20— ——— pifference Equations Mathematics is not a a careful march down a well-cleared highway, but a journey into a strange wilderness, where the explorers often get lost. —W. S. Anglin (1992) Economists often study the development through time of economic variables like national income, the interest rate, the money supply, the production of oil. and the price of wheat. The laws governing the behavior of these variables are usually expressed in terms of one or more equations. If time is taken to be a discrete (or integer valued) variable and the equations relate the values of such variables at different points of time, then we are confronted with difference equations or recurrence relations. In this case, time is usually measured by simply counting forward the number of periods thar bave elapsed after an initial time ¢ = 0. Sometimes, bowen we pauipnicrel neganive umes, in whi be thought of as the origin o! measure. “Tia é vegarded sed as a bcos variable and the equations involve un- known functions and their derivatives, We find ourselves considering differensial equations. “ This chapter deals with first- and second-order Aiferee® oes whereas the next chapter deals with the elementary theory of differential oa 3 “01 First-Order Difference Equations ae ts study (such as income, consumption. Changes in many of the quanto econo imerals (for example, each day, and savings) are usually observed * ated according '© the period to which wi uantities are when eek, or year). These 4) 747748 Chapter 20 / Difference Equations the behavior of we . . scr hey le Equations that relate such quantities at different times are che difference equations. For example, such an equation might relate the amoun, of national income in one period to the national income Jn one Or more previous 04 tel . pen Let f(t_x) be a function defined for all positive integers t and all real num. bers x. A fairly general difference equation of the first order is these economic variables is studied ar gj ye fit) @=h2..) (20.1) This is a first-order equation because it relates the value of a function in each period r to the value of the same function in the previous period f— 1 only. (When we deal with functions defined for discrete time periods, we usually let x, (rather than x(1)) denote the value of the variable at time tf.) Note: Some people refer to equations of type [20.1] as recurrence relations and would insist that a difference equation is one where the difference Ax, = x;~¥;| is specified as a function of r and x,-1. But Equation [20.1] is evidently equivalent to the difference equation Ax; = f(t.x;-1) — %-1. Conversely, given a difference equation Ax, = g(t. 1;—1). there is a comesponding recurrence relation x; = x)-1 + g(t.2/-1)- Because of this obvioes correspondence between recurrence relations and difference equations. there seems no good reason 1 maintain a distinction between the two. So we will refer to [20.1] as a difference equation. Suppose xo is given. Then successive insertions into [20.1] yield x = f(1,%0) x2 = (2.21) = f (2. F(L. x0) x3 = f(3. x2) = f(3, f(2, fF. x0))) and so on. For a given value of x, we can compute x, for any value oft. Formally. we state this simple result as a theorem: ae 20.1 (Existence and Uniqueness Theorem) Consider the ference equation x, = f(t. x,-)), 1 =,1,2,..., where f is defined for all values of the variables. If xp is an arbitr: rary fixed number, then there exists @ uniquely determined function x, that is i : i the given value for 1 = 0 a @ solution of the equation and has i teen for each choice of xo, there is a different corresponding unique souvee 1}. Consequently, there are infinitely many solutions. ‘The generat difference te sotaa tees ) = 0. If this equation © ‘equation of the first order is F(r.x,— im terms of 1 and /-). we have