Mathematics for Management

ALGEBRA
During your business degree program, you will use mathematics in many situations. In your
economics courses, you will have to determine how demand is related to price. You might even use
basic calculus to come up with a profit-maximizing price. In your statistics course, you might be
expected to know the basic laws of probability. In your finance courses, you will need to understand
the mathematics behind valuing cash flows. Most of your professors will expect you to know how to
solve simple equations and do basic manipulations of algebraic formulas. You may not have used
algebra, calculus, probability, and statistics for five or ten years. If you are an undergraduate English
or music major now entering a graduate business program, you may have never studied calculus or
basic probability and statistics.

The purpose of our course is to help level the playing field by giving you the analytic background you
need to hit the ground running and complete a top MBA program successfully. We will try to make
the concepts as interesting and easy to learn as possible. You may find it useful to refer to
the Mathematics for Management Concept Summary while taking the course.

Algebra

Algebra is simply a generalization of arithmetic in which letters are used to represent numbers or
quantities (such as price, demand, cost, revenue, and so on). Algebraic principles enable us to
examine relationships among those quantities. For example, given the price of a commodity and an
understanding of the relationship between price and demand, algebraic techniques allow us to
compute the demand for that commodity. We can also use algebra to determine the monthly
production quantity needed to break even — that is, to have monthly revenues just cover monthly
operating costs.

Variables

Many quantities in business are unknown. An unknown quantity, usually called a variable, is
typically represented by a letter. Often the value of a variable depends on the value of one or more
other variables. Let's look at some important business variables.

 The monthly cost y (let y = monthly cost in dollars) of operating Vivian Hoffman's
Happytail Vet Clinic depends on the number of patients x seen during a given month
(let x = patients seen during a month).
 The number of lasagna dinners q sold in a month (let q = number of lasagna dinners sold
in a month) at Smalltown's PastaQuick Italian restaurant depends on the price p (let p =
price in dollars) of a dinner.
 The number of tourists t who visit Smalltown in a year (let t = number of tourists visiting
Smalltown in a year) depends on the U.S. Gross National Product g (let g = GNP in
trillions of dollars) and the national unemployment rate u (let u = unemployment rate).
 The average time W (let W = average number of hours spent at the clinic) that a person
spends at Happytail Clinic depends on the average time S that Vivian spends with a

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 patient (let S = average hours Vivian spends with a patient) and the average number of
patients A that arrive each hour to her office (let A = average number of patients arriving
per hour).

In business, it is often crucial to understand how variables are related. In the next section, we
discuss how mathematicians describe relationships among variables.

Functions of One Variable

A function of one variable is a rule by which the numerical value of a

single variable (the independent variable) yields a numerical output
value (the dependent variable). The independent variable is usually
called x, and the dependent variable is usually called y. The
expression y = f(x) is used to indicate that the value of the dependent
variable y is determined from the variable x by the function f.
However, these particular letters are not set in stone. The
notation q = g(p) might mean, for example, that demand q is
determined from the price p by the function g.

====================================================================

Let's look at specific examples of functions of one variable.

Estimating operating cost. Let y = the monthly cost of operating Vivian's office and x = the number
of patients seen during the month. Then y = f(x) might be expressed by f(x) = 20,000 + 35x. Not
surprisingly, this functional relationship indicates that an increase in the number of patients seen
increases Vivian's operating costs. For example, if Vivian sees 400 patients during a month, her
monthly operating cost isf(400) = 20,000 + 35(400) = $34,000. If Vivian sees 500 patients during
a month, her monthly operating cost would be higher, because f(500) = 20,000 +35(500) =
$37,500.

Estimating demand for Lasagna Dinners. Let q = the number of lasagna dinners sold during a
month at the PastaQuick restaurant, p = the price of a lasagna dinner, and D = the demand.
Suppose that

This functional relationship indicates that a higher price results in a lower demand for dinners. For
example, if PastaQuick charges $4 per dinner, the demand is represented by

…………=200

What would happen to demand if they charged $14 for a lasagna dinner?

====================================================================

Graphing a function

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The input and output of a function can be expressed as an ordered pair, ordered so that the first
element is the input (or tuple of inputs, if the function takes more than one input), and the second is
the output. In the example above, f(x) = x2, we have the ordered pair (−3, 9). If both input and
output are real numbers, this ordered pair can be viewed as the Cartesian coordinates of a point on
the graph of the function. But no picture can exactly define every point in an infinite set. In modern
mathematics, a function is defined by its set of inputs, called the domain, a set containing the
outputs, called its codomain, and the set of all paired input and outputs, called the graph. For
example, we could define a function using the rule f(x) = x2 by saying that the domain and
codomain are the real numbers, and that the ordered pairs are all pairs of real numbers (x, x2).
Collections of functions with the same domain and the same codomain are called function spaces,
the properties of which are studied in such mathematical disciplines as real analysis and complex
analysis.

A function of one variable of the form f(x) = bx + a is called a linear function. Here a and b are
simply numbers (called constants), b is called the slope and a the . In short, a function of a single
variable is linear if x is multiplied by a constant (and not, for example, squared or manipulated in
some other fashion). Linear functions are discussed extensively
later in this chapter.

Examples of Linear Function

 y = 3x + 5 is a linear function.
 The graph of the function y = 2x is shown below. This is a
linear function since the points fit onto a straight line.

In the examples given so far, Vivian's monthly operating cost is a linear function of the number of
patients seen, whereas PastaQuick's monthly demand for lasagna dinners is not a linear function
of price. That's because price is not merely multiplied by a constant in the demand function

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PROBLEMS

1) The annual salary (let y = annual salary) of an assistant at Clooney's Dreamhome Realty is
$20,000 plus $1,500 times the assistant's years of experience (let x = years of experience).
Express y as a function of x. What would be the salary for an assistant with 10 years of
experience? Is salary a linear function of experience?

(2) The total time in minutes (let y = total time) that Owen's assistant, Britney Swift, needs to
complete a stack of closings is 200 times the square root of the number of closings (let x =
number of closings). Express y as a function of x. How long would it take Britney to complete
16 closings? Is the time needed a linear function of the number of closings?

Functions of More Than One Variable

To express the dependence of a dependent variable on more than one independent variable, you
need to use a multivariate function. For example, if y depends on the independent variables x1, x2,
and x3, you can write y =f(x1, x2, x3). Formally, a function is a relation between a set of inputs and a
set of permissible outputs with the property that each input is related to exactly one output. The
input variable(s) are sometimes referred to as the argument(s) of the function.

Let's look at two examples of multivariate functions.

Estimating Tourist Visits. The number of tourists to visit Smalltown in a year (let t = tourists visiting
in a year) may depend on the U.S. Gross National Product (let g = GNP in trillions of dollars) and
the national unemployment rate (let u = unemployment rate), as represented by this multivariate
function: t = f(g, u) = 10,000 + 1000g - 2000u. This function implies that a $1 trillion increase in
GNP will increase Smalltown's annual tourist count by 1000 people and that a 1% increase in the
unemployment rate will decrease Smalltown's annual tourist count by 2000. As a complete
example, let's imagine a year in which the GNP is $14 trillion and the unemployment rate is 7%. The
tourist count would then be rendered as follows:

t = f(14,7) = 10,000 + 1000(14) - 2000(7) = 10,000.

Estimating the average time spent. Applying a principle you will learn in operations class to this
example, you can see that the average time (let W = average number of hours a patient spends at
Vivian Hoffman's veterinary office) depends on the following variables:

 S, or the average number of patients Vivian can see in an hour

 A, or the average number of patients who arrive at the office per hour

This dependence can be expressed by the following multivariate function:

Note that this function is valid only if S > A. If S were equal to A, one would have to divide by zero,
and division by zero is not defined. If S were less than A, the function would yield a negative
expected time, which is not possible.

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Evaluating a Function. As an example of how to determine the average time (W) given our function,
suppose that an average of 3 clients arrive each hour and that Vivian spends an average of 12
minutes with each patient. On average, how many hours will a patient spend in the office?

