Lecture notes on Mathematics for Business

Nguyen Thi Thu Van

International School of Business, UEH, Vietnam

August 29, 2023

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 Assessment Summary
1. Class Attendance and Participation: 10%
Each student is given 10pts in advance.
Each absence will be deduced 1.5pts (no more than 3 absences)
In the case absence is unexpected, assign relevant evidence to Admin
and the lecturer in order to be exempted.
2. Midterm Test: 25%
3. Group Project: 15%
4. Final Exam: 50%

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 Chapter R: Linear Equations and Non-linear Equations

Outline of the chapter: In this chapter, we will review some concepts in college
algebra. Knowing algebra is a fundamental prerequisite to success in higher
mathematics. The topic includes

Expressions with one or more variables

Equations, inequalities of one or more variables

Linear/nonlinear equations, inequalities

The set of real numbers

Exponents

Radicals

Polynomials

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter R: Linear Equations and Non-linear Equations R.1. Algebraic expressions with one or more variables

Definition
An algebraic expression is simply a combination of numbers and letters by using
brackets and mathematical symbols such as +, −, ×, :, powers, or roots. Letters
used in algebraic expressions represent variables/unknowns.

Example
x
20 + x, , x + 2y , x 2 + 3(y − 5),
y

Algebra is a language, and you must be familiar with its rules to correctly
interpret algebraic statements. The following order of operations has been agreed
upon through centuries of usage: Brackets first (B) - Indices second (I) -
Division and Multiplication third (DM) - Addition and Subtraction fourth
(AS). This is sometimes remembered using the acronym BIDMAS!

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 Chapter R: Linear Equations and Non-linear Equations R.1. Algebraic expressions with one or more variables

Mathematical expressions provide a precise way of representing calculations that

need to be worked out in many business models.

Example
A company has a policy to reimburse employees for use of their cars for travel: for
the first 50 miles they may be able to claim 90 cents a mile, but this could fall to
60 cents a mile thereafter. If the distance, x miles, is no more than 50 miles, then
travel expenses, E (in dollars), could be worked out using the formula E = 0.9x.
If x exceeds 50 miles, the employee can claim $0.9 a mile for the first 50 miles
but only $0.6 a mile for the last (x − 50) miles. The total amount is
E (x) = 0.9 × 50 + 0.6(x − 50) = 15 + 0.6x.

Travel expenses can therefore be worked out using two separate expressions:

E = 0.9x when x is no more than 50 miles,

E = 15 + 0.6x when x exceeds 50 miles.

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 Chapter R: Linear Equations and Non-linear Equations R.2. Equations, Inequalities of one or more variables

Definition
An equation is a mathematical statement that consists two equal algebraic
expressions, one on each side of an ‘equal’ sign =.

For example, 2x = 5, 2x = 3y are equations. Below are some equations/formulas

commonly used in economics:

Example
Net Income = Revenue – Expenses (net income equation)

Assets = Liabilities + Shareholder’s Equity (accounting equation) [Business

assets are items of value your business owns. Liabilities are debts you owe.
And, business equity is how much ownership you have in your business.]

Break-even Point = Fixed Costs / (Sales Price Per Unit – Variable Costs Per
Unit) [Use the break-even point formula to determine how many products
you need to sell during a period to break even.]

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 Chapter R: Linear Equations and Non-linear Equations R.2. Equations, Inequalities of one or more variables

Definition
Inequality identifies two algebraic expressions are not equal by means of
the symbols like ̸=, <, >, ≤, ≥.

For example, x < 2, x + 3y > 5.

Inequalities arise in business when, for instance, there is a budgetary

restriction on resource allocation.
Example
A firm’s Human Resources department has a budget of $25,000 to spend
on training and laptops. Training courses cost $700 for one employee and
new laptops are $1200 per laptop.
(a) If the department trains E employees and buys L laptops, write down
an inequality for E and L.

(b) If 12 employees attend courses, how many laptops could be bought?

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 Chapter R: Linear Equations and Non-linear Equations R.3. Linear, non-linear equations/inequalities

Definition
An equation involving two variables x and y is linear if it has the form of

ax + by = c

where a, b and c are given. More general, a linear equation of n variables

x1 , x2 , . . . , xn is of the form

a1 x1 + a2 x2 + · · · + an xn = c

where a1 , a2 , . . . , an and c are given.

Example. The following equations are linear:

(1) 2x + 3y = 1.

(2) 0x + 5y = 2 ⇔ 5y = 2

(3) x + 3y + 5z = 2

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 Chapter R: Linear Equations and Non-linear Equations R.3. Linear, non-linear equations/inequalities

Definition
Equations that are not linear are called non-linear equations.

Example. The following equations are non-linear:

(1) x 2 + 3y = 1.

(2) 0x + 5y 3 = 2 ⇔ 5y 3 = 2
√
(3) x + 3y + 5 z = 2

Definition
Similar to linear/non-linear equations, a linear inequality is of the form
ax + by < c (or >, ≤, ≥) and a non-linear inequality is an inequality which is not
linear, for instance, x 2 + y 2 ≤ 1.

Example.
(1) x + 3y ≥ 1.

(2) 3x + 5y 2 < 2.
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 Chapter R: Linear Equations and Non-linear Equations R.4. Real numbers

The set of natural numbers is denoted IN = {1, 2, 3, . . . }

The set of whole numbers IN0 = {0, 1, 2, 3, . . . }

The set of integers Z = {. . . , −4, −3, −2, −1, 0, 1, 2, 3, 4, 5, . . . }

n is even then n = 2k with k ∈ Z,

n is odd then n = 2k + 1 with k ∈ Z.

I = {x|x is written as a quotient of 2 integers}
The set of rational numbers Q

I ∪ I, where I is the set of irrational numbers.

The set of real numbers IR = Q
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 Chapter R: Linear Equations and Non-linear Equations R.4. Real numbers

To represent real numbers, we draw a horizontal line which is called the

real number line. The point representing zero is call the origin.

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 Chapter R: Linear Equations and Non-linear Equations R.5. Exponents

Definition
Integer exponents. If n is a natural number, then an = a × a × a × · · · × a where
a appears as a factor n times and an is read as the nth exponent/power of a or a
raised to the nth exponent/power. By definition, we have that

am × an = am+n ; (am )n = am×n

Zero and negative exponents. By convention, a0 = 1 if a ̸= 0. If a is any nonzero

real number, and if n is a positive integer, then a−n = a1n
3 −1 4


Example. 20 = 1; 4 = 3

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 Chapter R: Linear Equations and Non-linear Equations R.5. Exponents

Newton binomial formula. Let n ∈ IN and x, y ∈ IR. Newton binomial says that

x n − y n = (x − y ) x n−1 + x n−2 y + · · · + xy n−2 + y n−1

When x = 1, y ̸= 1, Newton binomial becomes

1 − yn yn − 1
1 + y + · · · + y n−2 + y n−1 = =
1−y y −1

36 36
1 1 2

1 35

1−( 21 ) ( 12 ) −1
Example. 1 + 2 + 2 + ··· + 2 = 1− 21
≡ 1
2 −1

101 101
2 2 2

2 100

1−( 23 ) ( 23 ) −1
1+ 3 + 3 + ··· + 3 = 1− 32
≡ 2
3 −1

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 Chapter R: Linear Equations and Non-linear Equations R.6. Radicals

√ √
Let n ∈ IN. The radical n
a is defined by n
a = a1/n and is read as the nth
root of a, where
the number a is the radicand,

n is the index of the radical.

√ √
The familiar symbol a is used instead of 2 a.
√
n
The relationship between the radicals and exponents is a = b ⇔ an = b.
Therefore, notice that
if the index n of radical is even then the radicand b ≥ 0,

if the index n is odd then b can be any.

√
Example. The expression 1 − x is well-defined when x ≤ 1, while
√
3
1 − x is well-defined for any x.

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 Chapter R: Linear Equations and Non-linear Equations R.7. Polynomials

Definition
A polynomial is a term or a finite sum of terms in which all variables have whole
number exponents, and no variables appear in denominators. The degree is the
highest exponent.

Example
x 3 + 8 : polynomial of degree 3

x 2 y + xy 4 : polynomial of degree 5

Each variable plays a mathematical role equally in a polynomial. Therefore,

to compute the degree of a polynomial involving more than one variable, we
simply replace each by a common variable, for example, X and the highest
exponent of X will be the degree of the polynomial.

2x + 5 : polynomial of degree 1
√
x 2 + 3 x + 1 + 8: not a polynomial due to the fractional exponent in the
second term.
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 Chapter 1. Mathematics of Finance

This chapter includes the following features:

Percentages - Scale factors

Simple interest - Compound interest

Savings - Loans.

Investment appraisal

A calculator is handy while studying this chapter.

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter 1. Mathematics of Finance 1.1. Percentages

The word percentage literally means per cent, i.e. per hundred or out of
100. It stands for a portion of a whole expressed as a number between 0
and 100 rather than as a fraction and it is represented by the symbol %
Example
20 students out of a total of 37 in the student list are female. What
percentage are female?

20
Answer. Our class has 37 × 100 ≈ 54.3% female students. [This does not
mean that there are more than 54 female students in the class.]

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 Chapter 1. Mathematics of Finance 1.1. Percentages

An investment rises from $2,500 to $3,375. So

3375−2500
The percentage increase of the investment is 2500 = 0.35 = 35%

new value 3,375 3,375−2,500

The scale factor is old value = 2,500 =1+ 2,500 = 1.35.

At the beginning of a year, the population of a small village is 8,400.

If the annual drop in population is 5%, the population at the end of
the year is
5 5
8400 − 8400 × = 8400(1 − ) = 8400 × 0.95 = 7980
100 100

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 Chapter 1. Mathematics of Finance 1.1. Percentages

How to compute overall percentage changes

To compute the overall percentage change over an entire period, we

simply multiply all the scale factors together on each corresponding
individual period. For instance,
If share prices rise by 32% during the first half of the year and rise by
a further 10% during the second half, the scale factor for the whole
32 10
year is (1 + 100 ) × (1 + 100 ) = 1.32 × 1.1 = 1.452 and therefore the
overall percentage change during the year is 45.2%.
If the price of a good rises by 5% in a year but then is reduced by
30% in a sale, the scale factor for the whole year is
5 30
(1 + 100 ) × (1 − 100 ) = 1.05 × 0.7 = 0.735. In this case, the price is
reduced by 26.5% over the entire period.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

Suppose that Peter invests P0 dollars into a bank with the annual interest
rate of r %. How much will he receive?

After t days (t < 365), Peter receives

r%  t 
Pt = P0 + INT = P0 + t × P0 × = P0 1 + r % ×
365 365

Thus, after 1 year, he receives

P1 = P0 + INT = P0 + P0 × r % = P0 (1 + r %)

where INT is the interest paid direct to the investor and it is called
the simple interest.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

However after 1 year, Peter still lets that amount in his account, so at the
end of the second year, he will receive

P2 = P0 (1 + r %) + INT = P0 (1 + r %) + r % × P0 (1 + r %) = P0 (1 + r %)2

Recursively, after n years Peter receives

The compound amount is P0 (1 + r %)n

The compound interest, which means interest earns on interest:

INT = P0 (1 + r %)n − P0

Notations: P0 is called the present value and P1 , P2 , . . . , Pn are called the

future values of P0 after 1 year, 2 years, ..., n years, respectively.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

Example
If $10,000 invested at 5% interest compounded annually then the amount
the investor receives
5
after 216 days is P216 days = 10, 000 + 10, 000 × 100 × 216
365 ≈ 10, 295.89

So the simple interest is 295.89 dollars.

5 4


at the end of the fourth year is P4 = 10, 000 1 + 100 = $12, 155.06

This infers that the compound interest is 2, 155.06 dollars.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

It is worth noting that the interest are often compounded more frequently than a
year, so the periodic interest rates are required to be considered. The following is
the simple rule for periodic rates w.r.t. the annual rate r %:

If the interest is compounded semiannually then the semiannual rate is

 2×n
rs = 2r , and thus, Pn = P0 1 + r 2%

If the interest is compounded quarterly then then the quarterly rate is

 4×n
rq = 4r , and thus, Pn = P0 1 + r 4%

More general, if the interest is compounded m times per year [called frequency of
compounding per year] then the periodic rate is rp = mr , and thus,
 m×n
r%
Pn = P0 1 +
m

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

Example
A principal of $10 is invested at 12% interest for 1 year. The future value
if the interest is compounded
annually =
semiannually =
quarterly =
monthly =
weekly =

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

However, r % is only nominal rate, because the interest rate that we actually
earn for a year if interest is compounded more than one time a year is higher.
This rate is called effective rate.

Indeed, suppose we invest $10 in a bank account and earn a return of 12 %

interest compounded semiannually. Then the compound interest earned after a
year is
 2 " 2 #
12% 12%
10 1 + − 10 = 1+ − 1 × 10 = 0.1236 × 10 = 12.36% × 10
2 2

This means that we actually earn 12.36 %.

Generally, if r % is the nominal rate compounded m times per year then the
corresponding effective rate is
 m
r%
re = 1 + −1
m
It’s clear that when m = 1 then r = re .
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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

As we have seen that if a principal of $10 is invested at 12% interest, then

the future value after one year if the interest is compounded
annually = 11.2
semiannually = 11.236
quarterly = 11.255
monthly = 11.268
weekly = 11.272
It’s clear that the future value rises as the frequency of compounding rises.
However the rate of rise appears to be slowing down, suggesting that
numbers are converging to some fixed value.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

Indeed, if the interest is compounded in a smaller and smaller time periods (which
means m becomes very large) then the future value rises, however, after n years,
they appear to be approaching a fixed number
 n×m " m/r % #n×r %
r% 1
Pn = lim P0 1 + = lim P0 1+ m = P0 e n×r %
m→∞ m m→∞
r%

In this case the interest is said to be compounded continuously.