Equation (20.1).See, 20, 1 Frat orcey Ditterence The existence and uniqueness th Equations 749 Jies that when xo is given, th ‘orem for (20,1 7 a natural number 1. Does thie successive value J is almost trivial. It im- his not 8 Of x, can ae tell us the whole story’? ny a fr ‘We do, in fact, need to know more In ally imerested in establishing qualitative req gm *PPlications, we are usu- entering into the difference equation aff ges in the parameters ect its 7 tions are difficult or impossible to handle if tom 3% 60 on. Such ques- “insertion method” alone. Actually. the insertin, base our discussion on the defect in connection with numerical com, ‘ ati we have a difference equation of the ope DON) ade ove. suppose that A time-consuming process of successive ij 10 compute x109- insertions will i sion for x10. However, computational errors can emily ene, aie ws bck with approximate numbers (as we usually do in serious applications), the ap- proximation error might well explode and in the end give an entirely misleading answer. So there really is a need for a more systonatic oe oe ieee equations. Preferably, the solutions should be expressed in terms of elemen- tary functions. Unfortunately. this is possible only for rather restricted classes of equations. First-Order Equations with a Constant Coefficient We study first the linear difference equation x,=axyth G12...) (202) Starting with a given xo, it is possible to calculate x, algebraically for small :. Indeed. x) =axot+d atx +aby +h: ay ay + by = alan + bi) +b2 = 7x07 ab +P 9 +07 tabs + bs by = ala?xo + ab) +b) tbs = the benefit of each step being explained: 33 = axa Here are two more values of x, withovt 2 +b Xs a airy rab) tab tabs 4 Syp +a'bi abby + a°by tabs + bs formula for x, begins with the _,.@b,=1. 6; in turn, t0 give ‘at the following hypothesis ; I This makes the pantern cleat. 1p, Tis mes in pte soho the overall sum a'o + Literoo Chapter 20 / Difference Equations (which is wue for = 1,2, 3, 4. 5) ‘The difference equation (= 1,2,...) X, = ax) +b, has the solution i x, = a'xy + Leth (@=1,2....) (203) (Remember that a’~* = a° = 1 when r = k.) Indeed, one can check that (20,3) really is a solution of [20.2]. Substituting the expression suggested by [20.3] for %,-1 into the right-hand side of [20.2] yields it i! ax) +b = a(a' x + Yer!) +b =a'xot+ Salty, +0, nl k=) =a'xo+ Vata, = This matches our expression for x,, so [20.3] does solve the difference equation. Consider the special case when b, = b for all k = 1,2,.... Then ' ' > = bya soa"! +a! 4... 4a tl) asl =) Because of the summation formula [6.10] in Section 6.5 for a geometric series, we have I+ata?+..-+a!! = (1—a')/(1 —a). fora ¥ 1. Thus, fort = 1.2.--- 204] Fora =1, we have l+a4.--tal! =p and x, =x +16 fort = Example 20.1 Solve the difference equations: (@) x= in) +3 (b) x, = 3x1 +4Sec. 20. 1 / Firat-Order Diterence Equations 754 olution Using [20.4] and letting a = 1 Solution of (2): [2 and b = 3 gives the following 41 = (4)! (eo ~ 6) 46 fo solve (b), we use (20.4) again. Lewing a = ~3 and b = 4 gi =4 gives X= (3) (so — $1 ple 202 (A Model of Growth) Let ¥, denote national income, J, total investment, and S, total ail in period r. Suppose that saving is proportional to national income snd investment is proportional to the change in income. Then, for ¢ = 1,2.