The important point here is that if W is to be expressed in hours per patient, A and S must be
expressed in patients per hour. Then the function will yield a value in hours per patient
(because S and A are in the denominator of the function, the units of W will be hours/patient).

Linear Multivariate functions

A multivariate function f(x1, x2, ...xn) of variables x1, x2, ...xn is a linear function if there exist numbers
a, b1, b2, ...bn (often called constants) such that f(x1, x2, ...xn) = a + b1x1 + b2x2 + ...bnxn. Earlier in this
section, we found that the number of tourists visiting Smalltown during a year was a linear function
depending on the GNP and unemployment rate. We also found that the average time a patient
spends in Vivian's veterinary office was nota linear function of the arrival rate and average service
time. That's because S and A appear in the denominator of .

PROBLEMS

1. Suppose that you want to determine the number of digital cameras Smalltown's local
electronics store should order from its Las Vegas warehouse. Let

 h = the cost of holding one digital camera in inventory for a year;

 D = the annual demand for digital cameras; and
 K = the cost of placing an order for digital cameras with a supplier.

The famous Economic Order Quantity formula (which you will study in operations class) dictates
that each time the store orders digital cameras, it should order a quantity q such that

Suppose that it costs $100 to place an order and that the store sells an average of 400 digital
cameras per month. If it costs $5 to hold a camera in inventory for a year, how many cameras
should be ordered? Is the order quantity a linear function of D, K, and h?

2. Tina is opening a lemonade stand to make money to pay for her trip to the state soccer
championship. At the supermarket, Tina buys lemons for 10 cents each and sugar for $2.50
per pound — her only lemonade-related expenses. If Tina buys L lemons and S pounds of
sugar, write a function that expresses Tina's expenses. If Tina buys 40 lemons and 10
pounds of sugar this month, what are her monthly expenses? Are her expenses a linear
function of lemons and sugar purchased?

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Linear Equations: One Variable

An equation is simply a mathematical statement that equates two quantities. For example, in
economics class, you will learn that the equilibrium price in a market is the price that makes supply
and demand equal. By setting supply and demand equal to each other, we can find the equilibrium
price.

In this section of this online tutorial, you will learn how to solve linear equations involving a single
variable (call it x). An equation in a single variable is linear if each term in the equation is either a
constant or the variablex multiplied by a constant. For example, 13x = 5x + 16 is a linear equation of
one variable, whereas 9x2+ 4 = 85 is not a linear equation.

Also consider the nonlinear equation 9x2 + 4 = 85. It has two solutions: x = 3 and x = -3. Each makes
the two sides of the equation equal.

The key to solving an equation is to perform mathematical operations on both sides of the equation
that simplify it but do not change the set of solutions to it. If you can perform mathematical
operations on both sides of an equation that isolate all terms involving the variable on one side of
the equation, the equation is usually easy to solve. To solve linear equations, use the following rules:

 Rule 1: Adding the same quantity to both sides of an equation does not change the set of
solutions to that equation.
 Rule 2: Multiplying or dividing both sides of an equation by the same nonzero
number does not change the set of solutions to that equation.

Finding the breakeven point. Recall that the monthly cost of operating Hoffman's Happytail Vet
Clinic is 20,000 + 35x, where x = the number of patients seen during the month. Suppose that
Vivian charges each patient $75 and wants to know how many patients to see during a given month
in order to ensure that her monthly revenues cover her monthly costs. In short, she wants to know
the value of x that satisfies the equation 75x = 20,000 + 35x.

As a check, substitute x = 500 into the original equation to find that each side is equal to 37,500.

75(500) = 20,000 + 35(500) = 37,500

Finding the equilibrium price. Let p = the price in dollars per gallon of gasoline in Smalltown.
Suppose that the daily demand for gas in Smalltown (in thousands of gallons) is 500 - 10p and that
the daily supply of gasoline in Smalltown is 400 + 20p. At what price for gasoline would daily
supply and demand be equal?

To find out, solve for the value of p in the equation 500 - 10p = 400 + 20p. Begin by adding 10p to
both sides, which yields 500 = 400 + 30p. Next, add -400 to both sides of the equation, which yields
100 = 30p. Finally, divide both sides by 30 to obtain 100/30 = p, or p = 10/3. Therefore, p is
approximately $3.33.

Again, you can check your solution by substituting 10/3 into the equation: 500 - 10(10/3) = 400 +
20(10/3) = 1400/3. The substitution verifies that a price per gallon of approximately $3.33 brings
supply and demand into equilibrium; therefore, p = 10/3 is the solution to the equation.

PROBLEMS

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(1) Refer back to the assumptions outlined in the section on finding the breakeven point. How many
patients would Vivian have to see in a month to earn a profit of $10,000?

(2) Gregory can mow the family's lawn in 3 hours, and Jennifer can mow it in 4 hours. If they team
up to mow the lawn together, how long will it take to finish mowing the lawn? Hint: If they mow
for x hours, Gregory will mow a fraction of the lawn that can be expressed as x/3.

The Cartesian Plane

Graphing the function y = f(x) requires choosing values of x and finding the value of y for each
value of x. Each pair of values (x, y) is a coordinate that you can plot on the x-y, or Cartesian, plane
(named after French mathematician and philosopher René Descartes).

In the first (upper right) quadrant of the

Cartesian plane, x and y are both positive.
In the second (upper left) quadrant, x is
negative and y is positive. In the third
(lower left) quadrant, both x and y are
negative. In the fourth (lower right)
quadrant, x is positive and y is negative.

PROBLEMS

(1) Graph the point (-3, -5).

(2) Graph the point (2, -4).

(3) Graph the point (1, 2).

(4) Graph the point (-3, 2).

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Straight Lines

Many relationships between variables are best expressed using straight lines. For example,
straight lines have been used to model the following relationships:

 How does monthly operating cost depend on units produced?

 How does demand depend on price?
 How does the price of a home depend on the size of that home?

In this segment, you will learn how to graph a straight line and to interpret equations and functions
involving straight lines.

The defining feature of a straight line is that for

any value of x, the line has the same slope.
Essentially, the slope of a function for a given
value of x is the change in y when x increases by 1
(when you get to the calculus section, this
principle will be defined more rigorously). The
equation of a straight line can be written in
the slope intercept form as y = mx + b, where m
and b are constants.

The constant m is the slope of the line, because

whenever x increases by 1, y increases by an
amount m. When m is positive, an increase
in x increases y, whereas if m is negative, an
increase in x decreases y.

The constant b is called the y intercept because

the point (0, b) is the point where the line
intersects the y axis. Here are some examples of straight lines.

How do you graph a line in slope-intercept form, y = mx + b, such as y= 10x − 20? You know that
the yintercept of this line is −20; therefore, the point (0, −20) is on the line. Set y equal to 0 in the equationy =
10x − 20, and you find that x = 2. Therefore, the point (2, 0) is also on the line y = 10x − 20. That point is on
the x axis and is thus called the line's x intercept. If you draw a line segment between the y intercept and
the x intercept and then extend the line infinitely in both directions, you have a graph of all points on the line.

Consider the line y = 10x. For this line, b = 0, and the point (0, 0) is both the x intercept and
the y intercept. To graph this line, you need to locate a point on it other than (0, 0). For example, if
you set x equal to 1, you find that the point (1, 10) is on the line. Enter any integer between -6 and
+6 into the input box below, and click the apply button to produce a straight line that intersects with
point (0, 0) and extends in both directions.

Meaning of the slope

The value of a line's slope — independent of its sign, positive or negative — represents the line's
steepness. For example, a line with a slope of 6 is steeper than one with a slope of 2. A line with
slope of -6 is steeper than one with a slope of -2 and also steeper than one with a slope of 2.

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Two lines with the same slope are said to be parallel. Parallel lines never intersect. The following
figure shows the two parallel lines y = 3x + 8, and y = 3x - 4 . The figure below makes it clear that
these lines will never meet. For any value of x, the y coordinate for y = 3x + 8 will always be 12 units
larger than the y coordinate for the line y = 3x - 4.

