895 1 1 1 1 1+ 1 (p2/3 q 4/3 )3/2
2 4 2

Problem 1-6 (1.5)

(a 3c )1 a 3c 1 1 1
Simplify: (a) 210 (32)9/5 (b) 52 + 122 10 (c) (d) + +
a 5c (a 2c )2 1+x 1x 2 1x

Problem 1-7 (1.5)

8 2 2
Simplify: (a) 40 (0.4)1 + 3
+ 4 41 (b) 64 323/5 (c) +
2 x 2 4x x x4

Problem 1-8 (1.5)

The surface area S and the volume V of a sphere of radius r are respectively, S = 4r 2 and V = 43 r 3 .
(a) Express S in terms of V by eliminating r.
(b) A sphere of capacity 100 m3 is to have its outside surface painted. One liter of paint covers 5 m2 . How
many liters of paint are needed?

Problem 1-9 (2.2)

Solve the following equations:
a 2 b2 x x
(a) 1 1
= + for x (b) Y = I + a(Y (c + dY )) for Y
a b a b

Problem 1-10 (2.4)

If 23x = 16y+1 and 2x = 5y 2, what is x + y?

Knut Sydster, Arne Strm, and Peter Hammond 2008

 CHAPTER 2 FUNCTIONS OF ONE VARIABLE 3

Problem 1-11 (2.2)

Consider the system of equations

(i) Y = C + A M (ii) C = aY + b (iii) M = mY + M

Express Y in terms of A , M and the constants a, b, and m.

Problem 1-12 (2.4)

Solve the following equations:
5P + 6Q = 28
(a) 10r 2 3r + 0.2 = 0 (b) (c) (x 2 4)(x 2 25) = 0
8P 3Q = 7

Problem 1-13 (2.5)

Solve the following equations (systems):
P + 2Q = 1 9x xy 2 = 0
(a) x(16 x 2 ) = 0 (b) 52p1 = 125p (c) (d)
P 2 + Q2 = 2 3x 2 2y = 0

Problem 1-14 (4.10)

2
(a) Compute (i) ln(9 4) 2 ln(3 + 3) (ii) ln 32 4 ln 2 eln(ln 2) (iii) eln(e ) ln 2 (iv) e5 ln 3ln 2

(b) Solve for x: (i) ex 3x+1/2 = e (ii) (ex 1)(ex + 1) = 3 (iii) 8ln x = 64 (iv) x = 2
2 2

(v) ln(5 x 2 ) = ln(x 2 + 4x 11) (vi) e2t + 3et = 10

Chapter 2 Functions of One Variable

In this chapter of the manual, we collect problems on functions of one variable, referring to chapters 46 in
the text. In our experience, training students to master functional notation is very important, yet sometimes
neglected in introductory texts. In particular, understanding the denition of the derivative requires such
an understanding, and in some sense it is more important for economists than the ability to differentiate
complicated functions. Economic interpretations of the derivative like in Examples 6.4.3, Problems 6.4.5 and
6.R.4 should be stressed.
In order to have students see mathematics applied as soon as possible to economic optimization problems,
we consider in Section 4.6 a monopolist with a quadratic cost function who faces a linear (inverse) demand
function. The perfectly competitive rm is treated as a special case. It is shown that, in order that the prot
maximum for a monopolist should coincide with that for a competitive rm, its output should be subsidized
(rather than taxed). (Alternatively, it should have its price regulated.)
General polynomials and polynomial division might perhaps be regarded as optional, but power functions
are denitely crucial So are exponential and logarithmic functions, of course.

Knut Sydster, Arne Strm, and Peter Hammond 2008

4 CHAPTER 2 FUNCTIONS OF ONE VARIABLE

Section 5.1 which examines how changes in a function relate to shifts in its graph, with application to
shifting demand and supply curves is useful for economic students. Section 5.3 on inverse functions might
be postponed till Section 7.3 on differentiating the inverse.
Our treatment of the single variable calculus begins in Chapter 6 and is rather standard. As already
indicated, one should emphasis economic interpretations of the derivative.
Limits were used to dene derivatives informally in Section 6.2. The more careful discussion that is really
needed is the topic of Section 6.5, though even this remains rather informal.
In fact, Chapter 6 almost completes the inventory of functions of a single variable used in this book, and
in most mathematical work in undergraduate economics. The major omission is the family of trigonometric
functions discussed in FMEA. In economics, they are used almost exclusively to solve second- and higher-
order difference and differential equations, which are topics in FMEA.