Example. A principal of $2,000 is invested at 10% interest compounded

continuously. After how many days will the investment first exceed $2,100?

Remember that the number of periods must be a whole number because the
interests are only added on at the end of each compounding period.

The number e is named after the Swiss mathematician Leonhard Euler and is

m
x
e ≡ limm→∞ 1 + m1 . Euler then proved that limx→∞ 1 + x1 = e. Note that
m ∈ IN, x ∈ IR
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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

To summarize, if the investment earns a return of r % compounded

periodically then after k periods (say, months, quarters, semi-years, and so
on), the future value of P0 is calculated by

Pk = P0 (1 + rp %)k ,

where rp = mr is the periodic interest rate and m is the frequency of

compounding per year.

If interest is compounded continuously then after n years, P0 becomes

Pn = P0 e n×r %

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

−k
Present value: P0 = Pk (1 + rp %) . Let’s recall that

Pk is the future value of P0 after k periods.

r % is the annual interest rate and thus, rp = mr in which m is the frequency

of compounding a year. In the backwards process, r % is referred to as the
discount rate.

If interest is compounded continuously, P0 = Pn e −n×r % in which n is the years.

Example
Find the present value of $1,000 in 4 years’ time if the discount rate is 10%
compounded

(a) semiannually

(b) continuously ?

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

The discount rate is often used to calculate the present value of promissory notes.
It is worth mentioning that a promissory note is a written statement agreeing to
pay a sum of money either on demand or at a definite future time. When a note
is purchased for its present value at a given interest rate, the note is said to be
discounted, and the interest rate is called the discount rate.

Example. Suppose a $10,000 note due eight years from now is sold to a financial
institution for $4700. What is the nominal discount rate with quarterly
compounding?
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 Chapter 1. Mathematics of Finance 1.3. Savings and loans

Recall that Newton binomial says that: when k ∈ IN and b be real

number. Then

1 − b k = (1 − b)(1 + b + b 2 + · · · + b k−2 + b k−1 )

So, if b ̸= 1 then

1 − bk bk − 1
1 + b + b 2 + · · · + b k−2 + b k−1 = =
1−b b−1
101
1

1 2

1 100

1−( 12 )
Example. 1 + 2 + 2 + ··· + 2 = 1− 21

We’ll make use of the Newton binomial formula in the two important
activities in Finance, such as savings and loans.

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 Chapter 1. Mathematics of Finance 1.3. Savings and loans

In this section we focus on two applications of geometric series into

finance: savings and loans. We are approaching two topics by the
following examples.
[Savings] Peter saves $100 in a bank account at the beginning of
each month. The bank offers a return of 12% compounded monthly.
How much does Peter save after 12 months?

[Loans] Determine the monthly repayments needed to repay a

$100,000 loan which is paid back over 25 years at the end of each
month when the interest rate is 10% ?
Caveat: A fixed amount of money has different values at a different point
in time, which refers to as the time value of money. Therefore, a golden
rule for financial mathematics is never compare or identify capitals
without transforming them into a common date.
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 Chapter 1. Mathematics of Finance 1.3. Savings and loans

Savings: Imagine simply one decides to invest regularly an equal amount

of money into a bank account in order to meet some future financial
commitment. This is sometimes referred to as a sinking fund!

Suppose that each payment is made at the beginning of the periods and
every payment is an equal amount a. Then the accumulated amount, after
n periods, will be calculated by

(1 + rp )n − 1
Vn = a(1 + rp ) + a(1 + rp )2 + · · · + a(1 + rp )n = a(1 + rp ) .
rp

If there is no other specification, it is often tacitly assumed that savings is

made at the beginning of each consecutive period.

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 Chapter 1. Mathematics of Finance 1.3. Savings and loans

Loans: one needs an amount of money right now and decides to borrow it
from a bank. The loan is promised to pay back by a series of repayments
(or, also called, an annuity) made at equal time intervals. Such an annuity
can be thought of as the opposite of a sinking fund!

Suppose that each repayment is made at the end of the periods, then the
actual value of a debt, after n repayments made, is

1 − (1 + rp )−n
V0 = a(1 + rp )−1 + a(1 + rp )−2 + · · · + a(1 + rp )−n = a ,
rp

where a is the amount repaid equally at each period.

If there is no other specification, it is often tacitly assumed that loans is

due at the end of each consecutive period.

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 Chapter 1. Mathematics of Finance 1.3. Savings and loans

Example
[Savings] Suppose $1,000 is placed in a savings account on the 1st of
December 2016 and, from then on, $50 is deposited in the account on
the first of the next months. If the interest is at 4.3% compounded
monthly, how much is in the account on 1 Jan., 2019?

[Loans] A debtor is to amortize an $18,000 car loan by making equal

repayments at the end of each month for 36 months. If the interest is
at 5% compounded monthly.
What is each monthly repayment?

Just after the 16th repayment, the debtor would like to pay off the rest
of loan by only three quarter repayments at the interest rate of 4.5%
compounded quarterly. What is each quarterly repayment?

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 Chapter 1. Mathematics of Finance 1.4. Investment appraisal

Two ways of assessing individual projects are based on Net Present

Value (NPV) and Internal Rate of Return (IRR).
NPV = the present value of revenue - the present value of the costs.

A project is considered worthwhile if the NPV is positive.

IRR = the annual rate which, when applied to the initial outlay, yields
the same return as the project after the same number of years.

A project is considered worthwhile if the IRR is larger than market

rate.
It is often that if a decision is to be made between two different projects
then the one with higher NPV or IRR is the better choice. Of course, in
practice, other factors such as risk need to be taken into account before a
decision is made.

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 Chapter 1. Mathematics of Finance 1.4. Investment appraisal

Example
A project requiring an initial outlay of $15,000 is guaranteed to produce a
return of $20,000 in 3 years’ time. Use the
Net Present Value

Internal Rate of Return

methods to decide whether this investment is worthwhile (i.e., the NPV is
positive) if the prevailing market rate is 5% compounded annually. Would
your decision be affected if the interest rate were 12%?

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 Chapter 1. Mathematics of Finance 1.4. Investment appraisal

Example
Suppose that it is possible to invest in only one of two different projects. Project
A requires an initial outlay of $ 1,000 and yields $ 1,200 in four years’ time.
Project B requires an outlay of $ 30,000 and yields $ 35,000 after four years.
Which of these projects would you choose to invest in when the market rate is 3%
compounded annually?

Caveat: the IRR method is sometimes an unreliable way of comparing

investment opportunities when there are significant differences between the
amounts involved. This is because the IRR method compares percentages, and
obviously a large percentage of a small sum could give a smaller profit than a
small percentage of a larger sum.

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 Chapter 1. Mathematics of Finance Homework to practice

HOMEWORK

Section 5.1: page 229

Section 5.2: page 233

Section 5.3: page 237

Review: page 255

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter 2: Functions

Outline of the chapter: We will introduce linear functions, nonlinear

functions, and some functions used in Business.

Notice that at the end of this chapter, you must be able to:
determine independent/dependent variables of issues mostly arising in
Business,
represent relationship between quantities using
equations/inequalities/functions,
recognize possible properties of a quantity based on other quantities,
find the domain of a function and sketch a function,
know how to compute exactly or approximately related quantities,
finally know how to fit data points by regression model.

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 Chapter 2: Functions 2.1. Linear functions

Slopes and equations of lines

An important characteristic of a straight line is its slope, a number that represents
the “steepness” or the “slant” of the line. The slope of a non-vertical line is
 
rise ∆y y2 − y1 y1 − y2
m ≡ tan θ = = = ≡
run ∆x x2 − x1 x1 − x2

Furthermore, the slope of a horizontal line is 0, while the slope of a vertical line is
undefined.

Note that using similar triangles, it can be shown that the slope of a line is
independent of the choice of points on the line.
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 Chapter 2: Functions 2.1. Linear functions

It is clear that x−intercept is the x coordinate of a point at which the

graph passes through the x−axis, while y −intercept is the y coordinate of
a point at which the graph passes through the y −axis.

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 Chapter 2: Functions 2.1. Linear functions

The standard equation of a straight line:

Ax + By = C with A, B, C ∈ IR

The slope-point equation of a straight line passing through (xA , yA ) :

y = m(x − xA ) + yA

The slope-intercept equation of a straight line:

y = mx + b

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 Chapter 2: Functions 2.1. Linear functions

Sketching the graph of linear functions

In general, to sketch a straight line from its mathematical equation, it is sufficient
to perform the following steps:

calculate the coordinates of any two distinct points lying on the line. The
easiest thing (in terms of the amount of arithmetic involved) is to put x = 0
and find y and then to put y = 0 and find x.

sketch the rectangular coordinate system consisting 2 perpendicular real

number lines. Horizontal line represents x− values and vertical line
represents y − values.

plot these two points on graph paper and use a ruler to draw the line
passing through them.

Example
Sketch the line according to the equation 2x + 3y = 6.
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 Chapter 2: Functions 2.1. Linear functions

Applications of linear functions

A mathematical model is a mathematical description (often by means of a

function or an equation) of a real-world phenomenon, such as the demand for a
product, the cost of emission reductions, and so on. The purpose of the model is
to understand the phenomenon and perhaps to make predictions about future
behavior.

There are many different types of functions that can be used to model
relationships observed in the real world. In what follows, we discuss the behavior
and graphs of these functions and give examples of situations appropriately
modeled by such functions.

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 Chapter 2: Functions 2.1. Linear functions

Example.

(1) A car uses 6 liters of petrol for 100 km and 9 liters for 150 km. Find the
petrol usage equation, assuming it is linear. Find the amount of petrol used
if it traveled 30 km.

(2) A study found that a student spent 6 hours per day in study may score 80
marks in a test and a student spent 3 hours per day just scored 50 marks.
Find an equation to show the relationship between the time spend in study
per day and the marks scored by a student, assuming it is linear and then
find the marks scored by a student if he/she spent 5 hours per day in study.

In reality, data sets collected from business processes have more than 2 distinct
points. If data points seem to be related linearly, we could find linear models that
are best fit the data in order to describe the trends and predict the behavior of
business process in the future.

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 Chapter 2: Functions 2.1. Linear functions

Simple regression method used the least square lines

Take a look at the following scatter plots comparing the average price per gallon
of regular unleaded gasoline to premium gasoline for all 50 states.

Intuitively, the fuel price is more likely to be related linearly and positive (as
premium prices increase, so do the regular unleaded prices).

However, there are many practical data sets whose data points are not related
linearly. This is the reason why it is just as important to study non-linear
functions.
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 Chapter 2: Functions 2.2. Nonlinear functions

Let X, Y be two sets (X =input set, Y = output set). A function

f : X → Y is a rule that assigns, to each element x of X , at most one
element y of Y , denoted f (x).

It is useful to think of function as a machine: putting x into the machine

f , out of the machine we get f (x). Thus, x is called independent
variable/input, while f (x) is dependent variable/output which depends
on the input x.

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 Chapter 2: Functions 2.2. Nonlinear functions

Domain: the set of all inputs x allowable is called the domain of function f and
denoted D. Mathematically speaking,

D = {x|f (x) is well defined}

Range: If D is the domain of f then the set of all outputs f (x) is called the
image/range of f and denoted R. Briefly,

R = {f (x)|x ∈ D}

Example. Which following rule is a function? If it’s a function, find its domain
and range.

(a) x and f are related by (f (x))2 = x.

(b) x and f are related by f (x) = x1 .

x2
(c) f (x) = 1+x 2 .
√
(d) f (x) = 1 − x 3.
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 Chapter 2: Functions 2.2. Nonlinear functions

Properties of function
Monotone: A function f is called increasing (resp. decreasing) on I ⊂ D
if, for all x1 , x2 ∈ I , x1 < x2 implies f (x1 ) ≤ f (x2 ) (resp. f (x1 ) ≥ f (x2 ))

For example, f (x) = 2x + 1 is increasing on IR and g (x) = x 2 is increasing

on (0, ∞) and decreasing on (−∞, 0).
Symmetry: A function is called symmetric about the y −axis if
f (−x) = f (x).

For example, g (x) = x 2 is symmetric about the y −axis.

Periodic functions: A function is called periodic with period of T > 0 if
f (x + T ) = f (x) for all x.

For example, trigonometric functions such as sine, cosine, tangent,

cotangent are periodic.
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 Chapter 2: Functions 2.2. Nonlinear functions

Four ways to represent a function

A function can be represented

by a formula (algebraically)

by a table (numerically)

by a graph (graphically)

in words (verbally)

Notice that if a single function can be represented in all four ways, it’s
often useful to go from one representation to another to gain additional
insight into the function.

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 Chapter 2: Functions 2.2. Nonlinear functions

Special functions
Case-defined functions (or called also piece-wise functions): functions defined
by more than a formula over different intervals 
are called case-defined functions.
x if x ≥ 0
For example, the absolute-value function |x| =
−x otherwise.

