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University of Warwick

Introductory Mathematics and Statistics


Preparation Material for the Academic Year 2016/17

Michele Aquaro

Piotr Jelonek

This version: 22nd August 2016

These notes may contain typos or mistakes. If you find any, please email us at M.Aquaro@warwick.ac.uk
and P.Z.Jelonek@warwick.ac.uk.

Contents
1. Indicative Syllabus and Suggested
1.1. Introduction . . . . . . . . . .
1.2. Indicative Syllabus . . . . . .
1.3. Suggested Readings . . . . . .

Readings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Matrix Algebra
2.1. Introduction . . . . . . . . . . .
2.2. Vectors . . . . . . . . . . . . .
2.3. Matrices . . . . . . . . . . . . .
2.4. Vector Spaces . . . . . . . . . .
2.5. Rank, inverse, and determinant
2.6. Systems of Linear Equations . .
2.7. Eigenvalues and Eigenvectors .
2.8. Quadratic Forms . . . . . . . .

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3. Statistics
3.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2. Random Variables and Probability Distributions . . . . . . . . . . . . . . . . . .
3.3. Moments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4. Multivariate Calculus and Constrained Maximization


4.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2. Multivariate Calculus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.3. Constrained Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5. Difference and Differential Equations


5.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2. Difference Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.3. Differential Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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A. Solutions

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1. Indicative Syllabus and Suggested


Readings
1.1. Introduction
All of the MSc Economics core modules taught at the University of Warwick require students to
have a solid quantitative background. Introductory Mathematics and Statistics aims to provide you
with the necessary mathematical and statistical skills to complete these modules. In particular,
this document contains a selection of examples and exercises taken from various sources to help
you practicing with core quantitative techniques.

1.2. Indicative Syllabus


This pre-sessional module covers four topics: matrix algebra, statistics, multivariate calculus and
differential equations. Please see below for a more detailed list of what we intend to cover. Please
be aware that this list is indicative and can be subject to minor changes.
Matrix Algebra Vectors: definition, sum, inner product, orthogonality. Matrices: definition, transpose, sum, product, square matrices, trace, rank, inverse, determinant. Partitioned
matrices: definition, block diagonal matrices, partitioned sum, partitioned product, inverse
of a partitioned matrix. System of linear equations: definition, square matrix systems,
general case. Eigenvalues and eigenvectors: definition, characteristic polynomial, algebraic
multiplicity, geometric multiplicity, determinant and eigenvalues, similar matrices, diagonalisation, symmetric matrices. Quadratic forms: definition, definiteness and eigenvalues,
principal minors, leading principal minors, definiteness and principal minors.
Statistics Probability: definition, independence, conditional probability. Random variables
and probability distributions: discrete random variable (univariate and multivariate), continuous random variable (univariate and multivariate), joint densities, marginal densities,
conditional densities, cumulative distribution functions. Moments: expected value, higher
moments, properties, conditional expectation and conditional variance, law of iterated
expectations. Some special distributions: Bernoulli, Normal, Binomial, Uniform, Chi-square,
Students t, multivariate Normal.
Multivariate Calculus and Constrained Optimization Convex analysis: convex set,
level curves, upper and lower level sets. Multivariate functions: homogeneous of degree k,
convex, concave, quasiconvex, quasiconcave. Multivariate calculus: gradient, Hessian, Young
theorem, Taylor theorem and second order approximations, stationary points, first and
second order optimality condition, bordered Hessian. Constrained optimization: KarushKuhn-Tucker Theorem, sufficient optimality conditions (in two cases: concave and general).
Comparative statics: Envelope Theorem, Roys identity. Matrix differentiation: Jacobian,
derivative of a quadratic form.

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Difference and Differential Equations Single difference equation: definition, solution by


substitution, particular and general solutions, homogeneous and nonhomogeneous equations,
trajectories, stability. System of difference equations: definition, solution by change of
variables in case when A may be diagonalized, higher order equations. Single differential
equation: definition, differential equation as a difference equation in a limit, general solution,
trajectories, stability. System of differential equations: definition, solution by change of
variables in a case where A may be diagonalized, higher order equations. Phase diagrams:
definition, rules of plotting phase diagrams.