Problem 2-1 (4.3)

Figure 2-1 below shows the graphs of a quadratic function f and a linear function g. Use the graphs to nd
for which x the following hold: (i) f (x) g(x) (ii) f (x) 0 (iii) g(x) 0.
y
6
5
4
3 y = g(x)
2
1

3 2 1 1 2 3 4 x
1
2
3
y = f (x)
4
Figure 2-1

Problem 2-2 (4.2, 6.4)

The cost of producing x units of a commodity is given by C(x) = x 2 + x + 100.

(a) Compute C(0), C(100), and C(101) C(100).
(b) Compute the incremental cost C(x + 1) C(x), and explain in words its meaning.
(c) Compute the marginal cost C  (x) and C  (100). What is the difference between C  (x) and C(x+1)C(x)?

Problem 2-3 (4.6)

The price P per unit obtained by a rm in producing and selling Q units of a commodity is P = 52 4Q,
and the cost of producing and selling Q units is C = Q + 41 Q2 .
(a) What is the prot function (Q)?
(b) Find the value of Q that maximizes prots.

Knut Sydster, Arne Strm, and Peter Hammond 2008

 CHAPTER 2 FUNCTIONS OF ONE VARIABLE 5

Problem 2-4 (4.5)

(a) Consider the demand and supply curves D = 200 41 P , S = 20 + 2P . Find the equilibrium price P ,
and the corresponding quantity Q .
(b) Suppose a tax of $0.25 per unit is imposed on the producer. How will this inuence the equilibrium price?
Compute the total revenue obtained by the producer before the tax is imposed (R ) and after (R).

Problem 2-5 (4.7)

Figure 2-5 displays the graphs of two functions f and g.
y y

x x

ax + b
y = f (x) = y = g(x) = px 2 + qx + r
x+c
Figure 2-5
Specify (if possible) which of the constants a, b, c, p, q, and r are > 0, = 0 or < 0.

Problem 2-6 (6.6)

x5
Differentiate: (a) y = 2x 5 (b) y = 31 x 9 (c) y = 1 10
1 10
x (d) y = 3x 7 + 8 (e) y =
10
1 1
(f) y = x 5 x 5 (g) y = 41 x 4 + 13 x 3 + 21 52 (h) y = + 3
x x

Problem 2-7 (6.8)

2t + 1
Differentiate: (a) y = x 12 (b) y = x x 2 x 3 (c) f (x) = 21 x 6 4x 2 + 3 (d) G(t) =
t2 + 3
(e) y = 2x 2 + 10 (f) h(L) = (La + b)d

Problem 2-8 (6.4)

If x(t) denotes the number of litres of petrol left in a car at time t, with time measured in hours, what is the
interpretation of x(0) = 0.75?

Problem 2-9 (5.2)

ax + b
Let f (x) = , where a, b, and c are constants, and c  = 0. Assuming that x  = a/c, show that
cx a
f (f (x)) = x.

Knut Sydster, Arne Strm, and Peter Hammond 2008

6 CHAPTER 2 FUNCTIONS OF ONE VARIABLE

Problem 2-10 (6.2)

Suppose f (0) = 2.5 and that the derivative of f has the linear graph shown in Fig. 2-10. Find a formula for
f (x) and sketch its graph. (First nd a formula for f  (x).)

y
3

2 f  (x)
1

x
1 1 2 3

Figure 2-10

Problem 2-11 (6.9)

Mediana is a small nation where the number f (x) of digital TV sets (in millions) in year x is expected to
grow according to the formula
1.5
f (x) = 2 , x0
x+1
(a) Find f  (x) and f  (x).
(b) Sketch the graph of f . What is the limit of f (x) as x ?

Problem 2-12 (6.9)

(a) Let g(x) = 3x 3 15 x 5 . Find g  (x) and g  (x).

(b) Check where g is increasing and where it is concave.
(c) Prove that g(x) = g(x). What does this mean geometrically?
(d) Sketch the graph of g.

Problem 2-13 (6.7)

x
(a) The function f is dened by f (x) = for all x. Compute f (2), f (1), and f (5).
x2 2x + 4
(b) Show that x 2 2x + 4 is never 0.
(c) Compute f  (x) and nd where f  (x) is 0.
(d) Let P be the point on the graph corresponding to x = 1. Find the equation for the tangent to the graph
at this point.
(e) Sketch the graph of f .

Problem 2-14 (6.7)

Let a, b, m, and n be xed numbers, where a < b, and m and n are positive. Dene the function f for all x
by f (x) = (x a)m (x b)n . For the equation f  (x) = 0, nd a solution x0 that lies between a and b.