-0++ * S=ay, i} 1, = BU, -¥-1) Ql Sah GB) Here [3] is the familiar equilibrium condition, whereas a and 6 are pos- jtive constants. Assume that 8 > @ > 0. Deduce a difference equation determining the path of ¥,, given Yo, and solve it. Solution From (3] and (1), 4, = o¥s- Inserted into [2], this yields a¥; = BAY, — Y-1) or (a — B)Y, = ~BYi-1- Thus, naz a Sh (4) Using [20.4] gives the solution £ ) =12 ie) =-(2)%m ah?) * C =a) ‘The difference equation [4] constitutes an instance of the equation {6} Pp Wal.) < 2 )y,_, = +ah-! Y, (1+ 5) 1 The soluon of (6) is ¥s = (1+ #70, NOE YN See croordsnal proportional growth rate, because £ = (Ye! 00°" growth rate is g = a/(B — @)-752 Cnapter 20 / Ditterence Equations Equilibrium States and Stability Consider the solution of x, = ax,—1 +6 given in (204). If x9 = oy) _ b/( — a) for all 1. In fact, if =b/(1 ~a) for some 5 > 0. then 9), then Kyat =a = b/( ~ a), and so on. We conclude that if x, ever be will remain at this constant level frag” | Also x,4> b/(] =a) at some time s. then x, The constant is called an equilibrium (or stationary) state for x, =ax,) +b whena 2} Note: An alternative way of finding x* is to seek a solution of x, = ax,_;—b wig «t= 2" forall 1. Such a solution must satisfy x, = x) = x" and so x* = ar", Therefore, for a # 1, we obtain x* = b/(1 — a) again. Definition [20.5] allows us to rewnte (20.4) as a ox" Salt) — 3") x, x" =a" (xo - 2") Note that x, — x* is the deviation of x, from its equilibrium value. ‘So [20.6] stows that this deviation grows (or shrinks) at the constant proportional rate < Suppose the constant a is less than 1 in absolute value—that is. |¢ < -| 20. The equation is then called stable, Two cases of stability are sown? Fig. 20.1 (a) and (b). In the first case, x, converges monotonically down w equilibrium state, In the second case, x, exhibits decreasing flucmauors the equilibrium state. In this case, we have damped oscillations. pee If |a| > 1, then the absolute value of a’ approaches 20 8 1 ay, [204], it follows that x, moves farther and farther away from the equilitoer®y except when 1) = b/(| — a). Two cases of this phenomenon are UMSTAS Fig. 201 (c) and (). In the fist cate, x, tends to —o0, and inthe S008 exhibits increasing fluctuations around the equilibrium state. In the laner we say that there are explosive oscillations.| | t + (©) xg <2" FIGURE 20.1 Example 20.3 Equation fa] in Example 20.1 is stable because a = 1/2 The equihbmem state is b/(1 —a) = 3/(1 — 1/2) = 6. We see from the solunon given in that example that x, — 6 as t > 00. Equation [b] in Example 20.1 is not stable because | The solution does not converge to the equilibrium state 1° = 1 as r except if xo = I—in fact, there are explosive oscillanons. Example 204 (The Hog Cycle: A Cobweb Model) ; Assume that the total cost of raising g pigs 1s C(q) = aq ~ 5q° Suppose there are NV identical pig farms. Let the demand curve for pigs be given by D(p) = y — 4p. as a function of price p, where the constants @, 3. y. and 5 are all positive. Suppose. too. that each farmer behaves compeuuvels, taking Price p as given and maximizing profits x(q) = pq—C(a) = py —ag— Sa" ‘Then the quantity g > 0 can only maxumize profits if pre andso 92S ir (8) x9 <2" x(q) = p—a@— 269 =0os” 754 Chapter 20 / Difference Equations We see from [1] that (gq) > 0 for q < (p~a)/26. and x(q) > (p—a)/2B. Thus. q = (p —&)/2B maximizes profits provided , fo In aggregate. the supply of pigs from all NV farms is Poo = 2 (p >a) Now. suppose it takes one period to raise each pig, and tha, choosing the number of pigs to raise for sale at time r, each farmer ren” bers the price p, at time t~ 1 and expects py to be the same as pe, the aggregate supply at time z will be 5, = N(p.n1 —a)/26 Equilibrum of supply and demand in all periods requires that § = Dep). 