Using two points to find a line. How do you find the equation of a line when you know two points on
the line? First, find the line's slope by computing m = slope = change in y/change in x. Now suppose
that one of the two points is (x0, y0). Then you can find the equation of the line using the point
slope form of the line equation:

After multiplying both sides of this equation by x - x0, you can easily write a straight line equation in
the form y = mx + b.

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Estimating a linear demand curve. Suppose that Tina is opening a lemonade stand and wants to
determine how the demand for a glass of lemonade depends on its price. In this example, the
price p will play the role of x, and the demand q will play the role of y. Tina thinks that if she charges
50 cents per glass, she can sell 20 glasses per day, but that if she charges 75 cents, she will sell only
10 glasses per day. Let's assume that a straight line represents the relationship between price and
demand. Tina believes that the points (50, 20) and (75, 10) are on her demand curve for lemonade.
Upon moving from the first point to the second point, q decreases from 10 to 20 and p increases
from 50 to 75. Therefore, the slope of the demand curve is expressed by

(10 - 20)/(75 - 50) = -0.40.

A line with the equation y = a, where a is a constant, is a horizontal line. Horizontal lines have a
slope of zero. A line with the equation x = a is a vertical line, which has an undefined slope. The
graphs show the lines y = 4 and x = 3.

It is often convenient to express a line in the form ax + by = c, where a, b, and c are constants. This
is called the general form of the line equation. Suppose that Jennifer has $200 to purchase stock.
If she buys Company A (x) at $10 per share and Company B (y) at $20 per share, the points on the
line 10x + 20y = 200 in the first quadrant represent her budget constraint (focus only on the first
quadrant because the number of shares must be nonnegative). Any point on this line, or inside the
triangle bounded by the line and the x and y axes, represents a set of shares that Jennifer can
purchase. The easiest way to graph a line from its general-form equation is to find the
line's x and y intercepts. Setting x equal to zero and solving 20y = 200 reveals that (0, 10) is
the y intercept. Setting y equal to zero and solving 10x = 200 reveals that (20, 0) is the x intercept.
The set of points representing the possible share purchases is shown below.

If Jennifer instead had $300, her budget constraint would be a line passing through points (30, 0)
and (0, 15), parallel to her current budget constraint.

PROBLEMS

(1) Demand for a product is 500 units, and the price is $100. If the price increases to $101,
estimated demand will drop to 490 units. Assuming a straight line relationship between supply and
demand, graph the equation of the line relating supply and demand.

(2) Workers in Fredonia can produce either 20 gallons of wine per day or 50 pounds of cloth per
day. Let x = gallons of wine produced per day and y = pounds of cloth produced per day. If there are
1000 workers, what straight line (together with the x and y axes) delineates the boundary of the
combinations of wine and cloth that can be produced if the workforce is fully utilized? Graph the
region in the x-y plane that represents all combinations of wine and cloth that can be produced.

(3) If the number of workers were increased, what would happen to your answer to exercise 2?

(4) If the workers in Fredonia became more efficient at producing wine, what would happen to the
slope of the line in exercise 2? If Fredonian workers instead became more efficient at producing
cloth, what would happen to the slope of the line in exercise 2?

(5) Michael Johnson is thinking about joining a country club that charges $5000 per year for
membership and $30 per round of golf. Draw the straight line that expresses (for x ≥ 1) the
relationship between rounds of golf played, or x, and the annual amount, y, that Michael must pay
to the country club. Why aren't all the points on the straight line relevant to expressing this
relationship?

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Finding Solutions: Two Equations

In business, you often have two variables or unknowns (call them x and y) that are related by two
equations. To find the values of the unknowns, you must find the values of x and y that satisfy both
equations. In this section, you will learn how to use the methods of substitution and elimination,
and the graphical approach to solve two linear equations involving two variables. In finance class,
you will have to solve linear equations to use the arbitrage approach for determining the price of put
and call options and of other securities.

Example. Gregory has just returned home from a flag football game. His two sisters, Tina and
Jennifer, ask him what the score was. Gregory is annoyed that they missed the game, so he answers
them with the following riddle: "In all, 45 points were scored. If you double my team's score and add
10 points, you get triple the other team's score." How can Tina and Jennifer determine the score of
the game?

Begin by defining variables representing the unknown quantities. Let x = points scored by Gregory's
team and y = points scored by the opposing side. Next, try to find the two equations suggested by
Gregory in terms of x andy. In all, 45 points were scored, so x + y = 45. Given that doubling
Gregory's team's score and adding 10 points equals triple the other team's score, 2x + 10 = 3y.
Therefore, you must find the values of x and y that simultaneously satisfy x + y = 45 and 2x + 10 =
3y.

The graphical approach

Conceptually, the simplest way to solve two linear equations with two unknowns is to graph the
lines corresponding to each equation. The point where the lines intersect yields the solution to the
system of equations.

The first equation, x + y = 45, can be graphed after identifying the x and yintercepts. To find the y intercept,
setx equal to zero. The point (0, 45) is the y intercept. To find the xintercept, set y equal to zero. The point (45,
0) is the x intercept. Connecting these points yields the line x + y = 45. Next, take the equation 2x + 10 = 3y.
Adding −3y to both sides yields 2x − 3y + 10 = 0. Next, add −10 to both sides and we obtain 2x − 3y = −10.
The x intercept is (−5, 0), and the y intercept is (0, 10/3). Connecting these points yields the line satisfying 2x +
10 = 3y.

The two lines intersect where x = 25 and y = 20, so Gregory's team won, 25 to 20! When x equals 25
and yequals 20, both equations are satisfied because 20 + 25 = 45 and 2(25) + 10 = 3(20).

One problem with the graphical approach is that it is difficult to precisely identify the coordinates
where the two lines intersect.

Given two lines, one of the following must be true:

 The lines intersect at a single point. That implies that the two equations defined by the lines
have a unique solution, as in Gregory's football riddle.
 The lines are parallel and thus do not intersect. For example, x + y = 2 and 2x + 2y = 5 are
parallel (both lines have slopes of -1). Therefore, the two linear equations x + y = 2 and 2x +
2y = 5 have no solution.
 The two lines are the same line and intersect in an infinite number of points. For example,
the two lines x + y = 2 and 2x + 2y = 4 are the same line, so the system of equations x + y =
2 and 2x + 2y = 4 has an infinite number of solutions.

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Even if system of linear equation involves more than two variables, the system of equations will still
have either no solution, a unique solution or an infinite number of solutions. This is true no matter
how many variables and how many equations there are.

Solving by substitution

Reconsider the problem of solving the equations x + y = 45 and 2x + 10 = 3y. You can add -x to both
sides of the first equation and solve for y in terms of x (y = 45 - x). If you substitute 45 - x for y in
the equation 2x + 10 = 3y, you can easily solve for x. Given that y = 45 - x, you also know y and,
therefore, are finished. This approach is called the substitution method for solving linear
equations.

Solving by elimination

It is often easiest to solve a system of two equations by adding a multiple of one equation to the
other equation in order to eliminate a variable from one of them. For example, consider Gregory's
riddle, which required solvingx + y = 45 and 2x + 10 = 3y. Multiplying both sides of the first
equation by -2 yields -2x - 2y = -90. Adding this equation to 2x + 10 = 3y yields 10 - 2y = 3y - 90.

Now you can solve for y. Add 2y to both sides of the equation to get 10 = 5y - 90. Adding 90 to both
sides yields 100 = 5y. Then dividing both sides by 5 yields y = 20. Substituting y = 20 into x + y = 45
reveals that x + 20 = 45. Adding -20 to both sides yields x = 25. Therefore, as before, x = 25 and y =
20 is the solution to the system of equations.

PROBLEMS

(1) Tina is trying to determine the prices in dollars she should charge for lemonade (PL) and orange
juice (PO) at her lemonade stand. She believes she can sell 50 + 10(PL) - 20(PO) glasses of orange
juice per day and 100 - 30(PL) + 10(PO) glasses of lemonade per day. If Tina wants to sell 20 glasses
of orange juice per day and 90 glasses of lemonade per day, what prices should she charge?