1.3. Suggested Readings


These are some suggested reading lists. If you have other textbooks or lecture notes
covering the same material for instance, textbooks or lecture notes you have used
in your undergraduate studies you are welcome to use them instead. Sometimes, we
receive emails asking whether other textbooks are suitable replacements for any of the
suggested readings. Please be aware that, unfortunately, it is not always possible for us to
give a precise answer to this question.
Main Suggested Readings:
(SB) Simon and Blume, Mathematics for Economists, 1994.
(SHSS) Sydsaeter, Hammond, Seierstad, and Strom, Further Mathematics for Economic
Analysis, 2008.
(A) Amemiya, Introduction to Statistics and Econometrics, 1994.
You are welcome to use different editions than the ones listed. Also, the first two texts (SB and
SHSS) are largely substitutes for each other.
Here are some suggestions for other textbooks you may find helpful:
Abadir and Magnus, Matrix Algebra. This is the inspiration for the matrix algebra lecture
slides.
Sydsaeter and Hammond (and Strom), Essential Mathematics for Economic Analysis. This
is a basic, undergraduate level maths book. It is a predecessor to the SHSS book above.
Pemberton and Rau, Mathematics for Economists: An Introductory Textbook. This is an
alternative to the maths books above.
Casella and Berger, Statistical inference, second edition.
DeGroot and Schervish, Probability and statistics, fourth edition.
Hogg, McKean, and Craig, Introduction to mathematical statistics, seventh edition.
Bain and Engelhardt, Introduction to probability and mathematical statistics, second edition.

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2. Matrix Algebra
2.1. Introduction
This chapter contains a selection of exercises taken from Abadir and Magnus (2005). The
numbering is the same as in the original textbook; for instance, Exercise (1.7 Inner product)
refers to Exercise 1.7 on page 6 in Abadir and Magnus (2005). Also the notation is the same
as in the textbook; for instance, bold-face capital letters such as A and B denote matrices,
whereas bold-face small letters such as a and b denote vectors, see also Abadir and Magnus (2005;
Appendix B). All vectors are column vectors, unless stated otherwise.
The level of difficulty of these exercises ranges from basic to advanced. For your convenience,
exercises have been divided into two categories:
Core (basic and intermediate): Exercises 1.7(a)(d), 1.8, 1.10(a)(b), 2.3, 2.4(b)(e),
2.5(a), 2.9, 2.22(a)(b), 2.24, 3.15(a)(c), 3.16(a)(b), 3.17, 3.22, 3.23, 4.19, 4.20(a), 4.44,
6.46, 7.1, 7.2, 7.3, 7.4, 7.6, 7.10, 7.11, 7.15, 7.32, 8.1, and 8.2.
Advanced: Exercises 2.26(a)(b), 3.9(a)(c), 3.19(a)(c), 4.22(a)(e), 7.8, 7.9, 7.12, 7.13,
7.24, 7.26, 7.31, and 8.11.
We recommend you to practice all core exercises (a few times) before attempting the more
advanced ones.

2.2. Vectors
Exercise (1.7 Inner product)
Pm
Recall that the inner product of two real vectors x and y in Rm is defined as hx, yi := i=1 xi yi .
Prove that:
(a) hx, yi = hy, xi;
(b) hx, y + zi = hx, yi + hx, zi;
(c) hx, yi = hx, yi, where R;
(d) hx, xi 0, with hx, xi = 0 x = 0.
Exercise (1.8 Inner product, numbers)
Let



1
4
1
x = 2 , y = 5 , z = 1 ,
3
1
1


3
w = .
1

Compute hx, yi, hx, zi, and hy, zi, and find such that hy, wi = 0.

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Exercise (1.10 Triangle inequality)


For any x in Rm , show that
(a) kxk = || kxk for every scalar ;
(b) kxk 0, with kxk = 0 if and only if x = 0;
(c) kx + yk kxk + kyk for every x, y Rm , with equality if and only if either x = 0, y = 0 or
x = y (triangle inequality).

2.3. Matrices
Exercise (2.3 Matrix addition)
Let A, B, C, and the null matrix O be matrices with suitable dimensions so that the following
operations are defined. Prove that:
1. A + O = A.
2. A + B = B + A.
3. A + B + C = (A + B) + C = A + (B + C).
Exercise (2.4 Transpose)
(b) Prove that (X 0 )0 = X for any matrix X.
(c) What is the transpose of the row vector b0 = (1, 2, 3)?
(d) Show that (A + B)0 = A0 + B 0 for any two matrices A and B of the same order.
(e) For two real vectors a and b of the same order, show that the inner product ha, bi = a0 b.
Exercise (2.5 Multiplication, 1)
Let


1 2 3
A=
4 5 6

B=


4
1

5
2

6
3

(a) Compute AB 0 , BA0 , A0 B, and B 0 A.