Knut Sydster, Arne Strm, and Peter Hammond 2008

 CHAPTER 2 FUNCTIONS OF ONE VARIABLE 7

Problem 2-15 (6-11)

Consider the production function which, for xed inputs N and K, depends on the parameter as follows:

NvKv
F () = a (a, b, v, N , and K are positive constants)
(N + bK )v/

Use logarithmic differentiation to nd an expression for F  ().

Problem 2-16 (6.11)

Consider the function f dened by f (x) = x(ln x)2 , x > 0.
(a) Calculate f  (x) and f  (x).
(b) Determine where f is increasing and where f is decreasing.

Problem 2-17 (4.2)

Let f (x) = |x|. Which of the following statements are true for all possible pairs of numbers x and y?
(a) f (x + y) = f (x) + f (y) (b) f (x + y) f (x) + f (y) (c) f (xy) = f (x) f (y) (d) f (2x) = 2f (x)

(e) f (2x) = 2f (x) (f) f (x) = x 2 (g) f (2x) = 2f (x) (h) |f (x) f (y)| |x y|

Problem 2-18 (4.10)

All organic material contains the stable isotope carbon 12 and a little of the radioactive isotope carbon 14.
The ratio between the quantities of carbon 14 and carbon 12 is constant in living organisms, and seems to
have been constant for thousands of years. When an organism dies, its carbon 14 decays according to the law
4 (tt )
f (t) = f (t0 )e1.2510 0
()

where f (t0 ) is the quantity of carbon at the moment of death t0 , and f (t) is the quantity that is left at time t.
f (t)
(a) Show that t0 is given by t0 = t + 8000 ln . (This formula is the basis for radiocarbon dating, for
f (t0 )
which the American W. F. Libby received the Nobel prize in chemistry in 1960.)
(b) Helge and Anne Stine Ingstad found several Viking tools on old settlements in Newfoundland. The
charcoal from the replaces was analysed in 1972, and the percentage of carbon 14 in the charcoal
(compared with the content of carbon 14 in fresh wood) was 88.6%. Use the result from (a) to determine
when the Viking settlers lived in Newfoundland.

Problem 2-19 (5.3)

 
x+1
Let the function be dened by (x) = ln(x + 1) ln(x + 2) = ln for all x 0.
x+2
(a) Find the range of .
(b) Find the inverse of . Where is it dened?

Knut Sydster, Arne Strm, and Peter Hammond 2008

8 CHAPTER 2 FUNCTIONS OF ONE VARIABLE

Problem 2-20 (5.4)

The Norwegian income tax schedule for a single person in 2004 was as follows. Income below 23 000 kroner
was exempt from tax. Above this lower limit, all income was subject to a 7.8% social security tax. Above
32 900 kroner, the tax rate was 28% (in addition to social security). Above 354 300, a surtax of 13.5% was
imposed, and above 906 900, the surtax increased from 13.5% to 19.5%. Dene a mathematical function that
describes this tax schedule, and sketch its graph.

Problem 2-21 (5.5)

A rm has two plants A and B located 60 kilometers apart at the two points (0, 0) and (60, 0). See Fig. 2-21.
The two plants supply one identical product priced at $p per unit. Shipping costs per kilometer per unit are
$10 from A and $5 from B. An arbitrary purchaser is located at point (x, y).
 
(a) Give economic interpretations of the expressions p + 10 x 2 + y 2 and p + 5 (x 60)2 + y 2 .
(b) Find an equation for the curve that separates the markets of the two rms, assuming that customers buy
from the rm for which total costs are lower.
(c) Generalize the problem to the case where A = (0, 0) and B = (a, 0), and assume that shipping costs
per kilometer are r and s dollars, respectively. Show that the curve separating the markets is a circle, and
nd its centre and radius.
y
(x, y)

A B x
(0, 0) (60, 0)

Figure 2-21

Problem 2-22 (6.10)

 
The extreme-value distribution in statistics is given by F (x) = exp exp(x) .
(a) Write F (x) in standard form.
(b) Compute f (x) = F  (x), and write the result in two ways. The function f is called the density function
associated with F . Compute f  (x).

Problem 2-23 (7.5)

Let f (x) = e1/x (x = 0) with f (0) = 0. Verify by induction that f (k) (x) = x 3k pk (x)e1/x for x  = 0,
2 2

where pk (x) denotes some polynomial whose degree is 2k 2. Hence, show that f (k) (0) = 0 for all positive
integers k. (For this function, all Taylor polynomials at the origin are identically equal to 0, but the function
itself is 0 only at the origin. This example shows that the polynomial approximation to a function may be very
inaccurate. For this reason it is very important to estimate the size of the remainder.)

Knut Sydster, Arne Strm, and Peter Hammond 2008