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Linear Equations in Economic Problems

I. Mathematical Modeling

1. Mixture Problem. You have to prepare a mixture of apple and grape juices having specific
concentrations of sugar, to obtain a prescribed sugar concentration. Suppose the concentrations are:
12% (apple juice) and 22% (grape juice). What amounts of apple and grape juices are to be blended to
yield a 100-liter mixture having a 16% concentration of sugar?

(a). If you have 50 liters of apple juice and 70 liters of grape juice, and blend them, what will the
concentration of the resulting mixture be?

(b). Suppose the apple juice sells for $2.5/liter and the grape juice sells for $1.8/liter. How
should 100 liters of a 16% mixture be priced so that revenue from the blend equals that from selling
both juices separately?

2. Migration Problem. The minister of Telecommunications has collected data suggesting that
each year approximately 5% of customers using mobile operator A change their preferences to mobile
operator B, and 3% of those who use mobile operator B change to mobile operator A. If the current
proportion is stable, does these data provide information about a particular distribution of customers
among these two operators?

(a). If the total number of mobile customers in the next year is estimated to achieve 1mln
people, how will this quantity be distributed among the two operators?

3. Farm Production Problem. A farmer planted his 8-hectar farm with two crops. The first crop
yielded 6.5 tons/ha, and the second crop yielded 4.8 tons/ha. The overall yield for the entire farm was
43.5 tons of crops. How many hectares were planted in each crop?

(a). If the first crop sells for $0.15/ kg and the second crop sells for $0.10/kg, what is the total
farmer’s revenue?

4. Production Planning Problem. A firm produces a good in two qualities, and . The sales of
quality in the coming year are estimated to be 50% higher than the sales of quality. The profit per
unit sold of the two qualities is $300 for and $200 for . If the goal is a profit of $13000 over the next
year, how much of each of the two qualities must be produced?
 5. Investment Problem. A person has saved a total of $10 000 in two accounts. The interest
rates are 5% and 7.2% per year, respectively. If the person earns $676 interest in one year, what was the
balance in each of the two accounts?

(a). If the interest earned for the second account is twice the interest gained for the first
account, what is the balance of the two accounts?

II. Solving systems of linear equations. Graphical approach

1. Demand-Supply Problem. Suppose the demand and supply curves for a specific commodity
are given by the equations and , respectively, where is the unit price. What
is the equilibrium price for that commodity?

(a). What is the equilibrium price in the case when and ?

2. Systems of Linear Equations

I. Solving systems of linear equations. Gauss-Jordan elimination

1. Solve the following system using Gauss-Jordan elimination

(a). { ; (b). { ;

(c). { ; (d). { .

2. Find the solution to the following system of equations

{
 3. Check for the solution to the system

{ .

II. Cost Accounting Problem

Consider a firm with two service departments (Accounting and Maintenance) and two
production departments (Production A and Production B). The total costs of each particular department
include certain indirect costs for services provided by the service departments in addition to its direct
costs (salaries, raw materials, equipment and so forth). It is important to know the total costs of each
department, to be able, for instance, to set appropriate prices on the firm’s products. Suppose the
relevant data for the firm is presented in the following table.

Services (%)

Departments Accounting Maintenance Direct Costs Total Costs

Accounting 0 10 23

Maintenance 20 0 15

Production A 40 50 45

Production B 40 40 42

Thus, for example, Accounting charges 20% of its total costs to Maintenance, and so on. The
total costs of each department equal its direct costs plus its indirect costs for services rendered. The
respective unknown total costs are labeled , , , and . Thus, we have the following relations for
the total costs:

(a). Write the system of three equations in standard form (terms involving the unknowns are
written to the left of “=”, and the free terms are written to the right of equals sign in each equation).

(b). Show that (25,20,65,60) is the solution to the system.

 (c). Show that the sum of the total costs of the two production departments is equal to the sum
of the direct costs of all four departments.

III. Leontief Input-Output Model

Consider three corporations producing three types of energy: oil, electricity, and coal. To
produces its own type of product, each corporation requires the consumption of certain quantities of
energy produced by the other two corporations. For example, the production of electricity needs oil and
coal to power the generators. Suppose the current internal consumption needs are displayed in the
following table.

From/To Oil Corp. Electricity Corp. Coal Corp.

Oil Corp. 0 0.3 0.2

Electricity Corp. 0.2 0 0.2

Coal Corp. 0.3 0.4 0

The given consumption matrix shows, for example, that for Oil Corp. to produce $1 worth of oil
requires the consumption of $0.2 worth of electricity produced by Electricity Corp. and $0.3 worth of
coal produced by Coal Corp. Suppose, further, that there are average hourly external demands (during a
particular month) amounting to $5000 worth of oil, $10000 worth of electricity, and $2000 worth of
coal. The problem is to find the production levels for the three companies so as to meet current
demands including both external and internal needs.

Let , , , and denote respective hourly production levels (measured in dollars) for the
three companies. Then, according to the table data, we must have

(a). Write the system of three equations in standard form.

(b). Show that is the solution.