Example. Let C be the cost of mailing an envelope with weight w . The rule that
the US Postal Service used as of 2010 is as follows: The cost is 88 cents for up to
1 oz, plus 17 cents for each additional ounce (or less). The mailing cost can be
given by a table as shown below

Write a general formula for the cost function and draw its graph.
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 Chapter 2: Functions 2.2. Nonlinear functions

Polynomial function of degree n:

f (x) = an x n + an−1 x n−1 + · · · + a1 x + a0
where n is non-negative integer and the coefficients a0 , a1 , . . . , an are
constants and an ̸= 0. Particularly,
n = 0: Constant functions f (x) = c, i.e. the value of f is always c
whatever x is.

n = 1: Linear functions f (x) = ax + b

n = 2: Quadratic function f (x) = ax 2 + bx + c

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 Chapter 2: Functions 2.2. Nonlinear functions

Suppose that 0 < a ̸= 1.

Exponential function: f (x) = ax

Logarithmic functions: f (x) = loga x

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 Chapter 2: Functions 2.2. Nonlinear functions

Example
The percentage, y , of households possessing refrigerators, t years after
they have been introduced in a developed country, is modeled by
y = 100 − 95e −0.15t .
1. Find the percentage of households that have refrigerators
(a) at their launch,
(b) after 1 year,
(c) after 10 years,
(d) after 20 years.
2. Sketch a graph of y against t.

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 Chapter 2: Functions 2.2. Nonlinear functions

Combinations of functions

We can combine any two functions f and g to create a new one using the basic
algebraic operations:

Sum/Difference: (f ± g )(x) = f (x) ± g (x)

Example: f (x) = 2x; g (x) = x + 100. Then (f + g )(x) = 3x + 100

Product: (fg )(x) = f (x) × g (x)

Example: f (x) = x; g (x) = 2x + 100. Then (f × g )(x) = 2x 2 + 100x

Quotient: (f /g )(x) = gf (x)

(x) for g (x) ̸= 0, i.e. we further restrict the domain
to exclude any value of x for which g (x) = 0.
x 2 +3x+100
Example: f (x) = x 2 + 3x + 100; g (x) = x. Then (f /g )(x) = x
provided that x ̸= 0

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 Chapter 2: Functions 2.2. Nonlinear functions

Composite function: f ◦ g (x) = f (g (x)) can be read as the composition of f

with g , meaning that output of g will be input of f .

Inverse: If g and f satisfy the fact that g ◦ f (x) = x and f ◦ g (x) = x then g is
called the inverse of f and denoted f −1 ≡ g .

Theorem
If g is one-to-one, meaning that different inputs will yield different outcomes,
then its inverse exists and is unique!
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 Chapter 2: Functions 2.2. Nonlinear functions

For example, the following functions are inverses of one another.

f (x) = 1/2x + 2 and g (x) = 2x − 4

√
f (x) = x 2 and g (x) = x

f (x) = loga x and g (x) = ax

Two functions that are inverses of one another will be symmetric about the line
y = x.

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 Chapter 2: Functions 2.3. Functions used in Business

Demand function: p = D(q) where p is the unit price of a certain commodity if

customer demands q units. Supply function: p = S(q) where p is the unit price
at which the producer is willing to supply q units of the commodity to the
market. It turns out that, in any competitive market, demand is
decreasing, while supply is increasing.

Example. Suppose that Greg Tobin, manager of a giant supermarket chain, has
studied the supply and demand for watermelons. He has noticed that the demand
increases as the price decreases. He has determined that the quantity (in
thousands) demanded weekly, q, and the price (in dollars) per watermelon, p, are
related by the function p = 9 − 0.75q. Find the quantity demanded at a price of
$5.25 per watermelon and at a price of $3.75 per watermelon?

Greg also noticed that the quantity of watermelons supplied decreased as the
price decreased. Price p and supply q are related by p = 0.75q. Find the quantity
supplied at a price of $5.25 per watermelon and at a price of $3.00 per
watermelon. Graph both functions on the same axes.
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 Chapter 2: Functions 2.3. Functions used in Business

The law of supply and demand says that in a competitive market environment,
supply tends to equal demand, and when this occurs, the market is said to be in
equilibrium. [Theory of Equilibrium points in N-person non-cooperative games
were studied by John Nash, 1950.]
When the market is not in equilibrium, it has a shortage when demand exceeds
supply [D(x) > S(x)] and a surplus when supply exceeds demand [S(x) > D(x)].

John Forbes Nash Jr. (June 13, 1928 – May 23, 2015) was an American mathematician who is the only person to be awarded

both the Nobel Memorial Prize in Economic Sciences in Game theory in 1994 and the Abel Prize in 2015. The movie ‘A

beautiful mind’ is about Nash’s life.

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 Chapter 2: Functions 2.3. Functions used in Business

Example 1. Let the supply and demand equations of a product be p = q 2

and p = −2q 2 + 9 , respectively.

(a) Find the equilibrium point.

(b) Sketch the graph of each equation on the same axes.

Example 2. Let do similarly as in the example above in which the demand

function is p = 8000/q and the supply function is p = q/40 + 10.

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 Chapter 2: Functions 2.3. Functions used in Business

Total Cost = variable cost + fixed cost

variable cost, denoted c(x) which varies with output, is a function used to
express how production expenses will change at different output levels (or
number of units) x.

c(x) = x × p where p = the cost per unit

fixed cost is costs which are independent of output such as rental lease
payments, salaries, insurance payments, potentially some utilities, and so on.

Revenue function denoted r (x) is a function used to express the amount one
receives after selling x units of a commodity.

r (x) = x × p where p = the selling price

Profit function denoted p(x) is the interest received after selling x units of a
commodity.
p(x) = r (x) − total cost
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 Chapter 2: Functions 2.3. Functions used in Business

Example. A firm producing poultry feed finds that the total cost C (x) in
dollars of producing and selling x units is given by

C (x) = 20x + 100

Management plans to charge $24 per unit for the feed.

(a) What is the fixed cost?

(b) Determine the revenue function.

(c) How many units must be sold for the firm to break even?

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 Chapter 2: Functions 2.4. Transposition

Transposing a formula is the rearrangement of a formula to make one of the other

letters the subject. It is often used to express a quantity in term of price and vice
versus.

Example. The demand function p + 2q = 8 for q units of a commodity at a price

of p dollars for each unit can be transposed into one of the forms:

p = −2q + 8 where q is independent variable and p is dependent which

depends on q.

q = −p/2 + 4, where p is independent variable and q is dependent which

depends on p.

In summary, we can write, for instance, the demand function in forms:

p = −2q + 8 or q = −p/2 + 4 or p + 2q = 8.

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 Chapter 2: Functions 2.5. Transformation

We can also obtain a new function by transformations of functions, such

as shifting, stretching, and reflecting their graphs. By applying certain
transformations to the graph of a given function we can obtain the graphs
of certain related functions.

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 Chapter 2: Functions 2.5. Transformation

Transformations can be used to find new equilibrium quantity and price after tax.

Tax policy is the choice by a government as to what taxes to impose, in what

amounts, and on whom. For example, in the United States, gasoline sales taxes
are generally imposed on the buyer—the stated price does not include the
tax—while in Canada, the sales tax is generally imposed on the seller.

When a tax imposed on the seller: at any lower price, the sellers would reduce the
number of units offered. Thus the price curve is shifted up as in the left panel.

When the imposition of a tax is put on the buyer: the buyers reduce the
willingness to pay for any given unit by the amount of the tax. Therefore the
demand curve is shifted down as in the right panel.
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 Chapter 2: Functions 2.5. Transformation

Example
The demand and supply functions of a good are given by p = −2qd + 50
and p = 1/2qS + 25 where p, qD and qS denote the price, quantity
demanded and quantity supplied, respectively.
(a) Determine the equilibrium price and quantity.

(b) Determine the effect on the market equilibrium if the government

decides to impose a fixed tax of $5 on each good on the seller-side.

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 Chapter 2: Functions Homework to practice

HOMEWORK

Section 3.2: page 160

Section 3.3: page 167

Review: pages 189, 221

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter 3. Differentiation

Outline of the chapter:

Limits

Continuity

Tangent and velocity problems

Derivative of a function

Rules of differentiation

Some applications of differentiation in Business

Rates of change - Relative rate of change

Elasticity

Marginal functions

Optimization in Business: Economic lot size, Economic order quantity,

Diminishing point of returns
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 Chapter 3. Differentiation 3.1. Limits

In mathematics, a limit is the value that a function (or sequence)

”approaches” as the input (or index) ”approaches” some value. Limits are
essential to calculus and are used to define continuity, derivatives, and
integrals.
Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say loosely that the limit of f when x goes to a is L,
and write limx→a f (x) = L if we can make f (x) arbitrarily close to L by
taking x sufficiently close but not equal to a.

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 Chapter 3. Differentiation 3.1. Limits

Sometimes we also want to talk about limit from one side.

Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say that the limit of f when x goes to a on the right
(resp., on the left) is L, and write

limx→a+ f (x) = L (reps., limx→a− f (x) = L)

if we can make f (x) arbitrarily close to L by taking x sufficiently close but

bigger than a (reps., smaller than a ).

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 Chapter 3. Differentiation 3.1. Limits

Theorem
limx→a f (x) exists if and only if limx→a+ f (x) and limx→a− f (x) exist and
are equal. In that case limx→a f (x) = limx→a+ f (x) = limx→a− f (x)

Consequently, if limx→a+ f (x) ̸= limx→a− f (x) then limx→a f (x) does not
exist.

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 Chapter 3. Differentiation 3.1. Limits

We also want to talk about infinity as limit.

Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say that the limit of f when x goes to a is infinity,
and write
limx→a f (x) = ∞

if we can make f (x) arbitrarily big by taking x sufficiently close but not
equal to a.

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 Chapter 3. Differentiation 3.1. Limits

Definition
If the values of the function f (x) approach a number L as x increases
without bound, we write

limx→∞ f (x) = L

Similarly, we write limx→−∞ f (x) = M when the functional values of f

approach a number M as x decreases without bound.

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 Chapter 3. Differentiation 3.1. Limits

Example. The following well-known function

(x−µ) 2
h i
1 −1
f (x) = √ e 2 σ

σ 2π
is called the normal [Gaussian] density function and its graph is shaped
like a bell-curve, in which the parameters µ and σ are the mean and the
standard deviation of data values observed, respectively.

We have that limx→±∞ f (x) = 0.

The Gaussian density function is after the German mathematician Carl Friedrich
Gauss [1777–1855]
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 Chapter 3. Differentiation 3.1. Limits

Theorem
If c ∈ R then the constant function f (x) ≡ c is often denoted c itself.
And we have
lim c = c and lim x = a
x→a x→a

It’d be worth introducing one of the important theorems of Euler:

1 x
 
1
lim (1 + x) x = e and lim 1+ =e
x→0 x→∞ x

The number e is named after the Swiss mathematician Leonhard Euler

m
[1707–1783] and is limm→∞ 1 + m1 .

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 Chapter 3. Differentiation 3.1. Limits

Limit Laws
Theorem
If limx→a f (x) and limx→a g (x) exist then
(a) limx→a [f (x) ± g (x)] = limx→a f (x) ± limx→a g (x)

(b) limx→a f (x)g (x) = [limx→a f (x)][limx→a g (x)]

(c) limx→a gf (x)

(x) =
limx→a f (x)
limx→a g (x) if limx→a g (x) ̸= 0.

The laws are still valid with the process x → ∞ instead of x → a.

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 Chapter 3. Differentiation 3.1. Limits

Corollary
Let n be a positive integer. If limx→a f (x) exists then
(a) limx→a cf (x) = c limx→a f (x)
(b) limx→a x n = an
(c) limx→a (f (x))n = (limx→a f (x))n
√ √
(d) limx→a n x = n a
In the above formula if n is even we assume that a > 0
p p
(e) limx→a n f (x) = limx→a n f (a)
In the above formula if n is even we assume that limx→a f (x) > 0.

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 Chapter 3. Differentiation 3.1. Limits

Below are some remarks that are worth noting:

the limit of function f when x → a can be thought of as the limiting
value of f as x is very close to a, that is,

lim f (x) = L ⇔ [f (x) ≈ L as x ≈ a]

x→a

the limit of function if exists must be unique.

Finally in reality nothing is exactly one hundred percent, so limits are

essential and you should know how to compute/use them proficiently!

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 Chapter 3. Differentiation 3.2. Continuity

In mathematics, a continuous function is a function that does not have

any abrupt changes in value. More precisely,
Definition
f is said to be continuous at a if limx→a f (x) = f (a)

which also means that sufficiently small changes in the input of a

continuous function result in arbitrarily small changes in its output. A
function that is not continuous is called a discontinuous function.

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 Chapter 3. Differentiation 3.2. Continuity

Economists speak quite often about the continuity and discontinuity of

economic functions/relationships.
Example
Suppose that a salesperson receives a salary according to a contract that
establishes a relationship between pay and the level of sales made by the
salesperson. In particular, suppose that the contract stipulates that the
salesperson’s monthly salary will be composed of three parts:
(i) a basic amount of $800,
(ii) a commission of 10%,
(iii) a lump-sum bonus of $500 if the salesperson’s sales for the month
reach or exceed $20,000.
From this description, one can see that her salary will jump by $500 if the
critical level of $20,000 worth of sales is achieved. This implies a
discontinuity in her salary schedule.
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 Chapter 3. Differentiation 3.2. Continuity

The definition of continuity of functions at a point is also extended to an

interval as follows.
Definition
A function f is continuous on an interval [a, b) if it is continuous at every
point in the interval and limx→a+ f (x) = f (a).

A function f is continuous on an interval (a, b] if it is continuous at every

point in the interval and limx→b− f (x) = f (b).