50 ee =y-bp, (t= 1.2...) Solving for p, in terms of p,-; and the parameters gives the difference equation neh ae (=1.2,..) Q ‘The stationary state occurs when the price p* satisfies _ aN +2By Pore 2p5+N ‘The solution to [2] is P= p'+(-a)'(po— Pp") (a= N/2B8) 8 Equation (2] is stable if |—a! <1, which happens when N < 266. In this case. p, + p* as 1 + oc. The solution in this case is illustrated i Fig. 20.2. Here, Sp is the supply of pigs at time 0. The price at which all these can be sold is po. This determines the supply 5; one period later which then determines P,, and so on. The resulting price cycles are damped 24 both price and quantity converge to a steady-state equilibrium at m. This is also an equilibrium of supply and demand. If N > 283, howeve® then the oscillations explode, and eventually p, becomes less than @. TH? the pig farms go out of business. and the solution has 10 be described ® a different way. There is no convergence to a steady state. A third ine mediate case occurs when N = 266 and a = i. Then the pair (iP “oscillates perpetually between the two values (y — 8po- po) and (5(P0—"" a +y/8 — po)> 2S ya S.D FIGURE 20.2 The cobweb model in Example 20.4 case Problems 1 ea Solutions to the following difference quations with the given values ar =i, y=] b. 3x =x-1+2, x =2 ©. 2%, +3x-)+2=0, =-1 Q@y Hy +3=0, xy =3 2. Consider the difference equation in [20.4 and explain how its solution be- haves in each of the following cases, with x* = 6/(1 — a) (for ¢ = 1): adx* @a<-l, m>x e@agtl, mex fa=-l mex ga=1, b>0 ha=l, d<0 ia=l, b=0 3. Show that if A, is a given function of r, then the difference equation yeanytA, (LB a) hhas the solution a, saltgt (a tAy tal arto AD a) J for t= J use the summation formula In particular, let A, = be! for ¢= 0, 1, «an wession for the sum in the parentheses in for a geometric series to find an expression rt AO fora ec [2] in this case. Hence, find the solunon of and for a =c.156 = = Chapier 20 0 ee 4. Consider the difference equation yrarla + by) = O% (@=0,1,...) here we assume that a, b. and c are Positive constants, and y, > 9 wi ss =0,1..... |. Show that y, > 0 for all 1 b. Define a new function x, by = 1/34. Show that by using this subg, " gution, the new difference equation is of the type in (20.4). Nex, oh, the difference equation srr 2 + 3y1) = 49, assuming that yo = 1/2. What is the limit of y, as 1 > oo? 5. Consider the difference equation x, = /%;—) — 1 with xp = 5. Compute x,. x3, and x3. What about x4? (This problem illustrates the need to take care if the domain of the function f in [20.1] is restricted in any way.) Harder Problems 6. The authors Frisch, Haavelmo, Norregaard-Rasmussen, and Zeuthen, in their study of the “wage—price spiral” of inflation, considered the following sys- tem fort =0, 1, ...: Wie2-Wisr Pri — P . , Wa RM Rye Here W, denotes the wage level, P, the price index at time 1, and y and Bare constants. The first equation states that the Proportional increase in wages 1s equal to the proportional increase in the Price index one period earlier, whereas the second equation relates prices to current wages. a. Deduce from [1] the following equation for W,: Wise Wa , Se = a} ys BW pag (SOL) b. Use [2] to prove that War = ely + BW,) (t=0.1....) a where ¢ = c Under wh Wi/Po, and find a general expression for W; when cB #!- hat conditions will (3) be stable and what is the limit of i: # ' — 00 im this case?Ne compound Interest Recounted Values and The theory in the Previous secys . ection pound interest on a savin, be applied ‘ and y; respectively denote hem With deposits ont withdrawn for consumption and 7 the ICC rate per period is a constant > po posited as i a . » the relevant differen 1D Period r. If the interest Fr £65, ~ 6) (t= 1,2. 