Exercise (2.9 Noncommutativity)
(a) Show that BA need not be defined, even if AB is.
(b) Show that, even if AB and BA are both defined, they are in general not equal.
(c) Find an example of two matrices A and B such that AB = BA. (Two matrices with this
property are said to commute.)
Exercise (2.22 Symmetry)
Let A be a real square matrix.
(a) Show that A + A0 is symmetric, even if A is not symmetric.
(b) Show that AB is not necessarily symmetric if A and B are.

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Exercise (2.24 Trace as linear operator)


Let A and B be square matrices of the same order, and let and be scalars. Show that:
(a) tr(A + B) = tr(A) + tr(B);
(b) tr(A + B) = tr(A) + tr(B);
(c) tr(A0 ) = tr(A);
P P
(d) tr(AA0 ) = tr(A0 A) = i j a2ij ;
P
(e) tr(aa0 ) = a0 a = i a2i for any vector a.
Exercise (2.26 Trace, cyclical property)
(a) Let A and B be m n matrices. Prove that
tr(A0 B) = tr(BA0 ) = tr(AB 0 ) = tr(B 0 A).
(b) Show that tr(Aaa0 ) = a0 Aa for any square A and conformable a.

2.4. Vector Spaces


Exercise (3.9 Subspaces of R2 )
(a) Show that the set of real 2 1 vectors whose first component is zero is a subspace of R2 .
(b) Is the set of real 2 1 vectors whose first component is one also a subspace of R2 ?
(c) Is the set {(x, y), x 0, y 0} a subspace of R2 ?
Exercise (3.15 Linear dependence, theory)
A finite set of vectors x1 , . . . , xn (n 1) is linearly dependent if there exist scalars 1 , . . . , n ,
not all zeros, such that 1 x1 + + n xn = 0; otherwise it is linearly independent. Show that:
(a) the null vector by itself is a linearly dependent set;
(b) any set of vectors containing the null vector is a linearly dependent set;
(c) a set of nonzero vectors x1 , . . . , xn is linearly dependent if and only if a member in the set is
a linear combination of the others.
Exercise (3.16 Linear dependence)
(a) Show that the columns of the n n identity matrix are linearly independent.
(b) Show that the columns of

1 3
2
A = 1 5 3
5 1 0

the matrix

0
1
2

are linearly dependent. How about the rows?


Exercise (3.17 Linear dependence, some examples)

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(a) If x, y, and z are linearly independent vectors, are x + y, x + z, and y + z also linearly
independent?
(b) For which values of are the vectors (, 1, 0)0 , (1, , 1)0 , and (0, 1, )0 linearly dependent?
Exercise (3.19 Spanned subspace in R3 )
(a) Let A be a circle in R3 centered at the origin. What is the space A spanned by A?
(b) Let A be a plane in R3 not passing through the origin. What is A?
(c) Consider the vectors e1 = (1, 0, 0)0 , e2 = (0, 1, 0)0 , and v = (0, 2, 0)0 in R3 . Show that the
three vectors span a plane (the x-y plane), that e1 and e2 alone span the same plane, and
that e2 and v span only a line.
Exercise (3.22 Basis)
(a) Find a basis of R2 .
(b) Find another basis of R2 .
(c) Show that there are infinitely many basis of R2 .
Exercise (3.23 Basis,
Consider the matrix

1 1 1
A = 0 1 1
1 1 2

numbers)
1
2
3

1
2
5

1
3
5

2
1
1

2 5
3 3
0 4

and denote the nine columns by a1 , . . . , a9 . Which of the following form a basis of R3 ?
(a) a1 and a2 ;
(b) a1 , a4 , a6 , a8 ;
(c) a2 , a4 , a7 ;
(d) a3 , a5 , a9 .

2.5. Rank, inverse, and determinant


Exercise (4.19 Inverse of 2-by-2 matrix)
Consider the matrices


1 2
A=
2 4


B=

(a) Does A have an inverse? What is rk(A)?


(b) Does B have an inverse? What is rk(B)?
Exercise (4.20 Uniqueness of inverse)
(a) Show that an inverse, if it exists, is unique.