Accordingly, a function f is continuous on an interval [a, b] if it is

continuous at every point in the interval and limx→a+ f (x) = f (a) and
limx→b− f (x) = f (b).
Intuitively, a continuous function at a is a function that its graph has no
holes at a or is not broken into two pieces at a.

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 Chapter 3. Differentiation 3.2. Continuity

One often says that a picture is worth more than thousand words. So in
order to understand the concepts of continuity, let do the example below.
Example
Let f be given by the graph in the figure below. Which intervals is f
continuous on?

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 Chapter 3. Differentiation 3.2. Continuity

Example
Suppose the long-distance rate for a telephone call from Hazleton,
Pennsylvania to Los Angeles, California, is $0.08 for the first minute or
fraction thereof and $0.04 for each additional minute or fraction thereof. If
y = f (t) is a function that indicates the total charge y for a call of t
minutes duration then
Formulate the charge function

Sketch the graph of f for 0 < t ≤ 3 21

Determine the values of t at which discontinuity occurs.

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Recall that a linear function f (x) = mx + b changes at a constant rate m

w.r.t. x, that is, the rate of change of f (x) is the slope or the steepness of
the line y = mx + b.

However if a function f (x) is not linear, the rate of change is not a

constant but varies with x. In particular, when x = c, the rate is given by
the steepness of the graph of f (x) at the point P(c, f (c)), which can be
measured by the slope of the tangent line to the graph at P.

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Tangent problem. Find the slope of a tangent line at P(c, f (c)) on the
curve C of equation y = f (x).

Strategy: consider a point Q(c + h, f (c + h)) nearby P (Q ̸= P). The

slope of the secant line PQ is the difference quotient:
rise change in f f (c + h) − f (c)
mPQ = = =
run change in x h

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Observe that if we let Q approach P by letting c + h approach c then the

pink lines PQ approach the blue line at P. In other words, the blue line is
considered as the limiting line of the pink lines. As a result, the slope of
the tangent line at P can be calculated as
f (c + h) − f (c)
m = lim mPQ = lim
Q→P h→0 h

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Velocity problem. If an object is moving along a straight line according

to an equation s = f (t), where s is the displacement of the object from
the origin at time t, then the average velocity denoted va of the object
moving in the time interval from time a to time a + h is the following
difference quotient
displacement f (a + h) − f (a)
va = =
elapsed time h

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

If we consider the movement of the object in a shorter and shorter time

interval, the average velocity becomes the instantaneous velocity

f (a + h) − f (a)
v (a) = limh→0
h

Note that we are not concerned with the direction in which the movement
occurs, but displacement and velocity. The speed of the movement is
|velocity |.

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 Chapter 3. Differentiation 3.4. Derivative

Both problems lead to finding limit

f (a + h) − f (a) f (a + ∆x) − f (a)

lim ≡ lim .
h→0 h ∆x→0 ∆x
This limit arises actually not only in geometry and physics but in many
other practical situations, so it is given a special name: DERIVATIVE!

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 Chapter 3. Differentiation 3.4. Derivative

Definition
Given y = f (x). The derivative of a function at the number a, denoted by
f ′ (x = a) (followed by Newton’s notation) which is read ’f dashed of x‘ or
denoted by dx df
(x = a) ≡ dy
dx (x = a) (followed by Leibnitz’s), is

f (a + ∆x) − f (a) ∆f df
f ′ (a) = lim = lim = (x = a)
∆x→0 ∆x ∆x→0 ∆x dx
if the limit exists and, in this case, f is said to be derivable (or also called
differentiable) at a.

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 Chapter 3. Differentiation 3.4. Derivative

It turns out from the definition of the derivative that

f must be absolutely defined at a and about a if f ′ (a) exists

If f is derivable at every point in an interval (a, b) then f is said to be

derivable on (a, b)

If a number a is replaced by a variable x, the derivative of f is also a

function in terms of x that is also called a derived function!

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 Chapter 3. Differentiation 3.4. Derivative

Noting that not all functions are derivable. For example, function is not
continuous at a point then it is not derivable at that point, that is, the
graph at this point is broken into two pieces or has a hole.

Even continuous functions that whose graph has a sharp corner are also
not derivable.

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 Chapter 3. Differentiation 3.5. Rules of Differentiation

Theorem
If f and g are derivable and c is a constant then
c′ = 0
(f ± g )′ = f ′ ± g ′
(fg )′ = f ′ g + fg ′ and thus (cf )′ = cf ′
 ′ ′ ′
f
g = f gg−fg
2

Theorem (Chain rule)

If f = f (g ) and g = g (x), then f (x) ≡ f (g (x)) and

df df dg
= ×
dx dg dx
when f and g are derivable.

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 Chapter 3. Differentiation 3.5. Rules of Differentiation

Example
Given two functions f , g whose graphs are shown below. Let
u(x) = f (g (x)), v (x) = g (f (x)), and w (x) = g (g (x))

Find u ′ (1), v ′ (1), and w ′ (1).

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 Chapter 3. Differentiation 3.6. Applications in Maths

Based on the definition of derivative, we have that

If f ′ > 0 on a certain interval then the curve of f rises from the left to the
right of the interval and thus the function is said to be increasing.

If f ′ < 0, the curve of f drops and the function is decreasing.

The point at which f ′ = 0 is called the critical/stationary point. The point where
the curve changes from moving ups to moving down or v.v. is called the turning
point!

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 Chapter 3. Differentiation 3.6. Applications in Maths

Recall that the global/absolute max (min, reps.) value of f is the biggest
(smallest, reps.) value of f in its domain. The local/relative max (min, reps.)
point of f is the point at which its value is the biggest (smallest, reps.) compared
to values of points in its vicinity.

Theorem (First order derivative)

If f ′ (a) = 0 and f ′ changes sign around a, a is an extreme point, meaning either
local minimum point or local maximum point.

Example. Find the extreme point(s) of the function f (x) = x 3 − 2x 2 + x + 8 by

using the first order derivative theorem.
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 Chapter 3. Differentiation 3.6. Applications in Maths

The second order is defined by f ′′ (x) = (f ′ (x))′ . Moreover, the sign of f ′′ enables
us to identify the behavior of the function f . Precisely,

If f ′′ > 0 on a certain interval then the curve of f bends upwards on that

interval and the function is said to be convex.

If f ′′ < 0, the curve of f bends downwards and the function is said to be

concave.

The point at which f ′ = 0 and the curve changes the concavity is called the point
of inflection.

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 Chapter 3. Differentiation 3.6. Applications in Maths

Theorem (Second order derivative)

If f ′ (a) = 0 then
if f ′′ (a) > 0 then f attains a minimum value at a. The curve will
bends up ward at x = a.

if f ′′ (a) < 0 then f attains a maximum value at a. The curve will

bends down ward at x = a.

Example. Find the extreme point(s) of the function

f (x) = x 3 − 2x 2 + x + 8 by using the second order derivative theorem.

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 Chapter 3. Differentiation 3.7. Applications in Business

You may wonder what on earth differentiation has to do with economics?

In fact we cannot get very far with economic theory without making use of
calculus. In this section, we focus on the following topics:

Rate of change - Relative rate of change - Percentage rate of change

Elasticity

Marginal analysis

Optimization in Business

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 Chapter 3. Differentiation 3.7. Applications in Business

Rate of change

The rate of change of f (x), i.e, the rate of increase/decrease at x is

defined by f ′ (x).

Example
An efficiency study of the morning shift [from 8:00 a.m. til 12:00 noon] at
a certain factory indicates that an average worker arriving on the job at
8:00 a.m. will have produced Q(t) = −t 3 + 8t 2 + 15t units t hours later.
At what time is the worker performing most efficiently? and least
efficiently?

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 Chapter 3. Differentiation 3.7. Applications in Business

Relative rate of change

In many practical situations, the rate of change of a quantity f is not as

significant as its relative rate of change, which is defined as change in f
size of f .

Example
The air ticket price increased by $25. If the price currently is $2,500, then the
change represents a 1% increase. But if the price currently is $25, then the
change is 100% increase, meaning the price is double.

∆f
The relative rate of change in f = f and the corresponding percentage rate of
change in f = 100f ∆f %.

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 Chapter 3. Differentiation 3.7. Applications in Business

Elasticity

We are known that demand, in general, is a decreasing function, that is,

an increase in the unit price of a commodity will result in decreased
demand. However, the sensitivity or responsiveness of demand to a change
in price varies from one product to another.

For instance, the demand for products such as soap, flashlight batteries, or
salt will not be much affected by a small percentage change in unit price,
while a comparable percentage change in the price of airline tickets or
home loans can affect demand dramatically.

Economists use a quantity called elasticity of demand to measure the

sensitivity of the change.

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 Chapter 3. Differentiation 3.7. Applications in Business

Elasticity of demand is defined, supposed that q is a demand function in terms of

unit price p (q0 = q(p0 )), by
∆q
" #
percentage rate of change in demand q p ∆q p 1
E (p) = = ∆p = × = × ∆p
percentage rate of change in price p
q ∆p q ∆q

Therefore, when ∆p ≈ 0 and ∆q ≈ 0, we have that

 
p0 ∆q p0 dq p0 ′ p0 1
E (p0 ) = × lim = × (p0 ) ≡ × q (p0 ) = × ′
q0 ∆p→0 ∆p q0 dp q0 q0 p (q0 )

Demand is said to be
elastic if |E | > 1 ⇒ the percentage decrease in demand is greater than the
percentage increase in price that caused it, and thus, demand is relatively
sensitive to changes in price

inelastic if |E | < 1 ⇒ demand is relatively insensitive to changes in price

unit elasticity if |E | = 1
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 Chapter 3. Differentiation 3.7. Applications in Business

Example
The manager of a bookstore determines that when a certain new
paperback novel is priced at p dollars per copy, the daily demand will be
√
q = 300 − p 2 copies, where 0 ≤ p ≤ 300
(a) Determine where the demand is elastic, inelastic, and of unit elasticity
with respect to price.

(b) Interpret the results of part (a) in terms of the behavior of total
revenue as a function of price.

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 Chapter 3. Differentiation 3.7. Applications in Business

The relationship between revenue and price is shown below. Note that the
revenue curve is rising where demand is inelastic, falling where demand is
elastic, and has a horizontal tangent line where the demand is of unit
elasticity.

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 Chapter 3. Differentiation 3.7. Applications in Business

Example. Given a demand equation as

q = p 2 − 20p + 100

where p is the price per unit (in hundred dollars) and q is the quantity
demanded (in hundreds).

(a) Find the point elasticity of demand for $500.

(b) If this change in price of $500 is increased by 2%, what is the

approximate change in demand?

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 Chapter 3. Differentiation 3.7. Applications in Business

Example. The demand equation for a manufacturer’s product is

√
p = 50(151 − q)0.02 q+19

dp
(a) Find the value of dq when 150 units are demanded.

(b) Using the result in part (a), determine the point elasticity of demand
when 150 units are demanded. At this level, is demand elastic,
inelastic, or of unit elasticity?

(c) Use the result in part (b) to approximate the price per unit if demand
decreases from 150 to 140 units.

(d) If the current demand is 150 units, should the manufacturer increase
or decrease price in order to increase revenue?

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 Chapter 3. Differentiation 3.7. Applications in Business

Marginal functions

The additional cost incurred when the level of production is increased by ∆q

units, from q0 to q0 + ∆q is ∆C = C (q0 + ∆q) − C (q0 )
It turns out that the average additional cost will be

∆C C (q0 + ∆q) − C (q0 )

=
∆q ∆q
When ∆q ≈ 0 and ∆C ≈ 0, the average additional cost becomes

∆C C (q0 + ∆q) − C (q0 )

lim = lim = C ′ (q0 ) ≡ MC (q0 )
∆q→0 ∆q ∆q→0 ∆q
which is called the marginal cost.

The definition is analogously stated for the marginal revenue and marginal
profit.

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 Chapter 3. Differentiation 3.7. Applications in Business

When ∆q = 1, we have that

C (q0 + 1) − C (q0 ) ≈ MC (q0 ).

This means that the actual additional cost of producing one more unit, from q0
to q0 + 1, is approximated by the marginal cost MC (q0 ). The approximation is
worth in practice, because it is hard to formulate a cost function like the function
C in reality and thus computing exactly the cost for an additional unit will hard
or impossible.

More general, we have that

C (q0 + ∆q) − C (q0 ) ≈ MC (q0 ) × ∆q.

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 Chapter 3. Differentiation 3.7. Applications in Business

3
Example 1. If AC = 0.03q + 1.2 + q is an average-cost function, find the
marginal cost when q = 100.

Example 2. A manufacturer has determined that m employees will

produce a total of q units of product per day, where

q = m(50 − m)

If the demand function is given by

p = −0.05q + 10

find the marginal-revenue product when m = 2.

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 Chapter 3. Differentiation 3.7. Applications in Business

Example
Unit of output Total cost (in dollars) Marginal cost (in dollars)
1 5 5
2 9 4
3 12 3
4 16 4
5 21 5
6 29 8

Observe that the marginal cost curve decreases sharply with smaller
output and reaches a minimum. As production is expanded to a higher
level, it begins to rise at a rapid rate.
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 Chapter 3. Differentiation 3.7. Applications in Business

Exercise. A manufacturer has found that when m employees are working, the
number of units of product produced per day is
p
q = 10 m2 + 4900 − 700

The demand equation for the product is

8q + p 2 − 19, 300 = 0

where p is the selling price when the demand for the product is q units per day.

(a) Determine the manufacturer’s marginal-revenue product when m = 240.