(2) Owen and Sarah's pre-tax income is $100,000. Suppose that state income tax is 10% of taxable
state income and that federal income tax is 10/19 of taxable federal income. Taxable federal income
is $100,000 less state income tax. Taxable state income is $100,000 less federal income tax. How
much will Owen and Sarah pay in state and federal income tax? Hint: Let TF = taxable federal
income and TS = taxable state income.

Linear Inequalities: One Variable

A linear inequality in one variable looks like ax + b < cx + d, ax + b > cx + d, ax + b ≤ cx + d, or ax +

b ≥ cx + d. Here x is a variable, and a, b, c, and d are constants. Often you want to find the values
of x that satisfy a linear inequality. You can use the following rules to do that:

 If you add the same number to both sides of an inequality, the resulting inequality has
the same direction as the original inequality. For example, if the original inequality were a
"less than" inequality, the resulting inequality would also be a "less than" inequality.
 If you multiply or divide both sides of an inequality by the same positive number, the
resulting inequality has the same direction as the original inequality. For example, if the
original inequality were a "less than" inequality, the resulting inequality would also be a
"less than" inequality.
 If you multiply or divide both sides of an inequality by the same negative number, the
resulting inequality has the opposite direction as the original inequality. For example, if the

12
 original inequality were a "less than" inequality, the resulting inequality would be a "greater
than" inequality.

You can use these rules to simplify the inequality so that x is on one side and constant terms are on
the other side. Then you can easily find the set of values for x that satisfy the original inequality.

Examples of linear inequalities:

Let's find the values of x that satisfy the inequality 3x + 2 < x + 9.

To begin, add −x to both sides to get 2x + 2 < 9. Next, add −2 to both sides to get 2x < 7. Finally,
divide both sides of the inequality by 2 to get x < 7/2. Thus, all values of x < 3.5 satisfy the original inequality.
Now find all values of x that satisfy −2x + 3 ≤ −9. Start by adding −3 to both sides to obtain −2x ≤ −12. Since −2
is a negative number, dividing both sides of the inequality by −2reverses the direction of the inequality and
yields x ≥ 6. Therefore, any x at least as large as 6 satisfies the original inequality.

PROBLEMS

(1) Find all values of x that satisfy 4x - 3 ≥ 13.

(2) Find all values of x that satisfy -3x + 4 < 4x - 24.

Linear Inequalities: Two Variables

In several of your courses (probably operations, economics, and quantitative methods), you will
have to graph the set of points satisfying a linear inequality in two variables of the form ax + by ≤
cx + dy or ax + by ≥ cx + dy. Here a, b, c, and d are constants, and x and y are variables. To graph
the set of points satisfying such a linear inequality, you add the same amount to both sides of the
inequality until all the variable terms are on the left side and all the constant terms are on the right
side. Then the inequality looks like a'x + b'y ≤ c' or a'x + b'y ≥ c', where a', b', and c' are constants.

Now graph the line ax' + by' = c'. Choose any point P not on the line (the point (0, 0) is usually
easiest to check), and determine whether P satisfies the original inequality. If P satisfies the original
inequality, the line and all points on the same side of the line as P satisfy the original inequality.
Otherwise, all points on the line and on the side of the line not containing P satisfy the original
inequality.

Graphing a linear inequality: two variables

Financial planner Sarah Lopez Clooney is trying to allocate $100,000 of a client's money between
stocks and bonds. She wants to put at least as much of the client's money in stocks as in bonds. Help
Sarah graph the set of possible allocations. Assume that it is not necessary to invest the entire
$100,000 in stocks and bonds. If x = thousands of dollars allocated to stocks and y = thousands of
dollars allocated to bonds, then Sarah should graph the set of points satisfying the following
inequalities: x ≥ 0, y ≥ 0, x + y ≤ 100, and x ≥ y.

We begin by graphing the set of points where x ≥ 0.

13
The line x = 0 is simply the y axis. Any point with a positive value for x satisfies this inequality. Therefore, the
set of points satisfying x ≥ 0 is simply all points to the right of the y axis. The set of points satisfying y = 0 is
simply the x axis. Any point above the x axis satisfies y ≥ 0. Therefore, the set of points satisfying y ≥ 0 is
simply all points above the x axis. And the set of points satisfying both x ≥ 0 and y ≥ 0 is the entire first
quadrant. Next, find the set of points in the first quadrant that satisfy x + y ≤ 100. The x and y intercepts for the
line x + y = 100 are (100, 0) and (0, 100). Connecting these points yields the line x + y = 100. The point (0, 0)
satisfies the inequality x + y ≤ 100, so the set of points satisfying x ≥ 0, y ≥ 0, and x +y ≤ 100 is all points in the
first quadrant below the line x + y = 100. Now find the points that satisfy x ≥ y. First, graph the line x = y. It goes
through (0, 0) and (50, 50). Connecting those points yields the line x = y. Now look at the point (50, 0), which
satisfies x ≥ y. This point is below the line x = y. Therefore, x ≥ yis satisfied by all points below the line x = y.
You can now see that the set of points representing all possible asset allocations is simply the triangle ABC.

PROBLEMS

(1) Graph the set of points satisfying 2x - y ≥ 4.

(2) Sarah and Owen have a 100-acre farm in California on which they can grow cotton and grapes. It
takes 4 hours of labor to plant an acre of cotton and 10 hours of labor to plant an acre of grapes.

14
They have 500 hours of labor available for planting crops. Graph the set of points representing the
set of possible allocations of land between grapes and cotton.

Polynomials and Quadratic Functions

A polynomial is a function in the form f(x) = a 0 + a1x + a2x + ... anx , where n is a positive integer.
2 n

The highest power of x with a nonzero coefficient is called the degree of the polynomial. A straight
line is a first-degree polynomial. A second-degree polynomial is called a quadratic function, and
a third-degree polynomial is called a cubic function. For example, f(x) = 2x2 + x + 1 is a quadratic
function, and f(x) = 2x3 - x2 + 2x is a cubic function.

Polynomial functions are often used in economics to represent the cost of producing x units or the
profit associated with charging a price x. Polynomial functions are evaluated just like any other
function. Just remember that xn (x to the nth power) means x multiplied by itself n times. For
example, 34 = 81, 23 = 8, etc. For example, suppose Gregory Clooney works at Smalltown Bagels
(STB). If the cost in dollars of baking x bagels is given byc(x) = 10 + 0.001x2 + 0.2x, what is the cost
of baking 100 bagels? Simply evaluate c(100) = 10 + 0.001(100)2 + 0.2(100) = 10 + 0.001(10,000) +
20 = $40.

A quadratic function is usually written as y = f(x) = ax2 + bx + c, and its graph is called a parabola.
If a < 0 , then as x increases to the value -b/2a, the value of the quadratic function will increase, and
after -b/2a is reached, the value of the function will decrease. If a > 0, then as x increases to -b/2a,
the value of y will decrease, and then increase. Any parabola is symmetric about the line x = -b/2a.
That is, if x is k larger than -b/2a and k smaller than -b/2a, the function has the same value for both
these values of x. Here's how to graph a parabola.

Assume that if STB charges p dollars for bagels, its profit in hundreds of dollars is given by f(p) = -
p2 + 4p - 3. Now graph STB's profit as a function of price. Here a = -1 (i.e., 2a = -2) and b = 4. Since
a < 0, the profit will increase for a price less than -b/2a = -4/-2 = $2, and it will decrease when p >
2. Therefore, for p = 2, the parabola will assume its maximum value. When p = 2 , f(p) = -22 + 4(2) -
3 = 1. Therefore, the point (2, 1) is on the parabola. If p = 1, then f(1) = -12 + 4(1) - 3 = 0. Because of
the principle of symmetry, you know that the points (1, 0) and (3, 0) will be on the parabola. You
can also find f(0) = -(0) 2 + 4(0) - 3 = -3. Therefore, (0, -3) and (4, -3) are also on the parabola.
Drawing a smooth curve to connect these five points yields the graph.