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Exercise (4.22 Property of inverse)


For any nonsingular matrix A, show that:
(a) (A)1 = (1/)A1 with 6= 0;
(b) (A1 )1 = A;
(c) (A1 )0 = (A0 )1 ;
(d) (AB)1 = B 1 A1 if B is nonsingular and of the same order of A;
(e) if A and B commute and B is nonsingular, then A and B 1 commute.
Exercise (4.44 Determinant of the inverse)
(a) If A is nonsingular, show that |A1 | = |A|1 .
(b) If A is orthogonal, show that |A| = 1.
Exercise (Again: 4.19 Inverse of 2-by-2 matrix)
Consider the matrices



1 2
1
A=
B=
2 4
2


3
.
4

(a) Does A have an inverse? What is rk(A)?


(b) Does B have an inverse? What is rk(B)?

2.6. Systems of Linear Equations


Exercise (6.46)
Show that the system
2x1 + 3x2 + x3 = 7,
x1 + 2x2 2x3 = 8,
3x1 + 4x2 + 4x3 = 20
has no solutions.

2.7. Eigenvalues and Eigenvectors


Exercise (7.1 Find two eigenvalues)
Find the eigenvalues of the 2 2 matrices




3
5
3
4
A=
, B=
,
2 4
5 5
Exercise (7.2 Find three eigenvalues)
Find the eigenvalues of the 3 3 matrices

7 0 0
7 0 0
A = 0 3 0 , B = 0 3 5 ,
0 0 3
0 5 4


C=

3
5

7
C = 0
0

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.
7

0
3
0

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Exercise (7.3 Characteristic equation)


(a) Find the characteristic equation and the eigenvalues of

1 3 0
A = 0 1 0 .
2 1 5
(b) What is the rank of A?
Exercise (7.4 Characteristic polynomial)
(a) Find the characteristic polynomial and the eigenvalues 1 and 2 of the 2 2 matrix


a b
A :=
.
c d
(b) Show that 1 2 = |A| and 1 + 2 = tr A.
Exercise (7.6 A 6= B may have the same eigenvalue)
Suppose that two matrices A and B (of the same order) have the same characteristic polynomial.
Is it necessarily true that A = B?
Exercise (7.8 Eigenvectors are not unique)
(a) Show that an eigenvector cannot be associated with two distinct eigenvalues.
(b) But can two vectors be associated with the same eigenvalue?
Exercise (7.9 Linear combination of eigenvectors with same eigenvalue)
Pm
If x1 , . . . , xm are all eigenvectors of A associated with the same , show that i=1 i xi is also
an eigenvector of A.
Exercise (7.10 Find the eigenvectors, 1)
Consider the matrices




1 1
2 0
A=
, B=
0 1
0 2
(a) What are the eigenvalues and eigenvectors of A?
(b) What are the eigenvalues and eigenvectors of B?
Exercise (7.11 Geometric multiplicity, 1)
Consider the matrix

1 3 0
A = 0 1 0 .
2 1 5
What are the eigenvectors of A? Are they linearly independent? Are they orthogonal?
Exercise (7.12 Multiples of eigenvalues and eigenvectors)
(a) If is an eigenvalue of A, show that t is an eigenvalue of tA, with the same eigenvector(s).

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(b) If x is an eigenvector of A, show that tx (t 6= 0) is also an eigenvector of A, associated with


the same eigenvalue.
Exercise (7.13 Do A and A0 have the same eigenvalues?)
(a) Show that a matrix A and its transpose A0 have the same eigenvalues.
(b) Do they also have the same eigenvectors?
Exercise (7.15 Eigenvalues of a triangular matrix)
(a) What are the eigenvalues of a diagonal matrix?
(b) What are the eigenvalues of a triangular matrix?
Exercise (7.24 Similarity)
(a) Show that similar matrices have the same set of eigenvalues (with the same multiplicities).
(b) Do they have the same set of eigenvectors as well?
Exercise (7.26 Determinant and eigenvalues)
Qn
Show that the determinant of a square matrix equals the product of its eigenvalues, |A| = i=1 i .
Exercise (7.31 Linear independence of eigenvectors)
(a) Show that eigenvectors associated with distinct eigenvalues are linearly independent.
(b) Are there eigenvectors orthogonal to each other?
Exercise (7.32 Diangonalization of matrices with distinct eigenvalues)
Let A be an n n matrix with distinct eigenvalues. Then there exist a non singular n n matrix
T and a diagonal n n matrix whose diagonal elements are the eigenvalues of A, such that
T 1 AT = .