(b) Find the relative rate of change of revenue with respect to the number of
employees when m = 240.

(c) Suppose it would cost the manufacturer $400 more per day to hire an
additional employee. Would you advise the manufacturer to hire the 241st
employee? Why or why not?
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 Chapter 3. Differentiation 3.7. Applications in Business

Two general principles of marginal analysis

[Minimal average cost] Average cost is minimized at the level of

production where average cost equals marginal cost; that is, when
AC (q) = MC (q) followed by the first order derivative theorem.

Example. A manufacturer’s total-cost function is given by

q2
C= + 3q + 400
4
where C is the total cost of producing q units.

At what level of output will average cost per unit be a minimum? What is
this minimum?

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 Chapter 3. Differentiation 3.7. Applications in Business

[Maximum profit criterion] The profit P(q) = R(q) − C (q) is maximized at a

level of production q where marginal revenue equals marginal cost and the rate of
change of marginal cost exceeds the rate of change of marginal revenue; that is,
where
MR(q) = MC (q) and MR ′ (q) < MC ′ (q)

followed by the second order derivative theorem.

Example. Suppose that the demand equation for a monopolist’s product is

p = 400 − 2q (in dollars) and the average-cost function is
400
AC = 0.2q + 4 +
q
where q is the number of units.

(a) Determine the maximum profit

(b) If, a regulatory device, the government imposes a tax of $22 per unit on the
monopolist, what is the new price for profit maximization?
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 Chapter 3. Differentiation 3.7. Applications in Business

Economic lot size

Suppose that a company manufactures a constant number of units of a product

per year and that the product can be manufactured in several batches of equal
size throughout the year.

On the one hand, if the company were to manufacture one large batch every year,
it would minimize setup costs but incur high warehouse costs. On the other hand,
if it were to make many small batches, this would increase setup costs.

Calculus can be used to find the number that should be manufactured in each
batch in order to minimize the total cost. This number is called the economic
lot size.

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 Chapter 3. Differentiation 3.7. Applications in Business

Figure below shows several possibilities for a product having an annual demand of
12,000 units.
The first graph shows the results if all 12,000 units are made in one batch
per year. In this case an average of 6000 units will be held in a warehouse.
If 3000 units are made in each batch, four batches will be made at equal
time intervals during the year, and the average number of units in the
warehouse falls to only 1500.
If 1000 units are made in each of twelve batches, an average of 500 units
will be in the warehouse.

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 Chapter 3. Differentiation 3.7. Applications in Business

To solve the problem, we need to consider the variable q number of units in each
batch. In addition, we have the following constants:

k is cost of storing one unit of the product for one year;

f is fixed setup cost to manufacture the product;

g is cost of manufacturing a single unit of the product;

M is total number of units produced annually.

So the total production cost is the sum of the manufacturing and storage costs
 
M q fM kq
TC (q) = f × +g ×M +k × = + gM +
q 2 q 2
q
and the lot size that minimizes total costs is q = 2fM
k .

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 Chapter 3. Differentiation 3.7. Applications in Business

For example. A paint company has a steady annual demand for 24,500
cans of automobile primer. The comptroller for the company says that it
costs $ 2 to store one can of paint for 1 year and $ 500 to set up the plant
for the production of the primer.

Find the number of cans of primer that should be produced in each batch,
as well as the number of batches per year, in order to minimize total
production costs.

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 Chapter 3. Differentiation 3.7. Applications in Business

Economic order quantity

We can extend our previous discussion to the problem of reordering an item that is
used at a constant rate throughout the year. Here, the company using a product
must decide how often to order and how many units to request each time an order
is placed; that is, it must identify the economic order quantity. In this case, q is
the number of units to order each time. We also have the following constants:
k is cost of storing one unit for one year;
f is fixed cost to place an order;
M is total units needed per year.
q
fM kq 2fM
So the cost is storage cost + reorder cost is q + 2 and then q = k .
For example. A large pharmacy has an annual need for 480 units of a certain
antibiotic. It costs $3 to store one unit for one year. The fixed cost of placing an
order (clerical time, mailing, and so on) amounts to $31. Find the number of units
to order each time, and how many times a year the antibiotic should be ordered.
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 Chapter 3. Differentiation Homework to practice

HOMEWORK

Section 11.3: page 523

Section 11.4: page 533

Section 12.3: page 563

Review: pages 545, 583

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter 4. Partial Differentiation

Outline of the chapter:

Functions of several variables

Unconstrained/constrained optimization

Partial elasticity and marginal functions

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Most relationships in economics involve more than one variable. For

instance, the demand for a good depends not only on its own price but
also on the price of substitute and complementary goods, incomes of
consumers, advertising expenditure and so on.

Note that
Substitutes are products/services in different forms that have the same
functionality. For example, butter and margarine are substitute goods.

Complementary goods/services is an item used in conjunction with another

good/service. Usually the complementary good has little to no value when
consumed alone, but when combined with another goods/services, it adds to
the overall value of the offering. For example, an iPhone and apps with it
are complementary products.

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

To analyze general economic behavior we must extend the concept of a function

of one variable, and particularly the differential calculus, to functions of several
variables.
Definition
A function, f , of n independent variables is a rule that assigns to each incoming
tuple of numbers, (x1 , x2 , . . . , xn ), a uniquely defined outgoing number which is
called the dependent variable z. In symbols we write this as
z = f (x1 , x2 , . . . , xn ).

Domain of a function of n variables is defined by

{(x1 , x2 , . . . , xn )|f (x1 , x2 , . . . , xn ) is well defined}

a subset of IR × IR × · · · × IR ≡ IRn called the n dimensional space. In particular, if

n = 2 then it is a two dimensional space or a real plane.
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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Graph of a function involving two variables is a surface in three

dimensional space. It is necessary to bear in mind that the graph of
function of one variable is a curve in xy −plane.

To help you have a feeling of what is the graph of a function of two

variables, let us analyze how to sketch the graph of the following functions.
Example
Graph of the function f (x, y ) = x 2 + y 2 (D is the whole xy − plane)

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

First-order derivatives.
Definition
First-order partial derivative w.r.t. x:
∂f f (x0 +∆x,y0 )−f (x0 ,y0 )
∂x (x0 , y0 ) ≡ fx (x0 , y0 ) = lim∆x→0 ∆x

First-order partial derivative w.r.t. y :

∂f f (x0 ,y0 +∆y )−f (x0 ,y0 )
∂y (x0 , y0 ) ≡ fy (x0 , y0 ) = lim∆y →0 ∆y

∂f
Accordingly to compute for example ∂x , we need only to differentiate
mathematical expressions with respect to x and let all remaining letters in
the mathematical expressions constants in disguise. It is the same for
other variables.

Gradient vector of f at (x0 , y0 ) is denoted ∇f and determined by

∇f (x0 , y0 ) = [fx (x0 , y0 ); fy (x0 , y0 )]

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Second-order derivatives.
∂2f
Second-order partial derivative w.r.t. x: ∂x 2
≡ fxx = (fx )x
∂2f
Second-order partial derivative w.r.t. y : ∂y 2
≡ fyy = (fy )y
∂2f
Second-order partial derivative w.r.t. x and y : ∂x∂y ≡ fxy = (fy )x
∂2f
Second-order partial derivative w.r.t. y and x: ∂x∂y ≡ fyx = (fx )y

Note that in general (fx )y ̸= (fy )x . In the scope of this course, we will
consider functions that satisfy (fx )y = (fy )x . [According to Clairaut’s
theorem, (fx )y (x0 , y0 ) = (fy )x (x0 , y0 ) if the first order partial derivatives
are continuous at (x0 , y0 ).]

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

All variables to change: • If x changes a small amount ∆x and y changes a small

amount ∆y , the net change in z = f (x, y ) is

∂f ∂f
∆z ≈ × ∆x + × ∆y
∂x ∂y
which is called the small increments formula. The differential form of the small
increments formula states that
∂f ∂f
dz = × dx + × dy
∂x ∂y

• If z = f (x, y ) is a constant, then dz = 0. At this stage, after rearrangement, we

have that
∂z
dy
= − ∂x
∂z
dx ∂y

This formula is called the implicit differentiation and is a useful tool to compute
the derivative of an implicit function.

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Example. Use the small increments formula to estimate the change in

z = x 2 y 4 − x 6 + 4y

when
(a) x increases from 1 to 1.1 and y remains fixed at 0;

(b) x remains fixed at 1 and y decreases from 0 to -0.5;

(c) x increases from 1 to 1.1 and y decreases from 0 to -0.5.

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Recall that a local/relative minimum point is a point whose value is

smallest compared to the value of points around. It is analogous to
definition of relative/local maximum point.

A global/absolute minimum point is a point whose value is smallest

compared to every points in the domain.

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Let’s look at the three particular surfaces:

Example
Graph of the function f (x, y ) = x 2 + y 2 has the shape of a paraboloid
opened upwards.

(x = 0, y = 0) is called a minimum of f . Note that the tangent plane to

the surface at the minimum point is the xy −plane and the surface is
convex, which means it holds water in itself.

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Example
Graph of the function f (x, y ) = −x 2 − y 2 has the shape of a paraboloid
opened downwards

(x = 0, y = 0) is called the maximum of f . Note that the tangent plane to

the surface at the maximum point is the xy −plane and the surface is
concave, which means it pours water.

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Example
Graph of the function f (x, y ) = x 2 − y 2 has the shape of a hyperbolic
paraboloid

(x = 0, y = 0) is called the saddle point or minimax point of f . This

surface is neither convex nor concave at (0, 0).

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Steps to solve the unconstrained problem Min/Max z = f (x, y )

S1. [Fermat’s necessary condition] Find the stationary point/candidates (x0 , y0 )
of the function f by solving the simultaneous system fx = fy = 0
S2. [Sufficient condition investigating the concavity of the function] Classify the
candidates as minimum or maximum or saddle points by determining
∆ = fxx (x0 , y0 ) × fyy (x0 , y0 ) − fxy2 (x0 , y0 ). If
∆ > 0 then (x0 , y0 ) is an extreme point. This point is the local
minimum if fxx (x0 , y0 ) > 0 and is the local maximum if fxx (x0 , y0 ) < 0.
Note that if ∆ does not consist of (x0 , y0 ) then minimum/maximum
obtained will be global.
∆ < 0 then (x0 , y0 ) is the saddle point or so called minimax, that is,
neither min nor max.
∆ = 0 then no conclusion is stated yet. To get further information, we
have to consider δ = f (x, y ) − f (x0 , y0 ). If
δ ≤ 0 for all x, y then (x0 , y0 ) is a maximum
δ ≥ 0 for all x, y then (x0 , y0 ) is a minimum
Otherwise, (x0 , y0 ) is a saddle point.
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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Example. Find the critical points of the following functions and classify
them as a relative minimum, a relative maximum, or as a minimax point.

(1) f (x, y ) = x 2 + 4y 2 − 6x − 32y + 1

(2) f (x, y ) = x 2 + 3xy + y 2 − 9x − 11y + 3

(3) f (x, y ) = 1/3(x 3 + 8y 3 ) − 2(x 2 + y 2 ) + 1

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Example. [Price discrimination] Suppose a monopolist is practicing

price discrimination in the sale of a product by charging different prices in
two separate markets.

In market A, the demand function is pA = 100 − qA and in market B it is

pB = 84 − qB , where qA and qB are the quantities sold per week in A and
B, and pA and pB are the respective prices per unit.

If the monopolist’s cost function is C = 600 + 4(qA + qB ), how much

should be sold in each market to maximize the profit?

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Example. [Constraint problem] A firm produces two goods A and B.

The weekly cost of producing x items of A and y items of B is

TC (x, y ) = 0.2x 2 + 0.05y 2 − 0.1xy + 2x − 5y + 1000

(a) State the minimum value of TC in the case when there are no
constraints.

(b) Find the minimum value of TC when the firm is committed to

producing 500 goods of either type in total.

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 Chapter 4. Partial Differentiation 4.2. Optimization problems

Lagrange multiplier method for constraint problems.

Steps to find the optimal value of Min/Max z = f (x, y ) s.t. g (x, y ) = C

S1. Construct the Lagrangian function L(x, y , λ) = f (x, y ) − λ × [g (x, y ) − C ],
in which λ is called the Lagrange multiplier.
S2. Optimal conditions: ∇f = λ∇g [⇔ fx = λgx ; fy = λgy ] and g (x, y ) − C = 0.
Therefore, to find the optimal value we need to solve simultaneous system
Lx = Ly = Lλ = 0 for (x0 , y0 ) [and λ if necessary].
Example. Use Lagrange multiplier method to optimize the function z = 2x 2 − xy
subject to x + y = 12.
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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Our aim in this section is to study several applications of partial

differentiation in economics that have been considered in the case of
functions of one variable, such as

Substitute commodities and Complementary commodities

Elasticity of demand

Marginal utility and marginal production and so on.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Substitute/complementary commodities. It’s worth recalling that two

commodities are said to be substitute commodities if an increase in the demand
for either results in a decrease in demand for the other. Substitute commodities
are competitive, like butter and margarine.

On the other hand, two commodities are said to be complementary commodities

if a decrease in the demand of either results in a decrease in the demand of the
other. An example is provided by digital cameras and recording disks. If
consumers buy fewer digital cameras, they will likely buy fewer recording disks,
too.

Suppose D 1 (p1 , p2 ) units of the first commodity and D 2 (p1 , p2 ) of the second are
demanded when the unit prices of the commodities are p1 and p2 , respectively. It
is reasonable to expect demand to decrease with increasing price, so Dp11 < 0 and
Dp22 < 0.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

For substitute commodities, the demand for each commodity increases with
respect to the price of the other, so Dp12 > 0 and Dp21 > 0.