15
Now plot the five points that you know are on the parabola: (2, 1), (1, 0), (3, 0), (0, −3), and (4, −3). Connecting
those points with a smooth curve yields a parabola that represents the relationship between price and profit.

When you want to maximize profit in economics or you want to find an Internal Rate of Return in
finance, you often have to find the roots, or solutions, of a quadratic equation of the form ax2+ bx +
c = 0. The quadratic formula dictates that the root(s) of a quadratic equation are expressed by

If b2- 4ac > 0, the equation has two roots; if b2- 4ac = 0, the equation has one root; if b2- 4ac < 0, the
equation has no real roots (in this case the quadratic equation has what are called "imaginary
roots"). As an example of how to use the quadratic formula, find all solutions to x2 - 5x + 6 = 0. In
this equation, a = 1, b = -5, and c = 6. You can find the solutions as follows:

This yields x = 3 and x = 2.

You can verify that x2 - 6x + 9 = 0 has the unique solution x = 3, whereas the quadratic equation x2 +
3x + 6 = 0 has no real roots.

Multiplying binomials

You may remember from high school algebra the FOIL method. Consider the function f(p) = (3 -
p)(1 - p). Often we need to multiply terms involving a variable to represent a function as a
polynomial. We will now learn to multiply expressions involving two terms (an expression that
contains two terms is called a binomial). Thus (3 - p) and (1 - p) are binomials. To express f(p) as a
polynomial, you need to multiply two binomials. You may remember from high school algebra the
FOIL method for multiplying binomials: First, Outer, Inner, Last.

f(p) = (3 - p)(1 - p)

PROBLEMS

(1) What is the degree of the following polynomial: x5- 4x3 + 2x2?

(2) Graph the curve f(x) = x2 - 6x + 2.

(3) Find all roots of the equation 2x2 - 5x + 2 = 0.

(4) It costs $0.30 for Tina to produce a glass of lemonade. If she charges p dollars for one glass, she
believes she can sell 50 - p glasses of lemonade in a day. Find a quadratic function that gives Tina's
daily profit as a function of price. Then graph Tina's profit as a function of price.

16
Powers and Exponents

In business, you will often see expressions such as x , where x is the base and n is the exponent.
n

When n is a positive integer, xn simply means multiply x by itself n times. We read this expression as
the Nth root of x raised to the a power. For example, when a = 1 and b = 3 this expression yields the
cube root of x. For example, 34 = 3 × 3 × 3 × 3 = 81 and (-3)2 = -3 × -3 = 9. When the exponent is a
positive fraction — say, a/b — then

For example, 93/2 =……= 27. You will soon learn how to work with negative
exponents.

Rules for dealing with exponents

As long as x is not equal to zero, you can use the following rules for exponents:

Rule 1: x0=1

Rule 2: xa xb= xa+b

Rule 3: xa / xb= xa-b

Rule 4: (xa)b= xab

Rule 5: (x/y)a= xa /ya

Rule 6: x-a =1/ xa

Rule 7: (xy)a = xaya

Power Function

A function of the form y = f(x) = axn, where a is a constant, is known as a power function. (In most
business applications, a > 0, so let's assume that here.) If n > 1, then the graph of the power function
will show the function is increasing, and the graph will get steeper. For example, in y = 5x2, n = 5
and the graph is as follows:

17
Use http://www.meta-calculator.com/online/ to make different graphs

Cost curves where f(x) = the cost of producing x units are often described by the sum of power
functions and a constant. For example, f(x) = x2 + 3x + 2 might represent the cost of
producing x units.

If 0 < n < 1, the graph of the power function will show that the function increases as x increases, but
the graph eventually gets flatter. For example, for the power function f(x) = 2x.5, n = .5, and the
graph is as follows:

18
Often a power curve with 0 < n < 1 is used to model the response to a marketing effort, because the
response to a marketing effort usually exhibits diminishing returns. For example, f(x) = 2x.5 might
represent the number of units (in thousands) sold of a drug when x hundred sales calls to physicians
are made.

If n < 0, the power curve will decrease as x increases, but the graph eventually gets flatter. For
example, the graph of f(p) = 1000p-.5 is as follows:

A power curve with n < 0 often represents a demand curve. For example, f(p) = 1000p-.5 might be
the demand (in thousands of days of therapy) if a price of p dollars is charged for a prescription.

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Cobb-Douglas Function

The Cobb-Douglas production function uses exponents and is commonly used to model how the
number of units produced depends on two inputs (usually K = capital and L = labor). The Cobb-
Douglas function is expressed as f(K, L) = KaL1-a, where 0 < a < 1.

For example, if Tina spends K dollars buying supplies for lemonade and works L minutes making
lemonade, she can produce f(K, L) = K3/4L1/4 glasses of lemonade. This function is a special case of the
Cobb-Douglas production function, with a having the value 3/4. Using Tina's Cobb-Douglas
function, suppose that she spends $81 on supplies and 16 minutes making lemonade. She can then
produce f(81, 16) = (81)3/4(16)1/4. Using Rule 4, (81)3/4 = (811/4)3. When n is an integer, x1/n is simply n x .
Thus, , and (81)3/4 = 33 = 27. Similarly, (16)1/4 = 2. Thus, f(81, 16) = 27 × 2 = 54
glasses of lemonade.

Incidentally, the U.S. economy is thought to follow a Cobb-Douglas production function with a =
0.3.

Power and Exponents Exercises

(1) Evaluate 16-1/4.

(2) Evaluate 93/2.

(3) Simplify (x3)2 × (x4).

(4) Simplify

(5) Simplify x4 × (x3).

(6) When a price of p dollars is charged, the demand for a product is 1000p-1/4. If the price is $16,
what will be the demand for the product?

(7) Suppose that the number of units produced of a product is given by K1/3L2/3, where K = dollars
spent on capital and L = hours of labor available. If $27 is spent on capital and 64 hours of labor are
used, how many units can be produced?

(8) Suppose that production follows a Cobb-Douglas production function. If the quantity of
available capital and labor is doubled, what will happen to total output?

Order of Operations

When working with mathematical expressions, the order of operations is important. For example,
in the expression 40 - 12/4, should you take 40 - 12 and then divide by 4, or should you first divide
12 by 4? In this section, you will master the rules that govern the order in which mathematical
operations are performed.

Use the PEMDAS rule to determine the order of operations in mathematical expressions.

 P (Parentheses): If the expression contains parentheses, first evaluate all expressions with
parentheses, working from the innermost set of parentheses out.

20
  E (Exponents): Next, perform all operations involving exponents.
 MD (Multiplication and Division): Next, perform all multiplication and division
calculations from left to right.
 AS (Addition and Subtraction): Finally, perform all addition and subtraction calculations
from left to right.

NDR. En nuestras escuelas nos solían enseñar con los colores del semáforo para saber que iba
primero, rojo suma o resta, amarillo multiplicación o división, verde potencia o raíz.

Using the first letters of these operations, we get PEMDAS, from which we derive the most famous
of all mathematical mnemonics:

Please Excuse My Dear Aunt Sally.

Here are some examples of expressions that may look identical at first glance but that yield different
results when the order of operations is properly followed.

10+20/5=

(10+20)/5=

10/20+5=

10/(20+5)=

5+3*72=

(5+3)*72=

-(9)1/2=

(-9)1/2=

PROBLEMS

Evaluate the following expressions:

(1) 20 - 2 × 32

(2) (8 - 5) × (7 - 3)

(3) 10/(4 - 2) + 5

(4) 10/4 - 2 + 5

Entering Formulas and Graphing Functions in Excel

You will often need to use a financial calculator or Microsoft Excel to perform calculations. In this
course, we use Excel. Entering formulas in Excel is a snap if you remember the following rules:

21
  All formulas must begin with an equals sign (=).
 Use * for multiplication, / for division, and ^ for raising a number to a power.
 Excel uses PEMDAS to determine the order of operations.