2.8. Quadratic Forms


Exercise (8.1 Symmetry and quadratic forms)
(a) For every square matrix A, show that


A + A0
0
0
x Ax = x
x.
2
Exercise (8.2 Matrix representation of quadratic forms)
Write the following quadratic forms in matrix notation with a symmetric matrix: (a) x2 + y 2 xy,
(b) 4x2 + 5y 2 + z 2 + 2xy + 2yz, (c) x2 + 2y 2 + xy. Verify whether these forms are positive (or
negative) definite, semidefinite, or indefinite.

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3. Statistics
3.1. Introduction
This chapter contains a selection of exercises taken from Amemiya (1994). The numbering is the
same as in the original textbook; for instance, Example (3.2.3) refers to Example 3.2.3 on
page 24 in Amemiya (1994). Also the notation is the same as in the textbook; for instance, capital
letters X, Y, denote random variables, and small letters x, y, denote their realisations.

3.2. Random Variables and Probability Distributions


Example (3.2.3)
Let the joint probability distribution of X and Y be given by
X

1
0
Pr (Y = yj )

Pr (X = xi )

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2/8
4/8

1/8
3/8
4/8

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1

Are X and Y independent?


Example (3.4.1)
If fX,Y (x, y) = xye(x+y) , x > 0, y > 0, and 0 otherwise, that is Pr (X > 1, Y < 1)?
Example (3.4.5)
Suppose
(
(3/2)(x2 + y 2 )
fX,Y (x, y) =
0

for 0 < x < 1 and 0 < y < 1


otherwise.

Calculate



1
1
Pr 0 < X < 0 < Y <
2
2
and determine if X and Y are independent.
Hint: First calculate Pr(0 < X < 1/2, 0 < Y < 1/2) and Pr(0 < Y < 1/2), and then use the
Bayes Rule.
Example (3.5.1)
Suppose
(
fX (x) =

1 x/2
2e

if x > 0,
otherwise.

Find FX (x).

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Example (3.5.2)
Suppose
(
2(1 x)
fX (x) =
0

This version: 22nd August 2016

if 0 < x < 1,
otherwise.

Find FX (x).
Example (3.5.3 Mixture random variable)
Suppose

0
if x 0,

0.5 if 0 < x 0.5,


FX (x) =

x
if 0.5 < x 1,

1
if x > 1.
Draw FX (x).
Example

2
Let X be a continuous random variable with pdf fX (x) = (1/ 2)ex /2 , x R, and let
Y = + X, where and are two constants, with > 0. Determine fY (y).

3.3. Moments
Example (4.1.1)
Let
(
2x3
fX (x) =
0

if x > 1
.
otherwise

Find the expected value of X.


Example (4.1.2)
Let
(
x2
fX (x) =
0

if x > 1
.
otherwise

Find the expected value of X.


Example (4.3.1)
X
1
-1
Pr (Y = yj )

Y
1

-1

/2
(1 )/2

(1 )/2
/2

Pr (X = xi )

Compute cov(X, Y ).

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Example (4.3.2)
Let the joint probability distribution of (X, Y ) be given by
X

1
0
-1
Pr (Y = yj )

-1

1/6
1/12
1/6

1/12
0
1/12

1/6
1/12
1/6

Pr (X = xi )

Compute cov(X, Y ). Are X and Y independent?


Example (4.3.4)
Let the joint density be
(
x+y
fX,Y (x, y) =
0

if 0 < x < 1 and 0 < y < 1


.
otherwise

Calculate cov(X, Y ).
Example (4.4.1)
Suppose fX (x) = 1 for 0 < x < 1 and equal to zero otherwise, and fY |X (y|x) = 1/x for 0 < y < x
and equal to zero otherwise. Calculate E(Y ).
Example (4.4.2)
The marginal density of X is given by fX (x) = 1, 0 < x < 1. The conditional probability of Y
given X = x is given by
Pr (Y = 1|X = x) = x
Pr (Y = 0|X = x) = 1 x.
Find E(Y ) and var(Y ).
Example (7.3.3, Normal distribution)
Let X1 , , Xn be a random sample on N(, 2 ) and let x1 , , xn be their observed values.
Compute the maximum likelihood estimator of and .
Example (7.7.1, Binomial distribution)
Let X1 , , Xn be a random sample on Bin(n, p) and let x1 , , xn be their observed values.
Compute the maximum likelihood estimator of p.