However, for complementary commodities, the demand for each decreases with
respect to the price of the other, and Dp12 < 0 and Dp21 < 0.

Example
Suppose the demand function for flour in a certain community is given by
10
D 1 (p1 , p2 ) = 500 + − 5p2 ,
p1 + 2
while the corresponding demand for bread is given by
7
D 2 (p1 , p2 ) = 400 + − 2p1 ,
p2 + 3
where p1 is the dollar price of a pound of flour and p2 is the price of a loaf of
bread. Determine whether flour and bread are substitute or complementary
commodities or neither.
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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Elasticity. Suppose that demand function Q = f (P, PA , Y ) in which P is

the price of a certain good, PA is the price of an alternative good, and Y
is the income of consumers. So
P ∂Q P
The price elasticity of demand is EP = Q × ∂P ≡ Q × QP .
PA ∂Q PA
The cross-price elasticity of demand is EPA = Q × ∂PA ≡ Q × QPA .

If the alternative good is substitutable then QPA > 0 and thus EPA > 0.

If the alternative good is complementary then QPA < 0 and thus

EPA < 0.
Y ∂Q Y
The income elasticity of demand is EY = Q × ∂Y ≡ Q × QY .

If the good is inferior then QY < 0 and thus EY < 0.

If the good is normal then QY > 0 and thus EY > 0. Furthermore, if

EY > 1 then the good is superior.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Example. Given the demand function Q = 100 − 2P + PA + 0.1Y where

the price of a certain good P = 10, the price of an alternative good
PA = 12, and the income of consumers Y = 1000.
(1) Find
price elasticity of demand

cross-price elasticity of demand

income elasticity of demand

(2) Is the alternative good is substitutable or complementary?

(3) If income rises by 5%, calculate the corresponding percentage change

in demand. Would this good be classified as inferior, normal or
superior?

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Utility. Consumers are faced with a choice of how many items of various goods to
buy and has a preference between options available. To analyze the behavior of
consumers quantitatively, we associate with each set of options a number, U,
called utility, which indicates the level of satisfaction. For instance,

If a customer prefers apples to oranges no matter the amount consumed, the

utility function could be expressed as U(apples) > U(oranges).

If a customer prefers (1 avocado and 3 apples) to (2 avocados and 1 apple),

the utility function could be expressed as U(1, 3) > U(2, 1).

A little more general, suppose that there are two goods, G1 and G2 , and that the
consumer buys x1 items of G1 and x2 items of G2 . The variable U is then a utility
function of x1 and x2 , which we write as U = U(x1 , x2 )

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Suppose that utility is a function of two variables x1 and x2 and if x1

changes by a small ∆x1 and x2 changes by a small ∆x2 , then the net
change in U can be found from the the small increments formula:

∆U ≈ Ux1 ∆x1 + Ux2 ∆x2

1/4 3/4
Example. Given the utility function U(x1 , x2 ) = x1 x2 . Determine the
values of marginal utilities Ux1 and Ux2 when x1 = 100, x2 = 200. Hence
estimate the change in utility when x1 decreases from 100 to 99 and x2
increases from 200 to 201.

In this example, we will evidence that Ux1 x1 < 0 and Ux2 x2 < 0. This
illustrates the law of diminishing marginal utility, meaning the
consumption of good G1 or G2 increases, each additional item of G1 or G2
bought confers less utility than the previous item.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Marginal rate of commodity substitution (MRCS). If two commodities are

substitutable, then in order to maintain a constant value of utility when x1
decreases by ∆x1 units, it is necessary that x2 increases by a corresponding
quantity ∆x2 such that ∆U ≈ Ux1 ∆x1 + Ux2 ∆x2 = 0.
Ux1
It turns out that MRCS ≡ − ∆x
∆x1 =
2
Ux2

If fewer purchases are made of G1 , then the consumer has to compensate for this
by buying more of type G2 to maintain the same level of satisfaction.

Indifference/level curve is a curve that consists all points of the same utility:
C (U, U0 ) = {(x1 , x2 )|U(x1 , x2 ) = U0 }
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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

√ √
Example. Given the utility function U = x1 x2 find a general
expression for MRCS in terms of x1 and x2 .
(a) Calculate the particular value of MRCS for the indifference curve that
passes through (300, 500).

(b) Hence estimate the increase in x2 required to maintain the current

level of utility when x1 decreases by 3 units.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Production. The output, Q, of any production process depends on a

variety of inputs, known as factors of production. These comprise land,
capital, labor and enterprise.

For simplicity we restrict our attention to capital and labor. Capital, K ,

denotes all man-made aids to production such as buildings, tools and plant
machinery. Labor, L, denotes all paid work in the production process. The
dependence of Q on K and L may be written

Q = f (K , L)

which is called the production function.

Example
If Q = 100K 1/3 L1/2 then the inputs K = 27 and L = 100 lead to an
output
Q = 100(27)1/3 (100)1/2 = 100(3)(10) = 3000
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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Production functions can be studied in a similar way to utility functions.

So we also have ∆Q ≈ ∂Q ∂Q
∂K × ∆K + ∂L × ∆L ≡ QK × ∆K + QL × ∆L

Marginal rate of technical substitution (MRTS) is the amount by

which capital needs to rise to maintain a constant level of output when
QL
labour decreases by 1 unit: MRTS ≡ − ∆K ∆L = QK .

Example
√
Given Q = 2LK + L. If the current level of K and L are 7 and 4,
respectively, estimate the increase in capital needed to maintain the
current level of output given a 1-unit decrease in labour.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Homogeneous function. A production function f (K , L) is said to be homogeneous

of degree n if, for any number λ,

f (λK , λL) = λn f (K , L)

A production function is then said to display decreasing returns to scale, constant

returns to scale or increasing returns to scale, depending on whether λ < 1, λ = 1
or λ > 1, respectively. One useful result concerning homogeneous functions is
known as Euler’s formula, which states that
∂f ∂f
K +L = nf (K , L)
∂K ∂L

The special case n = 1 is worthy of note because the right-hand side of the
formula is then simply f (K , L), which is equal to the output, Q.

Euler’s formula for homogeneous production functions of degree 1 states that if

each input factor is paid an amount equal to its marginal product then each term
on the left-hand side gives the total bill for that factor.
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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

The Cobb—Douglas production function given by Q = AK α × Lβ , in

which A, α, β are positive constants, is an homogeneous function of degree
α + β.

The Cobb-Douglas production function is based on the empirical study of

the American manufacturing industry made by Cobb-Douglas. It is widely
used to represent the technological relationship between only two inputs,
labour and capital.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

Diminishing marginal productivity

The production function Q is simply defined as a function of labour L and capital
K . Moreover, in the short run the input K can be assumed to be fixed, so Q is
then only a function of one input L.

The diminishing marginal productivity states that the increase in output due to
a 1-unit increase in labour will eventually decline. In other words, once the size of
the workforce has reached a certain threshold level, the marginal product of
labour will get smaller. It’s kind of like the more you eat egg rolls, the less you
enjoy them.

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 Chapter 4. Partial Differentiation 4.3. Partial elasticity and marginal functions

A little more precisely, the marginal product of labour is

dQ
MQL = .
dL
When the values of MQL decline with increasing L, the production function
illustrates the law of diminishing marginal productivity (sometimes called the
law of diminishing returns).

Example. [Production defined as a function of time] An efficiency study of

the morning shift [from 8:00 a.m. til 12:00 noon] at a certain factory indicates
that an average worker arriving on the job at 8:00 a.m. will have produced
Q(t) = −t 3 + 8t 2 + 15t units t hours later. At what time does the diminishing
returns occur?

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 Chapter 4. Partial Differentiation Homework to practice

HOMEWORK

Section 17.1: page 753

Section 17.4: page 768

Review: page 782

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter 5. Integration

Outline of the chapter:

Indefinite integration

Definite integration

Applications in Business

Probability [for your further reference]

Consumers’ surplus - Producers’ surplus

Continuous money flow

Discounting

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 Chapter 5. Integration 5.1. Indefinite integration

Definition
If F ′ (x) = f (x) for all x in an interval I then we say that F (x) is an
anti-derivative of f (x) on I .

For example, the antiderivative of f (x) = x is F (x) = x 2 /2, because

′
x 2 /2 = x

Theorem
If F is an anti-derivative of f then all other anti-derivative have the form
F (x) + C where C is a real number.

Indeed, (F (x) + C )′ = (F (x))′ = f (x).

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 Chapter 5. Integration 5.1. Indefinite integration

Definition
If the function f has an anti-derivative then the integral of f denoted by
R R
f or f (x)dx is the collection of all anti-derivatives of f .

If F is an anti-derivative of f then the integral of f is often written as

Z
f (x)dx = F (x) + C

where C is any real number.

 3 ′
x3 x
x 2 dx = = x 2.
R
Example. 3 + C because 3

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 Chapter 5. Integration 5.2. Definite integration

To define the definite integral, let’s study the following area problem.

Problem. Find the area of the region S enclosed by the curve y = x 2 , the x-axis,
and the vertical lines x = 0 and x = 1.

One of the ways to find the area of this region is approximating each strip by a
small rectangle. As we have seen in the picture below, the more the number of
sub-intervals, the better the approximation.

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 Chapter 5. Integration 5.2. Definite integration

Area between curves. Consider the region S enclosed by the curve

y = f (x) ≥ 0, the x-axis, and the vertical lines x = a and x = b, where
f (x) is continuous function over x ∈ [a, b]

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 Chapter 5. Integration 5.2. Definite integration

The area of the indicated region can be calculated by performing the

following steps (Rectangular Approximation Method, or RAM for short).
1. We first divide up [a, b] into n subintervals of equal length by n + 1
points
x0 = a < x1 < x2 < · · · < xn = b

2. Set
b−a
, ∀i = 1, 2, . . . , n
∆x ≡ xi − xi−1 =
n
3. We take any point xi∗ ∈ [xi−1 , xi ], ∀i = 1, . . . , n
4. Area of a rectangle of width ∆x and height f (xi∗ ) is f (xi∗ )∆x
5. Total areas of rectangles = ni=1 f (xi∗ )∆x [is called Riemann sum].
P

6. Exact area
Rb
= limn→∞ ni=1 f (xi∗ )∆x ≡ i=1
Pn=∞
f (xi∗ )∆x ≡ a f (x) dx
P

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 Chapter 5. Integration 5.2. Definite integration

Theorem (Fundamental theorem of Calculus)

If f is continuous on [a, b] and F is an anti-derivative of f then
Z b
f (x)dx = F (x)|ba = F (b) − F (a) [Newton-Leibnitz formula]
a

In summary, to compute a definite integral we can possibly use definition or

theorem.
Rb Pn=∞
[by definition] a
f (x) dx = i=1 f (xi∗ )∆x

b−a ∗
where x0 = a, xi = a + i × ∆x, xn = b; ∆x = xi − xi−1 = ; xi ∈ [xi−1 , xi ]
n
Rb
[by theorem] a
f (x)dx = F (x)|ba = F (b) − F (a)

R1
Example. Let compute the integral 0 x 2 dx by both the Riemann sum and the
Fundamental theorem, and then compare results obtained.
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 Chapter 5. Integration 5.3. Applications in Business

Probability of a continuous random event

The probability density function or PDF of a continuous random variable gives
the relative likelihood of any outcome in a continuum occurring. Unlike the
case of discrete random variables, for a continuous random variable any single
outcome has probability zero of occurring.

Probability that a random variable X takes a value in the open or close interval
[a, b] is given by the integral of a function called probability density function fX
Z b
P(a ≤ X ≤ b) = fX (x)dx and P(X = c) = 0 for any c ∈ [a, b]
a

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 Chapter 5. Integration 5.3. Applications in Business

Consumers’ surplus.
Given a demand function P = f (Q). At Q = Q0 the price P = P0 .
P0 is the price that consumers are prepared to pay for the last unit that they buy,
which is the Q0 th good. For quantities up to Q0 they would actually be willing to
pay the higher price given by the demand curve. The consumer’s surplus is the
shaded area which represents the benefit to the consumer of paying the fixed
price of P0
Z Q0 Z Q0
CS = f (Q)dQ − P0 × Q0 = PdQ − P0 × Q0
0 0

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 Chapter 5. Integration 5.3. Applications in Business

Producers’ surplus.
Given a supply function P = g (Q). Assuming that all goods are sold, the total
amount of money received is then Q0 P0 , where P0 is the price at which the
producer is prepared to supply the last unit, which is the Q0 th good. For
quantities up to Q0 they would actually be willing to accept the lower price given
by the supply curve.
The producer’s surplus is the shaded area representing the benefit to the
producer of selling at the fixed price of P0 :
Z Q0 Z Q0
PS = P0 × Q0 − g (Q)dQ = P0 × Q0 − PdQ
0 0

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 Chapter 5. Integration 5.3. Applications in Business

Example 1. The demand equation for a product is q = 400 − p 2 and the

supply equation is p = q/60 + 5. Find the producers’ surplus and
consumers’ surplus under the market equilibrium.

Example 2. The supply equation for a product is given by the following

table, where p is the price per unit (in dollars) at which q units are
supplied to the market.

Use the trapezoidal rule to estimate the producers’ surplus if the selling
price is $80.