Please download the file Orderofoperations.xlsx. In the file Orderofoperations.xlsx, you will find the
Excel formulas needed to complete the calculations described in the previous section.

Note that the #NUM error indicates that there is no real square root of -9. (In reality, the square
root of -9 is 3i or -3i, where i is the square root of -1.)

Once you know how to enter formulas in Excel, you can easily use it to create graphs of functions.
Simply enter the values of x that you want to plot in one column; then enter the formula for the
function that you want to graph one column to the right of the first listed x value; then copy the
formula down to find the y value corresponding to the last value of x. Select the set of x values and
corresponding function outputs (y values). Finally, on the Insert tab, choose Scatter. This graphs the
selected coordinates and renders the graph of the function.

Here is an example of how to graph a function in Excel. Suppose that a price p is charged for a
product and that demand for the product is given by 1000p-.4. Let's graph the relationship between
price and demand as price varies between $1 and $10. Please download the file Demandgraph.xlsx.

PROBLEMS

(1) Suppose that Tina's neighbor, Jessica Spears, is opening a lemonade stand. If Tina charges a
price (in dollars) of p1 and Jessica charges a price p2, then Tina will sell 100p1/(p1 + p2) glasses of
lemonade. If p1 is in cell A2 and p2 is in cell B2, write a formula that yields the number of glasses of
lemonade Tina will sell.

(2) Use Excel to graph the function f(x) = -x2 + 4x - 3.

(3) Suppose that the number of units produced follows a Cobb-Douglas production function
with f(K, L) = K1/5L4/5. If K is entered into cell B1 and L is entered into cell C1, write a formula that
will yield units produced. If K = 100 and L = 50, how many units will be produced?

(4) Suppose that the cost of producing x units is given by c(x) = 500 + 2x3 - x2 + 2x. Graph the
relation between units produced and production cost. Assume that x can range between 0 and 100.

Inverse Functions

Suppose that demand q is a function of price. That relationship is frequently expressed as q = f(p).
Often in economics class you will instead need to find p as a function of q or p = g(q). Such a
function g is called the inverse function (or, in this case, the inverse demand curve) of f. In this
section you will learn how to find the inverse demand curve in several situations.

Jennifer has just gotten a job cooking at the local, independently owned OutaBurger fast food
restaurant. The restaurant's estimated daily demand for milk shakes is expressed as q = f(p) = 400 -
10p, where p is the price of milk shakes in dollars.

So far you have seen demand curves graphed with p on the x axis and q on the y axis. Economists,
however, usually graph q on the x axis and p on the y axis. To do that, you must solve for p as a
function of q. First, isolate all terms that include p on one side of the equation and solve for p. Add -
400 to both sides of q = 400 - 10p to get q - 400 = -10p. Then divide both sides of this equation by -

22
10 to get . To graph this function set p equal to 0 in order to find the q-axis intercept: (400, 0).
Then set q equal to 0 to find the p-axis intercept: (0, 40). The graph of the inverse demand function
is as follows:

p =40-q/10

Suppose that the daily demand for milk shakes is given by q = 100p-.5. To invert this demand
function, you need to solve for p as a function of q. To get p on one side of q = 100p-.5, you can first
multiply both sides of this equation by p.5. This yields qp.5 = 100. Dividing both sides of this equation
by q yields p.5 = 100/q. Squaring both sides of this equation yields p = 10,000/q2. Thus, g(p) =
10,000/q2 is the inverse demand function. Using values of q ranging from q = 1 to q = 100, we
obtain the following graph of the inverse demand function.

p = 10,000/q2

23
PROBLEMS

(1) Suppose that the demand curve for a product is q = 500 - 2p. Invert this demand curve.

(2) Suppose that the demand curve for a product is q = 200p-.25. Find the inverse demand curve.

Ratios and Percentages

The ratio of two numbers reflects their relative sizes. For example, if you want to divide an
inheritance in the ratio 2:3 between two siblings, the first sibling will get 2/3 as much as the second
sibling or, equivalently, the second sibling will get 3/2 as much as the first sibling. A percentage is
simply mathematical shorthand for one hundredth. For example, if a bookstore marks up the price
of a book 40% over the wholesale price, you can compute the retail price by adding forty hundredths
(or 0.4) times the wholesale price to the wholesale price. In this section, you will learn how ratios
and percentages can be used to solve business problems.

Suppose that the Clooneys are going holiday shopping. They want to spend $1000 on gifts for Tina,
Gregory, and Jennifer in the ratio 2:3:5. How much will they spend on each child? For some
number x, the Clooneys will spend 2x on Tina, 3x on Gregory, and 5x on Jennifer. Therefore 2x +
3x + 5x = 1000 or 10x = 1000. Dividing both sides of this equation by 10 yields x = 100. Therefore,
the Clooneys will spend 2x = $200 on Tina, 3x = $300 on Gregory, and 5x = $500 on Jennifer. Use
the box below to alter the amount the Clooneys spend and watch the gift amounts change based on
the same ratio of 2:3:5.

Assume that Smalltown Bagels sells chocolate chip cookies and that every 50-cookie recipe uses 2
cups of sugar. If STB wants to bake 200 cookies today, how many cups of sugar will it need?

Let x = cups of sugar needed. Then, x/200 = 2/50. Note that the right side of the equation is
expressed in cups of sugar/number of cookies; the left side must have the same units,
where x represents cups of sugar and 200 is the number of cookies. Multiplying both sides of this
equation by 200 yields x = 2(200)/50 = 8.

Remember that a percentage is shorthand for 1/100 or .01. Thus, 40% is the same as 0.4, and 120%
is the same as 1.2. To convert a fraction or decimal to a percentage, simply multiply the fraction or
decimal by 100.

Suppose that Gregory is practicing his free throw shooting. If he shot 50 free throws and made 84%
of them successfully, how many free throws did he make? The answer is simply 0.84 times 50 or
(0.84) × (50) = 42 free throws.

If Gregory is going to take 45 more free throws and hopes to raise his overall successful free throw
percentage to at least 90%, how many free throws would he have to make?

Percentages and corporate growth. Companies often set their growth targets in terms of percentage
growth. For example, suppose that Smalltown Bagels's sales during the current year (2012) are $3
million. Its goal is to grow sales revenues by 20% per year. What revenues does the company need
to generate during each of the next two years?

To grow by 20% during 2013, STB needs revenues to increase by (0.2) × 3 = $.6 million, for a target
of $3.6 million.

24
Then, to grow by 20% during 2014, assuming revenues of $3.6 million in 2013, STB will need to
increase revenues by (0.2) × (3.6) = $.72 million, for a 2014 target of 3.6 + 0.72 = $4.32 million.

Note that meeting the 20% growth target for 2014 required more revenue growth than was needed
to meet the 20% growth target for 2013. That's because the revenue figure was larger in 2013 than in
2012, and 20% of a bigger number is bigger than 20% of a smaller number. Many new companies
(such as Cisco and Microsoft in their early years) grow at high rates such as 30% a year. Once these
companies become large, however, it is hard for them to continue growing at 30% a year because
30% of the current revenue will be much larger than 30% of the company's initial revenue level.

Computing annual stock returns. Sarah Lopez Clooney bought some Company A stock in February
2009 when the stock was worth $20 a share. When she sold the stock, it was worth $24 a share.
What percentage profit did Sarah make on her investment in Company A?

On each share of Company A, Sarah made $4 ($24 - $20). That gain of $4 is a fraction (4/20 = 0.2)
of the original price. You can convert a fraction to a percentage by multiplying it by 100. Therefore,
Sarah earned a profit of 100 × (0.2) or 20%.

Percentages in Retail Marketing. Often retailers compute a product's retail price by marking up
from a wholesale price. Also, retailers will often mark down a product's price at the end of the
product's lifecycle. Let's look at some uses of percentages in retail.

Suppose that Smalltown's bookstore buys a book from a publisher for $12 and sells the book for
$20. What is the percentage markup over the publisher's price?