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4. Multivariate Calculus and Constrained


Maximization
4.1. Introduction
This chapter contains a selection of examples and exercises taken from the following textbooks:
(SB) Simon and Blume, Mathematics for Economists, 1994.
(SHSS) Sydsaeter, Hammond, Seierstad, and Strom, Further Mathematics for Economic
Analysis, 2008.
(PR) Pemberton and Rau, Mathematics for Economists: An Introductory Textbook, 2011.
The numbering is the same as in the original textbooks. For instance, Example (SB, 21.2)
refers to Example 21.2 on page 515 in Simon and Blume (1994); or Exercise (SHSS, 3.5.2)
refers to Section 3.5, Exercise 2 on page 134 in Sydsaeter, Hammond, Seierstad, and Strom (2008).

4.2. Multivariate Calculus


Example (SB, 21.2)
Find gradient and Hessian of the function f : R2 R:
f (x, y) = x2 + x2 y 2 + y 4 3x 8y.
Check definiteness of the Hessian. Is this function: convex, concave, both or neither?
Example (SB, 21.3)
A commonly used simple utility (or production) function f : R2 R: is
f (x, y) = xy.
Find the corresponding gradient and Hessian. Check definiteness of the Hessian. Could this
function be either concave or convex?
Example (SB, 21.4)
Find gradient and Hessian of the function f : R2 R:
1

f (x, y) = x 4 y 4 .
Check definiteness of the Hessian. Is this function: convex, concave, both or neither?
Example (SB, 21.5)
Now consider a general Cobb-Douglas function f : R2+ R:
f (x, y) = xa y b ,
where both a and b are any real constants. Check definiteness of the Hessian on R2 . Under what
conditions is f concave in this set? When f indeed is concave, what type of returns to scale does
it exhibit?

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Exercise (SB, 21.18)


For each of the following functions on R, determine whether it is quasiconcave, quasiconvex, both
or neither:
(a) ex ,

(b) ln z,

(c) x3 + x,

(d) x3 x,

(e) x4 x2 ,

(f) x4 + x2

(g) 3x3 5x2 + 7x,

(h) sin(x).

Example (SB, 21.13)


From the exercise above we know that the Cobb-Douglas function is concave when: 0 < a < 1,
0 < b < 1 and a + b 1. Since for this choice of parameters it is concave, it is also quasiconcave.
However, for some range of a and b this function may be quasiconcave without being concave.
Using the bordered Hessian criterion check for which a > 0 and b > 0 is the Cobb-Doubles
function quasiconcave.

4.3. Constrained Optimization


Exercise (SHSS, 3.5.2)
Assume that c is a positive constant and that we need to maximise
f (x, y) = ln (x + 1) + ln (y + 1)
subject to
x + 2y c,

x + y 2.

(a) Write does the necessary Karush-Kuhn-Tucker conditions for point (x, y) to be a solution
of the problem.
(b) Solve the problem for c = 52 . Justify why do the KKT conditions yield a maximum (why
are they sufficient).
0

(c) Let V (c) denote a value function. Find the value of V ( 52 ).


Exercise (SHSS, 3.5.3)
Find the maximum of:
f (x, y) = 4 ln (x2 + 2) + y 2
subject to:
x2 + y 2,

x 1.

Hint: reformulate is as a standard Karush-Kuhn-Tucker maximization problem.


Exercise (SHSS, 3.5.4)
Maximize:
f (x, y) = (x a)2 (y b)2
subject to:
x 1,

y 2,

for all possible values of the constants a and b.

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Exercise (PR, 18-2)


A small open economy produces two goods labelled 1 and 2; their prices p1 and p2 are determined
in world markets. The economy has fixed supplies K and L of capital and labour. For i = 1, 2 let
the economys output of good i be Fi (Ki , Li ), where Ki and Li denote the quantities of capital
and labour allocated to sector i, and where Fi is the production function for good i (subscripts
do not indicate partial differentiation). Under perfect competition, the economy will choose K1 ,
K2 , L1 and L2 so as to maximise:
p1 F1 (K1 , L1 ) + p2 F2 (K2 , L2 )
subject to the constraints: K1 + K2 = K, L1 + L2 = L. The maximum value of the objective
function is denoted by V (p1 , p2 , K, L). Using the Envelope Theorem, show that:
(a)
V
= Fi (Ki , Li )
pi

for i = 1, 2.