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 Chapter 5. Integration 5.3. Applications in Business

Continuous money flow

In an earlier chapter we looked at the concepts of present value and future value
when a lump sum of money is deposited in an account and allowed to accumulate
interest. In some situations, however, money flows into and out of an account
almost continuously over a period of time. Examples include income in a store,
bank receipts and payments, and highway tolls. Although the flow of money in
such cases is not exactly continuous, it can be treated as though it were
continuous, with useful results.

In this section, we introduce the following features:

Total money flow.

Present value of money flow.

Accumulated amount of money flow.

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 Chapter 5. Integration 5.3. Applications in Business

Total money flow

If I (t) is the income at time t then the total income/money flow over [0, T ] is
n=∞
X n=∞
X Z T Z T
[I (ti ) − I (ti−1 )] = I ′ (ti−1 )×∆t = I ′ (t)dt ≡ I (T ) − I (0) = f (t)dt
i=1 i=1 0 0

where f (t) represent the rate of flow of money per unit of time.
Notice that this “total money flow” does not take into account the interest the
money could earn after it is received. It is simply the total income.

Example. The income from a soda machine is growing exponentially. When the
machine was first installed, it was producing income at a rate of $1000 per year.
By the end of the 1st year, it was producing income at a rate of $1020.2 per year.
Find the total income produced during its first 3 years of operation.
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 Chapter 5. Integration 5.3. Applications in Business

Present value of money flow

If f (t) represent the rate of the continuous flow at a discount rate r compounded
continuously for T years, the present value of a continuous money flow is
n=∞
X n=∞
X Z T
′ −rti −rti
P0 = [I (ti )∆t] e = [f (ti )∆t] e = f (t) × e −rt dt
i=1 i=1 0

Example. A company expects its rate of annual income during the next three
years to be given by f (t) = 75, 000t, 0 ≤ t ≤ 3. What is the present value of this
income over the 3-year period, assuming a discount rate of 8% compounded
continuously?
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 Chapter 5. Integration 5.3. Applications in Business

Accumulated amount of money flow

If f (t) is the rate of money flow at an annual rate r at time t, the
accumulated amount of money flow at time T is
Z T
A=e rT
f (t)e −rt dt.
0

This amount includes interest received on the money after it comes in.
Example
If money is flowing continuously at a constant rate of $2000 per year over
5 years at 6% interest compounded continuously. Find
a. The total money flow over the 5-year period.

b. The accumulated amount of money flow, compounded continuously,

at time T = 5.
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 Chapter 5. Integration 5.3. Applications in Business

Discounting. To calculate the present value, P0 , when a single future

value, P, is discounted at r % interest continuously for t years, we can use
the following formula: P0 = Pe −rt

If the fund is to provide a continuous revenue stream for n years at an

annual rate of P dollars per year, then the present value can be found by
Rn
evaluating the definite integral P0 = 0 Pe −rt dt

Example. Calculate the present value of a continuous revenue stream of $

1,000 a year for 5 years if the discount rate is 9%.

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 Chapter 5. Integration Homework to practice

HOMEWORK

Section 15.3: page 701

Section 15.4: page 705

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

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 Chapter 6. Matrices

Outline of the chapter:

What is a matrix?

Basic matrix operations

Matrix inverse

Cramer’s rule

Applications of Linear Systems in Economics

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 Chapter 6. Matrices 6.1. What is a matrix?

A rectangular table consisting of m rows and n columns

 
a11 a12 . . . a1n
 a21 a22 . . . a2n 
 
A= . 
 .
.


am1 am2 . . . amn

is called a matrix of order m × n.

Rows of a matrix are horizontal, columns of a matrix are vertical.

Notation. Am×n = [aij ], i = 1, . . . , m, j = 1, . . . , n in which aij is called

the ij entry. The set of matrices of order m × n is denoted Mm×n .

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 Chapter 6. Matrices 6.1. What is a matrix?

In particular,
If m = 1 then A is also called row vector.
If n = 1 then A is called column vector.
If m = n then the matrix is said to be square and in this case, we call
A is the square matrix of order n.

Identity matrix of order n: aii = 1 for i = 1, . . . , n and aij = 0 for

i ̸= j, i, j = 1, . . . , n
 
1 0 ... 0
0 1 . . . 0
 
In =  ≡I
 ..
.


0 0 ... 1

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 Chapter 6. Matrices 6.1. What is a matrix?

Matrix Operations
Let A = [aij ] and B = [bij ] be two matrices of order m × n, i.e.,
A, B ∈ Mm×n .

Equality.
A = B ⇔ aij = bij
Addition/Subtraction.
A ± B = [aij ± bij ]
Scalar Multiplication. Let k be a real number.

k A = [k aij ]

Transposition. Let A = (aij ) be a matrix of order m × n. The transposition of A

denoted by AT is defined by symbolically AT = (aji ). This means that the first
row of AT is the first column of A, the second row of AT is the second column of
A, and so on. Thus A ∈ Mm×n , while AT ∈ Mn×m
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 Chapter 6. Matrices 6.1. What is a matrix?

Scalar/Dot/Inner product. Given a = (a1 a2 . . . an ) and

b = (b1 b2 . . . bn ). The scalar product of a and b is defined by

n
X
⟨a, b⟩ = ab T = a1 b1 + a2 b2 + · · · + an bn = ai bi
i=1

Example
a = (1 3 5), b = (−1 0 4) ⇒ ab T = 1 × (−1) + 3 × 0 + 5 × 4 = 19

Recall that the product of 2 vectors perpendicular to each other is 0. For

instance

a = (1 0), b = (0 1) ⇒ ab T = 0

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 Chapter 6. Matrices 6.1. What is a matrix?

Matrix Multiplication. Let A be a matrix of order m × n and B be a

matrix of n × p. The product of A and B is

n
X
AB = [cij ] where cij = aik bkj
k=1

Note that we can only multiply two matrices when the number of columns
in the first matrix is equal to the number of rows in the second matrix.

" # " #
1 × 7 + 2 × 9 + 3 × 11 1 × 8 + 2 × 10 + 3 × 12 58 64
= =
4 × 7 + 5 × 9 + 6 × 11 4 × 8 + 5 × 10 + 6 × 12 139 154
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 Chapter 6. Matrices 6.1. What is a matrix?

Observe that
" #" # " #
1 0 a11 a12 a11 a12
=
0 1 a21 a22 a21 a22
and
" #" # " #
a11 a12 1 0 a11 a12
=
a21 a22 0 1 a21 a22

In general, we have that

AIn = A = In A

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 Chapter 6. Matrices 6.1. What is a matrix?

Tabulations are handy while storing the raw data as we will see in the
following examples.
Example
A firm orders 12, 30 and 25 items of goods G1, G2 and G3. The cost of
each item of G1, G2 and G3 is $8, $30 and $15, respectively.
(a) Write down suitable price and quantity vectors, and use matrix
multiplication to work out the total cost of the order.

(b) Write down the new price vector when the cost of G1 rises by 20%,
the cost of G2 falls by 10% and the cost of G3 is unaltered. Use
matrix multiplication to work out the new cost of the order and hence
find the overall percentage change in total cost.

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 Chapter 6. Matrices 6.1. What is a matrix?

Example
A chain of sports shops, A, B and C , sells T-shirts, trainers and tennis racquets.
The weekly sales and profit per item are shown in the tables below:

The 3 × 3 matrices formed from the sales and profit tables are denoted by S and
P, respectively.

(a) If A = SP T , find the element a11 and give a brief interpretation of this
number.

(b) If B = S T P, find the element b33 and give a brief interpretation of this
number.
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 Chapter 6. Matrices 6.2. Inverse Matrix

By using multiplication matrix operation, we can easily convert a system of linear

equations into a matrix equation that



 a11 x1 + a12 x2 + · · · + a1n xn = b1


a21 x1 + a22 x2 + · · · + a2n xn

= b2
..



 .

+ am2 x2 + · · · + amn xn

a
m1 x1 = bm

⇔
    
a11 a12 ... a1n x1 b1
 a21 a22 ... a2n  x2   b2 
    
 . .=  .  ⇔ AX = B
 . .  . 
 . .  . 
am1 am2 ... amn xn bm
We know that the ordinary equation ax = b has a solution x = a−1 b if a ̸= 0,
where a−1 = 1a . Now, being seeking solution of the matrix equation above, we
will define A−1 .
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 Chapter 6. Matrices 6.2. Inverse Matrix

Let A be a matrix of order n × n. If there exists a matrix B such that

AB = In = BA

then A is said to be invertible and B is called the inverse matrix of A,

denoted by A−1 .
Example
# " " #
1 2 −2 1
Let a matrix A = . Verify that is the inverse of A.
3 4 3/2 −1/2

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 Chapter 6. Matrices 6.2. Inverse Matrix

How to find an inverse matrix?

1. Write an augmented matrix consisting of A on the left side and the
identity matrix on the right side
 
a11 a12 . . . a1n | 1 0 . . . 0
a21 a22 . . . a2n | 0 1 . . . 0
 
 . 
 .
 .


an1 an2 . . . ann | 0 0 . . . 1
2. Then we attempt to transform the augmented matrix by row
equivalent operations called Gaussian elimination method to one of
the form  
1 0 . . . 0 | b11 b12 . . . b1n
0 1 . . . 0 | b21 b22 . . . b2n 
 
. 
.
.


0 0 ... 1 | bn1 bn2 . . . bnn
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 Chapter 6. Matrices 6.2. Inverse Matrix

Gaussian elimination method

1. Interchange any two rows

 
3x + 4y = −5 x + 2y = 1
⇔
x + 2y = 1 3x + 4y = −5

2. Multiply each entry in a row by the same nonzero constant

 
x + 2y = 1 2x + 4y = 2
⇔
3x + 4y = −5 3x + 4y = −5

3. 
Add a nonzero multiple ofone row to another row.
x + 2y = 1 x + 2y = 1
⇔
3x + 4y = −5 0x − 2y = −8

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 Chapter 6. Matrices 6.2. Inverse Matrix

Example. Solve the following system




x + 3y + 2z =9

x − y + 3z = 16


3x − 4y + 2z

= 28

(a) by the Gaussian elimination method,

(b) by the inverse matrix.

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 Chapter 6. Matrices 6.2. Inverse Matrix

How to check a matrix invertible or not? one of the ways is finding its
determinant. If the determinant of a matrix is non-zero then the matrix is
invertible.
Matrix of order 2 × 2

a b
= ad − cb
c d
Matrix of 3 × 3:
a11 a12 a13
a21 a22 a23 =
a31 a32 a33

a22 a23 a21 a23 a21 a22

a11 - a12 + a13
a32 a33 a31 a33 a31 a32

International School of Business, UEH UEH, Vietnam August 29, 2023 187 / 220
 Chapter 6. Matrices 6.2. Inverse Matrix

Now the determinant of matrix of order n × n is defined inductively as

follows

For a square matrix A = [aij ]. The cofactor Aij of an element aij is

Aij = (−1)i+j Mij ,

where Mij is the determinant of the matrix formed by deleting the ith row
and the jth column of A.

The determinant of A of n × n is defined by

n
X
|A| = aij Aij ,
j=1

where i ∈ 1, n.

International School of Business, UEH UEH, Vietnam August 29, 2023 188 / 220
 Chapter 6. Matrices 6.2. Inverse Matrix

Steps to find determinant of a square matrix

For any square matrix A of order n × n (n > 1), we define the determinant
of A, denoted |A|, as follows:
1. Choose any row or column

2. Multiply each element in that row or column by its cofactor and add
the results
Note that

The determinant of a 1 × 1 matrix is simply the element of the matrix.

The value of a determinant will be the same no matter which row or column
is chosen.

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 Chapter 6. Matrices 6.3. Cramer’s rule

Solving systems of linear equations using determinants

Cramer’s rule for 2 × 2 systems

The solution of the system


a x + b y = c
1 1 1
a x + b y = c
2 2 2

Dx Dy
is given by x = ;y=
D D

a1 b1 c1 b1 a1 c1
where D = ; Dx = Dy = ; and D ̸= 0
a2 b2 c2 b2 a2 c2

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 Chapter 6. Matrices 6.3. Cramer’s rule

Cramer’s rule for 3 × 3 systems

The solution of the system


 a x + b1 y + c1 z = d1
 1


a2 x + b2 y + c2 z = d2


a3 x + b3 y + c3 z = d3


Dx Dy Dz
is given by x = ;y= ;z=
D D D
a1 b1 c1 d1 b1 c1 a1 d1 c1
where D = a2 b2 c2 ; Dx = d2 b2 c2 Dy = a2 d2 c2 ;
a3 b3 c3 d3 b3 c3 a3 d3 c3
a1 b1 d1
Dz = a2 b2 d2 ; and D ̸= 0
a3 b3 d3
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 Chapter 6. Matrices 6.3. Cramer’s rule

As for n × n systems, we do the same. Cramer’s rule in general case

gives

D1 D2 Dn
x1 = , x2 = , . . . , xn =
D D D

provided that D ̸= 0.

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 Chapter 6. Matrices 6.3. Cramer’s rule

Example. Solve the following system




x + 3y + 2z =9

x − y + 3z = 16


3x − 4y + 2z

= 28
by the Cramer rule.

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 Chapter 6. Matrices 6.4. Solvable methods for a system of linear equations

(1) We can solve a general system of m linear equations and n variables by

Gaussian elimination method,

Reducing matrix using elementary row operations to row echelon form.

For example,

(2) For a system of n linear equations and n variables, we can possibly solve by
Using inverse matrix,

Using Cramer rule.