The bookstore has increased the price by $8 ($20 - $12), so the price has increased by a fraction
8/12 = .6667 over the publisher's price. Multiplying .6667 by 100 reveals that the bookstore has
marked up the publisher's price 66.67%.

Suppose that a clothing store marks up the wholesale price on a bathing suit by 50%. Then, at the
end of the summer, the retail price is marked down 40%. Answer the question below to
determine whether the final price is above or below cost.

PROBLEMS

(1) Michael Johnson has $100,000 to invest in stocks, bonds, and gold. He would like to allocate his
portfolio in the ratio 5:4:1. How much money should he invest in each asset class?

(2) The ratio of wins to losses for Gregory's AAU basketball team was 11:9. They played 40 games.
What was their win-loss record?

(3) During 2011, Smalltown Bagels earned $2 million in revenues. Its profit margin is 30% of
revenue. Revenues are estimated to increase by 10% per year. Estimate STB's revenues and profits
for the years 2012 through 2014.

(4) The Smalltown Inn is Smalltown's best hotel. The base price for a room is $100 per day. The inn
marks up the base rate by 20% on Friday and by an additional 25% (over Friday's rate) on Saturday.
What will the room rates be on Friday and Saturday? If the inn wants to return to the base rate on
Sunday, by what percentage will it have to reduce Saturday's rate?

(5) Gregory's AAU basketball team has a 12-8 record. They will play a total of 80 games, of which
they need to win 70% to qualify for the AAU National Tournament. What percentage of their
remaining games do they need to win?

25
Elasticity of Demand

In your marketing and managerial economics classes, you will surely discuss pricing. When a
business determines what price to charge for a product, it must look at how sensitive the demand
for the product is to the product's price. The concept of demand elasticity helps a business
understand the relationship between a product's price and demand.

The demand elasticity (E) for a product is the percentage change in demand that results from a 1%
increase in the product's price. To illustrate the computation of demand elasticity, let's suppose that
for a price of $10 or less, the daily demand q for lasagna dinners at Smalltown's Italian restaurant is
given by q = 100 - 10p, where p = the price of a lasagna dinner. Let's determine the price elasticity if
the current price of a lasagna dinner is $4.

Note that the demand elasticity for a linear demand curve depends on the current price, as shown in
the following table.

P Q P up 1% new Q Elasticity
1 90 1,01 89,9 -0,1111
2 80 2,02 79,8 -0,25
3 70 3,03 69,7 -0,42857
4 60 4,04 59,6 -0,66667
5 50 5,05 49,5 -1
6 40 6,06 39,4 -1,5
7 30 7,07 29,3 -2,3333
8 20 8,08 19,2 -4
9 10 9,09 9,1 -9

Currently the daily demand for lasagna is 100 − 10(4) = 60. Let's increase the price of lasagna by 1% and see
what happens to the demand for lasagna. A 1% price increase would bring the price to 1.01(4) = $4.04. Then
the demand for lasagna would be given by 100 − 10(4.04) = 59.6. The percentage change in the demand for
lasagna is given by(100) (59.6 − 60)/60= −0.667%. Since our price increased by 1%, our demand elasticity is
given by (−0.667)/1 = −0.667.

If E < -1, the demand for a product is said to be elastic; if E > -1, the demand for a product is said to
be inelastic. If product demand is elastic, a small increase in price will decrease revenue; if product
demand is inelastic, a small increase in price will increase revenue. Conversely, if product demand is
elastic, a small decrease in price will increase revenue; if product demand is inelastic, a small
decrease in price will decrease revenue. Recall that if $4 is charged for lasagna, then E = -.667.
Therefore, when the lasagna price is $4, demand for lasagna is inelastic, and a small price increase
would increase revenue. To verify this insight, we can compare revenues at the $4 and $4.04 prices.

 Revenue if price is $4 = $4(q) = $4(100 - 10(4)) = $240

 Revenue if price is increased by 1% to $4.04 = $4.04(q) = $4.04(100 - 10(4.04)) = $240.78

Now suppose that the price of a lasagna dinner is $8. It can be shown (see the table on the previous
page) that when p = $8, E = -4. Therefore, when the lasagna price is $8, demand is elastic and a
price increase will decrease revenue.

 Revenue if price is $8 = $8(q) = $8(100 - 10(8)) = $160

 Revenue if price is increased by 1% to $8.08 = $8.08(q) = $8.08(100 - 10(8.08)) = $155.14

26
Necessities like salt and innovative pharmaceutical products are known to exhibit inelastic demand,
whereas products that are not necessities, such as foreign travel, exhibit elastic demand.

As we have seen, demand elasticity varies greatly along a linear demand curve. Economists often
like to model demand with a function that exhibits constant elasticity. If demand q=ap-b (for an
example, see "The Power Curve as a Demand Curve" page in the Powers and Exponents: Power
Function section), then it can be shown that for any price, demand elasticity equals -b. For
example, if we model daily demand for lasagna dinners by q=1000p-2, then the demand elasticity is -
2. This means that for any price, a 1% increase would reduce demand by 2%. Of course, if
b < -1, then demand is elastic while if -1 < b < 0, then demand for lasagna is inelastic.

PROBLEMS

(1) Again suppose that the demand for lasagna is q = 100 - 10p, where p = price in dollars. Show that
demand is inelastic when the price is $3.

(2) Again suppose that the demand for lasagna is q = 100 - 10p, where p = price in dollars. Show
that demand is elastic when the price is $9.

(3) Suppose that the daily demand for mocha coffees at Fourbucks is governed by the demand
function q = 1000p-3. What is the demand elasticity for mocha coffees? Is the demand elastic or
inelastic? Verify your answer from the definition of elasticity when p = 3 and p = 6.

Logarithms

Logarithms are convenient tools that reduce a multiplication problem to an addition problem.
They also simplify problems involving exponents to much simpler multiplication problems.
Logarithms may be used in your economics and finance courses, where you'll need them to properly
price put and call options, for example.

Assuming a positive number b, the logarithm of a number x to the base b is the power to
which b must be raised to result in the number x— i.e., the logarithm of x to the base b is c if bc = x.
In this case we write Logb x = c. For example, the logarithm of 100 to the base 10 is 2, because 100 is
10 squared. The logarithm of 1048576 — the number of rows supported in Excel 2007 — to the base
16 is 5, because 1048576 is 16 raised to the 5th power. (Base 16, or hexadecimal, is commonly used
in computer science and can often be used in describing the characteristics of computer
applications.)

In business, b is usually set equal to 10 or to e, which is a number that is approximately 2.7182.

When b = e, rather than Loge, Ln is used and the base is omitted. Therefore, Loge x = c and
Ln x = c are considered equivalent statements. The logarithm of a number x to base e is often called
the natural logarithm of x.

Here are some examples to clarify the definition of a logarithm.

 What is log10 1,000? We simply need to determine the power to which the base (10 in this
case) must be raised to give 1000.

 What is log10.01? Since 10-2 = .01, Log10.01 = -2.

 Using Excel (see tab 5) or a table of logarithms, you can find that Ln 20 = 2.996. By the
definition of logarithms, e2.996 = 20.

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  Using Excel (see tab 5) or a table of logarithms, you can find that Ln(.005) = -5.30. By the
definition of logarithms, e-5.3 = .005. Alternatively, the natural logarithm of .005 is -5.30.

The following rules involving logarithms can greatly simplify many mathematical problems. Note
that Rules 1 and 2 allow you to reduce a multiplication problem to an addition problem and that
Rule 3 allows you to simplify a problem involving exponents to a multiplication problem.

Rule 1: Logb x + Logb y = Logb x*y.

For example, Log10 100,000 = Log10 (100*1000) = Log10 100 + Log10 1000 = 2 + 3 = 5. Since 105 =
100,000, we know that Log10 100,000 = 5 and that Rule 1 is valid for this example.

Rule 2: Logb x - Logb y = Logb x/y.