(b)
V
F1
F2
= p1
= p2
.
K
K1
K2
(c)
F1
F2
V
= p1
= p2
.
L
L1
L2

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5. Difference and Differential Equations


5.1. Introduction
This chapter contains a selection of examples and exercises taken from the following textbooks:
(SB) Simon and Blume, Mathematics for Economists, 1994.
(SHSS) Sydsaeter, Hammond, Seierstad, and Strom, Further Mathematics for Economic
Analysis, 2008.
The numbering is the same as in the original textbooks. For instance, Example (SB, 21.2)
refers to Example 21.2 on page 515 in Simon and Blume (1994); or Exercise (SHSS, 3.5.2)
refers to Section 3.5, Exercise 2 on page 134 in Sydsaeter, Hammond, Seierstad, and Strom (2008).

5.2. Difference Equations


Exercise (SHSS, 11.3.1)
Verify by direct substitution that the following functions of t are solutions of the associated
difference equation (A and B are constant):
(a) xt = A + B2t where xt+2 3xt+1 + 2xt = 0,
(b) xt = A3t + B4t where xt+2 7xt+1 + 12xt = 0.
Exercise (SHSS, 11.3.2)
Check that xt = A + Bt is the general solution of xt+2 2xt+1 + xt = 0.
Exercise (SHSS, 11.3.3)
Check that xt = A3t + B4t is the general solution of xt+2 7xt+1 + 12xt = 0.
Exercise (SB, 23.8)
Find the general solution to the systems of difference equations provided below. You may denote
the initial values as, respectively, x0 , y0 and z0 .

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(a)
(b)

xn+1 = 3xn
yn+1 = xn + 2yn ;

xn+1 = 3xn yn
yn+1 = xn + 2yn zn

(c)

zn+1 = yn + 3zn ;
xn+1 = yn

(d)

yn+1 = xn + 5yn ;

xn+1 = 4xn 2yn 2zn

(e)

yn+1 = yn
zn+1 = xn + zn .

xn+1 = xn yn
yn+1 = 2xn + 4yn ;

5.3. Differential Equations


Exercise (SB, 24.13 and 24.16)
Find the solution of each of the following differential equations:
(a) y + 6y + 9y = 0 for initial values y(0) = 0 and y(0)

= 1,
(b) 6
y y y = 0 for initial values y(0) = 1 and y(0)

= 0,
(c) 4
y 4y + y = 0 for initial values y(0) = 1 and y(0)

= 0,
(d) y + 5y + 6y = 0 for initial values y(0) = 1 and y(0)

= 0.
Example (SB, 24.13)
Let u(x) be utility function over wealth x. At any wealth level x, Arrow-Pratt measure of absolute
00
0
0
risk aversion A(x) equals u (x)/u (x). The function A(x) is a percent rate of change of u at x;
it is a measure of concavity of the function u. Find a utility function that has a absolute risk
aversion that is constant (and equal to a). That is, solve:
00

u (x) + au (x) = 0.
Example (SHSS, 6.5.34)
Solve the following two systems of equations homogeneous and nonhomegeneus. Observe how
both solutions differ.
(a)

(b)
x = 2y

x = 2y + 6

y = x + y;

y = x + y 3.

Exercise (SHSS, 6.6.1)


Check (if possible) stability of the following systems of equations.
(b)

(a)

(c)

x = x 8y

x = x 4y + 2

x = x 3y + 5

y = 2x 4y;

y = 2x y 5;

y = 2x 2y + 2.

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Exercise (SHSS, 6.6.2)


For what values of constant a are the following systems globally asymptotically stable?
(a)

(b)
x = ax y

x = ax (2a 4)y

y = x + ay;

y = x + 2ay.

Exercise (SHSS, 6.6.3)


Find the general solution of the system:
x = x + 2y + 1
y = y + 2.
Is the system globally asymptotically stable?
Exercise (SHSS, 6.6.4)
Please do the following.
(a) Solve the differential equation system
x = ax + 2y +
y = 2x + ay + ,
where a, and are constants, a 6= 2.
(b) Find the equilibrium point (x , y ), and find necessary and sufficient conditions for this
system to be globally asymptotically stable.
(c) Let a = 1, = 4 and = 1. Determine a solution curve that converges to the
equilibrium point.

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A. Solutions
We are very keen on you first trying the majority of examples and exercises without having
solutions. Therefore, full answers will be uploaded on the web-page of the module by the
end of September.

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