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 Chapter 6. Matrices 6.5. Applications of Linear Systems in Economics

A firm produces 3 products A, B, and C that require processing of 3

machines M1, M2, and M3. The time in hours required for processing one
unit of each product by the three machines is given by the following table:

M1 is available for 440 hours, M2 for 310 hours, and M3 for 560 hours.
Find how many units of each product should be produced to make use of
all available time on the machines.

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 Chapter 6. Matrices 6.5. Applications of Linear Systems in Economics

An investment company three types of pooled funds: Standard (S), Deluxe (D),
and Gold Star (G). Each unit of S contains 12 shares of stock A, 16 stocks B, and
8 of stock C. Each unit of D contains 20 shares of stock A, 12 stocks B, and 28
of stock C. Each unit of G contains 32 shares of stock A, 28 stocks B, and 36 of
stock C.

Suppose an investor wishes to purchase exactly 220 shares of stock A, 176 shares
of stock B, and 264 shares of stock C by buying units of the three funds.

(a) Determine those combinations of units of S, D, and G that will meet the
investor’s requirement exactly.

(b) Suppose the investor pays $ 300 for each unit of S, $ 400 for each unit of D,
and $ 600 for each unit of G. Which of the combination from part (a) will
minimize the total cost to the investor?

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 Chapter 6. Matrices 6.5. Applications of Linear Systems in Economics

Homogeneous system in Economics

Suppose an economy consists of the Coal, Electric (power), and Steel sectors, and
the output of each sector is distributed as in the following table.

The entries in a column represent the fractional parts of a sector’s total output.
Denote the prices (i.e., dollar values) of the total annual outputs of the Coal,
Electric, and Steel sectors by pC ,pE , and pS , respectively. What are equilibrium
prices that make each sector’s income match its expenditures?

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 Chapter 6. Matrices 6.5. Applications of Linear Systems in Economics

Network flow
The network in the following figure shows the traffic flow (in vehicles per
hour) over several one-way streets in downtown Baltimore during a typical
early afternoon. What is the general flow pattern for the network?

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 Chapter 6. Matrices 6.5. Applications of Linear Systems in Economics

Leontief’s input - output analysis

Input–output models developed by Wassily W. Leontief divide the economy into
sectors where each sector produces goods and services not only for itself but also
for other sectors. These sectors are dependent on each other and the total input
always equals the total output.

Example. Suppose the economy consists of three people, the farmer F, the
carpenter C, and the tailor T. Assume that whatever the farmer produces, 20% is
used by him, 15% by the carpenter, 10% by the tailor, and the consumer uses the
other 40 billion dollars worth of the food. Ten percent of the carpenter’s
production is used by him, 25% by the farmer, 5% by the tailor, and 50 billion
dollars worth by the consumer. Fifteen percent of the clothing is used by the
tailor, 10% by the farmer, 5% by the carpenter, and the remaining 60 billion
dollars worth by the consumer. What should be, in billions of dollars, the required
output by each industry to meet the demand?

Wassily W. Leontief [1906–1999] won the 1973 Nobel Prize in economic science for the development of the “input–output”
International School
method and its of Business,
applications UEH
to economic problems. UEH, Vietnam August 29, 2023 199 / 220
 Chapter 6. Matrices 6.5. Applications of Linear Systems in Economics

According to the problem, we have the model as follows:

X = AX + D ⇔ (I − A)X = D ⇔ X = (I − A)−1 D

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 Chapter 6. Matrices Homework to practice

HOMEWORK

Section 6.3: page 279

Section 6.4: page 289

Section 6.6: page 300

Review: page 308

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

International School of Business, UEH UEH, Vietnam August 29, 2023 201 / 220
 Chapter 7. Linear Programming

Outline of the chapter: In this chapter, we will introduce basically linear

programmings and methods for solving them.
What is a linear programming

Standard form of a linear programming

Geometric method for solving a linear programming of 2 variables

Simplex method for solving a linear programming

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 Chapter 7. Linear Programming 7.1. What is a linear programming?

Let’s begin this chapter with an example in order to better understand what a
linear programming is?

Example. A manufacturer produces two models of racing bike, B and C, each of

which must be processed through two machine shops.

Machine shop 1 is available for 120 hours per month and machine shop 2 for 180
hours per month.

The manufacture of each bike of type B takes six hours in shop 1 and three hours
in shop 2. The corresponding times for C are 4 and 10 hours, respectively.

If the profit is $180 and $220 per bike of type B and C, respectively, how should
the manufacturer arrange production to maximize total profit?

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 Chapter 7. Linear Programming 7.2. Standard form of a linear programming

Standard form of a linear programming

A linear programming is a problem to maximize or minimize a linear

function Z = c1 x1 + c2 x2 + · · · + cn xn subject to the following conditions



 a11 x1 + a12 x2 + · · · + a1n xn ≤ b1


a21 x1 + a22 x2 + · · · + a2n xn

≤ b2
..



 .

a x + a x + · · · + a x ≤ b

m1 1 m2 2 mn n m

where aij are constants, bi are non-negative constants, cj are constants for
all 1 ≤ i ≤ m, 1 ≤ j ≤ n, and x1 , x2 , . . . , xn ≥ 0.

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 Chapter 7. Linear Programming 7.3. Geometric method

Geometric method for linear programming of 2 variables

One of the ways to conduct the optimization problem of 2 variables, for

instance, max Z = P(x, y ) = 180x + 220y subject to

6x + 4y

 ≤ 120

3x + 10y ≤ 180


x, y ≥ 0.


is to used the geometric method as follows.

S1. Sketch the constraint set on the xy plane.

S2. Compare the value of Z at corners of the constraint set: the biggest
value is the optimal value of the max problem and the smallest value
is the optimal value of the min problem.
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 Chapter 7. Linear Programming 7.3. Geometric method

Sketching linear inequalities

Graphing linear inequalities is nearly similar to doing with linear equation.

The difference is that the solution to the inequality is not the drawn line
but the area of the coordinate plane that satisfies the inequality. So you
need to do as follows:
draw a line of equation. This line divides the coordinate plane into
two halves and is called boundary line. One side of the boundary line
contains all solutions to the inequality.

choose a test point not lying on the boundary line. If coordinates of

the test point satisfy the inequality then the solution set of the
inequality is the part which consisting the point, otherwise choose
other part as the solution set. The boundary line is dashed for > and
< and solid for ≥ and ≤.
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 Chapter 7. Linear Programming 7.3. Geometric method

The area shaded darkly in the figure is the set of all points (x, y ) satisfying
the inequality y ≤ x + 2

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 Chapter 7. Linear Programming 7.3. Geometric method

Example. An Italian restaurant offers a choice of pasta or pizza meals. It

costs $3 to make a pasta dish, which it sells for $13. The corresponding
figures for pizzas are $2 and $10, respectively.

The maximum number of meals that can be cooked in a week is 1200 and
the restaurant has a weekly cost budget of $3000. How many pasta and
pizza dishes should be cooked each week to maximize profit?

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 Chapter 7. Linear Programming 7.3. Geometric method

Example. A small firm manufactures and sells litre cartons of non-alcoholic

cocktails, ‘The Caribbean’ and ‘Mr Fruity’, which sell for $1 and $1.25,
respectively. Each is made by mixing fresh orange, pineapple and apple juices in
different proportions.

The Caribbean consists of one part orange, six parts pineapple and one part apple.
Mr Fruity consists of two parts orange, three parts pineapple and one part apple.

The firm can buy up to 300 litres of orange juice, up to 1125 litres of pineapple
juice and up to 195 litres of apple juice each week at a cost of $0.72, $0.64 and
$0.48 per litre, respectively.

Find the number of cartons of ‘The Caribbean’ and ‘Mr Fruity’ that the firm
should produce to maximise profits. You may assume that non-alcoholic cocktails
are so popular that the firm can sell all that it produces.

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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

However, while the geometric method is used only for a linear programming of 2
variables, it is just as important to study methods for linear programmings
involving more than 2 variables.

Example. A manufacturer produces three models of bicycles. The time (in

hours) required for assembling, painting, and packaging each model is as follows:

The total time available for assembling, painting, and packaging is 36 hours, 60
hours and 66 hours, respectively. The profit per unit for each model is $3 (Model
A), $4 (Model B), and $5 (Model C). How many of each type should be
produced to obtain a maximum profit?
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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

Simplex method for max problem

Consider, for instance, the max problem of the function
Z = c1 x1 + c2 x2 + c3 x3 subject to



 a11 x1 + a12 x2 + a13 x3 ≤ b1


≤ b2

 a x + a22 x2 + a23 x3
 21 1


a31 x1 + a32 x2 + a33 x3 ≤ b3


a41 x1 + a42 x2 + a43 x3 ≤ b4





x1 , x2 , x3 ≥ 0.


Note that b1 , b2 , b3 and b4 are supposed to be non-negative constants.

In 1947, George B. Dantzig created a simplex algorithm to solve linear programmings for planning and decision-making in

large-scale enterprises. The algorithm’s success led to a vast array of specializations and generalizations that have dominated

practical operations research for half a century later.

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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

The latter system can be written as Z − c1 x1 − c2 x2 − c3 x3 = 0 subject to




a11 x1 + a12 x2 + a13 x3 +s1 = b1



a x + a x + a x
21 1 22 2 23 3 +s2 = b2


a31 x1 + a32 x2 + a33 x3 +s3 = b3


a41 x1 + a42 x2 + a43 x3

+s4 = b4 ,
where s1 , s2 , s3 and s4 are non-negative and called the slack variables. So
now we have a departing simplex table as follows.

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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

Steps to find the optimal solution of the max problem:

S1. If all indicators are non-negative then STOP and Z has a maximum
with the current list of basic variables.

S2. If there is any negative indicator then choose a column w.r.t. the
biggest negative indicator as a pivot column.

S3. Divide each entry in R by the corresponding positive entry (Z and

negative entry are not included) in the pivot column and choose a
pivot row which has the smallest positive quotient.

S4. Create a new simplex table in which the common entry of the pivot
column and the pivot row above is transformed into 1 and other
entries in the pivot column zeros by using the elementary row
operations [executing with pivot row only!]

S5. Turn back to S1.

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 Chapter 7. Linear Programming Homework to practice

HOMEWORK

Section 7.2: page 320

Section 7.3: page 334

Review: page 361

Haeussler, Paul, and Wood: Introductory mathematical analysis for business, economics, and the life and social sciences,

14th edition, Pearson (2022)

International School of Business, UEH UEH, Vietnam August 29, 2023 214 / 220
 Chapter 8. Differential Equations [for your further reference] 8.1. Dynamics

So far, all of our models have been static. In practice, economic variables take
time to vary.

The incorporation of time into economic models is known as dynamics, and it

enables us to decide whether equilibrium values are actually achieved and, if so,
exactly how individual variables approach these values.

When t, is a discrete variable taking whole number values. This describes

the situation in which variables change only after fixed periods. For example,
the prices of certain agricultural products change from one season to the
next but are fixed throughout each season.

When time is a continuous variable taking all possible values in a certain

interval. This describes the situation in which variables change from one
moment to the next. For example, the prices of certain commodities, such as
oil, effectively change instantaneously and are not fixed on a seasonal basis.

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 Chapter 8. Differential Equations [for your further reference] 8.2. Differential equations

When time is a continuous variable, we express this time dependence using the
usual function notation, P(t). It is appropriate to model the rate of change of P
with respect to t using the derivative, P ′ (t). Equations that involve the
derivatives of an unknown function are called differential equations.

Example. A bank pays 3.6 % interest on its certificate of deposit accounts, but
charges a $10 annual fee. Write an equation for the rate of change of the balance.

If the balance P(t) has a unit of dollars, the rate of change of the balance is
P ′ (t) which has a unit of dollars per year. Since the amount of increase in the
balance is 0.036P(t) dollars/year and the fee is 10 dollars/year, we obtain that

P ′ (t) = 0.036P(t) − 10.

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 Chapter 8. Differential Equations [for your further reference] 8.2. Differential equations

Ideal growth models

As we have studied so far, if the interest is compounded continuously, the

compound amount after t years is P = P0 e rt . This is the solution of the
differential equation:
P′ = r × P

under the initial condition P(t = 0) = P0 .

Example
A bank pays 3.6% interest each year, compounded continuously. If the
initial investment is 5, 000 dollars, the investment after t years can be
modeled by P ′ = 0.036P and therefore P = 5, 000e 0.036×t .

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 Chapter 8. Differential Equations [for your further reference] 8.2. Differential equations

Logistic models

However, capital cannot increase at an equal rate endlessly, the more so if the
system is completely or partially closed. When growing in such a system, capital
exhausts the limited resources in its environment. In other words, it enters into
self – competition which diminishes its growth – the system gets ‘satiated’.

Therefore, the growth of capital will be described by the logistic function of

growth proposed by Pierre-François Verhulst in the 1840s:
 
P
P′ = P 1 − × lnr
Pm

where Pm is the maximum (marginal) capital value (potential capital).

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 Chapter 8. Differential Equations [for your further reference] 8.3. Solving differential equations

Separable equations

A separable equation is a first-order differential equation in which the expression

for dP
dt can be factored as a function of t times a function of P. That is,

dP g (t)
= .
dt h(P)

We can use the Chain rule and the Fundamental theorem of Calculus to derive
R R
that h(P)dP = g (t)dt.

Example
Solve the following equation
dP t2
a. dt = P2 .

b. Find the solution of this equation that satisfies the initial condition
P(0) = 2.

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 Chapter 8. Differential Equations [for your further reference] 8.3. Solving differential equations

To be continued ...

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