For example, Log10 10,000/100,000 = Log10 10,000 - Log10 100,000 = 4 - 5 = -1. Since 10-1 = .1 =
10,000/100,000, we know that Rule 2 is valid for this example.

Rule 3: Logb xc = c*Logb x.

For example, to find Log10 1005, we can use b = 10, x = 100, and c = 5 and find that

Log10 1005 = 5 * Log10 100 = 5*(2) = 10.

Since Log10 1005 = Log10 (102)5 = Log10 1010 = 10, we see that Rule 3 is valid for this example.

Using Excel to compute logarithms. There are three Excel functions that are often used in business
to compute logarithms. Please download the file Logs.xlsx.

 LOG10(x) returns Log10 x.

 Log(x,b) returns Logb x. Of course, Log(x,10) would return Log10 x.
 Ln(x) returns the natural logarithm of x. Therefore, we use the Ln function to compute
natural logarithms.

The file contains some examples of the use of these functions.

Column G formula Column H Formula

Log10(1000) 3 3 log10(1000) log(1000,10)
Log10(1/100) -2 -2 log10(1/100) log(1/100,10)
Ln(20) 2,995732 LN(20)
Ln(.005) -5,29832 LN(.005)

In column I we list the formulas used in column G while in column J we list the formulas used in
Column H.

WORD PROBLES INVOLVING LOGARITHMS

The logarithm rules described earlier in this section can be useful in solving many business
problems. Here is an example.

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Sarah Lopez Clooney is thinking of investing in an Internet firm, BitsAreUs, which currently has $2
million in annual revenue and $5 million in annual expenses. Sarah believes the firm's expenses will
grow at 20% a year and their revenues will grow at 50% per year. How long will it take for BitsAreUs
to reach a breakeven level where costs and revenues are equal?

Let x = years until revenues and expenses are equal. In x years, BitsAreUs will have revenues of
2(1.5)x and expenses of 5(1.2)x. Therefore, to find the time until BitsAreUs breaks even, you must
solve 2(1.5)x = 5(1.2)x.

Dividing both sides of this equation by 2 yields 1.5x = 2.5(1.2)x.

Then, dividing both sides of the equation by (1.2)x you obtain (1.5/1.2)x = 2.5 or 1.25x = 2.5.

To solve for x, we use Rule 3 and take the natural logarithm of both sides of this last
equation.

First, you obtain x*Ln(1.25) = Ln(2.5). Dividing both sides of this equation by Ln(1.25) yields
Ln(2.5)/Ln(1.25) = x.

Using the Excel LN function you find that Ln(2.5) = .916 and Ln(1.25) = .223 so x = .916/.223 = 4.11
years.

Therefore, BitsAreUs will break even in an estimated 4.11 years. As a check, note that in 4.11 years
expenses will equal 5(1.2)4.11 = $10.58 million and that revenues will equal 2(1.5)4.11 = $10.58 million.

PROBLEMS

(1) Find Log10 10,000.

(2) Find Ln e6.

(3) Solve for b if Logb 81 = 4.

(4) Suppose that the daily demand q (in hundreds of cups) for mocha coffees at Fourbucks follows
the equation q = 1000p-.5, where p = price in dollars. If we graphed Ln p on the x axis and Ln q on
the y axis, what type of graph would we obtain? Hint: Take logarithms of both sides of the demand
curve.

(5) Suppose that the Happy Tail veterinary clinic earns $200,000 in profits this year. If its profits
grow at 25% per year, how many years will pass before its annual profit is $1 million?

Index Numbers

Most of us are familiar with the U.S. government's Consumer Price Index (CPI). The government
lists the following levels for the CPI since 1997.

The
website http://www.inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx shows
that the base year currently used for the CPI is 1982 and that the CPI for 1982 = 100. In effect, the
CPIs in the above table are relative to the 1982 base-level CPI. For example, the 2007 CPI is 2.02416
times as high as it was in 1982. Essentially, an index number indicates the percentage change in a

29
quantity, relative to a base level that is assigned a value of 100. As another example, the 2005 CPI
was 1.907 times (or 90.7%) higher than the CPI in 1982.

If you were to keep 1982 as the base year and if inflation were to continue, eventually the CPI might
become a large number such as 500. In such cases, you can change the base year to a more recent
year in order to prevent the price indexes from becoming too large. If the government decides to use
2000 as the base year, what would the CPIs be for the years 2004 through 2008? Since the CPI for
2000 is 168.8, simply scale all the listed CPIs relative to 168.8 rather than 100. For example, the
2005 CPI would be 100 x (190.7/168.8) = 1.13. The CPIs for the years 2000 through 2008, relative
to the base year of 2000, are listed to the right.

(1) For the years 2000 through 2008, compute the CPI index relative to a base year of 2005.

Appendices

Appendix A: Mathematics Concept Summary

You may find it useful to refer to the Algebra Concept Summary while taking the course. This .pdf
document is available in the Briefcase as well.

Appendix B: Exercise Solutions

As you work through the exercises, you may find it helpful to check your answers for accuracy.
Click the link below to download a spreadsheet containing the answers to each exercise presented in
the tutorial. You can also download this file from the Briefcase at any time.

Algebra - algebraanswers.xlsx

Final Exam Introduction

Welcome to the final exam for the Mathematics for Management tutorial. This test will allow you
to assess your knowledge of Mathematics for Management.

All questions must be answered for your exam to be scored.

Navigation:
To advance from one question to the next, select one of the answer choices or, if applicable,
complete with your own choice and click the “Submit” button. After submitting your answer, you
will not be able to change it, so make sure you are satisfied with your selection before you submit
each answer. You may also skip a question by pressing the forward advance arrow. Please note that
you can return to “skipped” questions using the “Jump to unanswered question” selection menu or
the navigational arrows at any time. Although you can skip a question, you must navigate back to it
and answer it - all questions must be answered for the exam to be scored.

Your results will be displayed immediately upon completion of the exam.

After completion, you can review your answers at any time by returning to the exam.

Good Luck!

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1. 1. If f(x,y) = (2x)y, then f(4,3) is equal to ____________.
a. 1296
b. 512
c. 256
d. 64
e. None of the above

2. If f(x) = x1/6 + x-1/3, then f(64) is equal to ________________.

3. The equation of the line passing through the points (0, 3) and (2, 7) may be written as
a. 2x - y = 3
b. x - 2y = 3
c. x + 2y = -3
d. y - 2x = 3
e. None of the above

4. The set of all values of x that satisfy 5(3 - x) ≥ 10 is expressed as

a. x ≥ 1
b. x ≤ -1
c. x ≤ 1
d. x ≤ 2
e. None of the above

5. Dylan Industries employs 50 workers. Blue collar workers are paid $600 per week, and
white collar workers are paid $1000 per week. Dylan's weekly payroll is $42,000. Dylan
has _______ white collar employees.

6. The function f(x) = -x2 + 4x + 9 assumes its maximum value for which value of x?
a. 2
b. 1
c. 3
d. 0
e. None of the above

7. Consider the equation 3x2 - 2x - 1 = 0. The sum of the roots of this equation is
a. 1
b. 2
c. -1/3
d. 2/3
e. None of the above

8. For x > 0, which of these statements best describe the graph of y = x.25?
a. The slope is greater than zero and is decreasing.
b. The slope is greater than zero and is increasing.

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 c. The slope is less than zero and is decreasing.
d. The slope is less than zero and is increasing.
e. None of the above

9. Let p = the price in dollars charged for the dose of a drug. Suppose that the annual
demand (in millions of doses) = 1000 - 3p. The annual supply (in millions of doses) =
600 + 2p. The annual supply will equal the annual demand if the price of a dose is
______ dollars.

10. Let q = the annual demand in pounds for a drug and p = the price per pound of the
drug. Suppose that q = 1,000,000p-6. Also suppose that you want to "invert the
demand curve" and express price as a function of demand. Which of the following is an
expression of the inverse demand curve?
a. p = 0.10q-1/6
6
b. p = 10q
c. p = 10q-1/6
d. p = 0.10q-1/3/10
e. None of the above

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