21,2...) The result in (20.3) implies that the solution of (20.7) is t = trum + Da spy 4S Orr) @=1.2.5 (20.8) because a = 1 +7 and b, =y—c. Let us multiply each term in [20.8] by (1 + 1)". This is a mukiplier of sufficient €conomic importance that is generally called the discount factor. The result is : 1 C141), = wo + 70 £1) - 4) (20.9) fi If time 0 is now, then the left-hand side is the present discounted value (PDV) of the assets in the account at time r. Equation [20.9] says that this is equal to a. initial assets wo 4 b. plus the total PDV of all future deposits, Lied + ry tye . c. minus the total PDV of all future withdrawals 37,211 +17) “cx In the case when wo = w, = 0, so that the first deposit opens the account at time 0, and the last withdrawal closes it at time r, we have tel ' su ante = ya +r) ye i= / of all deposits it to equal the total PDV of. ia vite (203) can be interpreted as follows: 3 for assets Wo, with @djustmenis ital med on inte hckakce' of Sater ith- This requires the total PD’ ; If time 1 is now, the formul interest €0) Current assets w, reflect the | er deposits, oF for the interest earned on all lat drawals.ine OR Se ee Example 20.5 (Mortgage Repayments) a riecder case of the difference equation [20.7] occurs when borrows an amount B at time 0 as a home mortgage. Suppose he fixed interest rate of r per period (usually paid cach month rather than oo? per year). Suppose, too, that there are equal repayments of me period, until the mortgage is paid off after 7 periods (for examp 2 " le, 34) Year, or 360 months). The outstanding balance or principal b, on the loan in 1 satisfies the difference equation Periog b= (+r)b-y-2 with by = B and by =O 1) This difference equation can be solved by using (20.4) with Ras a=1+r,b=~:, and by = B. We obtain = y(p—2)42 b=(+ry (B-2) 42 i But 6, = 0 when r = T, so 0 = (1 +r)? (B —z/r) + z/r. Solving for yields T Ene -T) -1 . 7u-a+n7] =: +r) @ rt The original loan is, therefore, equal to the PDV of T equal repayments of amount < each period, starting in period 1. Solving [3] for = instead yields rB (l+r)-7rB Toast = 8 + IG Spt . Hence, the repayment each period is slightly larger than just the interest ’B on the original loan B; there are principal as well as interest payments each period. This distinction is of some importance in tax jurisdicnons Lk the U.S., where the interest part rb,_, of each mortgage repayment 1s Use ally deductible from taxable income, whereas principal repayments are ®* deductible Pe Nouce that from (3), B — z/r this yields = =(z/r)(1 + 1)77. Inserted into} b= ery " = den] - on as the remaining principal at time 1. Thus, at time r, the interest paymen this principal at time + — | is rby = 2(1—(l+ryic'-7]2.3 Linear E t Coetticient quation: Sec. 20.3 20.3 / Linear ‘quations with a Vanabie Coet Because ¢ iS the total payment, jt f ~ t follows period ! is that the priney ‘cipal repayment in rhs bary lt san This 1s “ amon that starts out very small but th the rate r. In the last period. whens = 7. th hen grows exponentially at he interest payment 15 -(1- V\ lor Var) sr whereas the principal repayment is < is 2/1 +r. ' payment < IS due, only the amount z(1 pateae nen eee Pe pays principal: all the rest Problems 1. Find the solution of (20.7) for r = 0.2, wo = 1000. »,= 100. and «= 50 2. Suppose that at time t = 0, you borrow $100.00 at the fixed interest rate r = 0.07 per year. You are supposed to repay the loan in 30 equal repayments ‘fo that after T = 30 years, the mortgage is paid off. How much 1s the yearly repayment? How much of this is interest and how much is prncrpal: (2) m the first year and (b) in the Jast year? 3. A loan of amount $L is taken out on January | of year 0. Installment payments for the principal and interest are made annually commencing Of Pex the interest Tate be r <2 50 that De BETS January | of year 1. amounts to rL for the first payment. The contract states that the principal share of the repayment will be half the size of the interest share. a. © OF te eget afer January 1 of year R(T _ b. Find r when it is known that exactly half the original loae paid after 10 years. c. What will the remaining payments be eacl changed? h vear if the contract is not s with a variable n of the near difference This will be the case in am when the interest der a more general fo" Sometimes economists need 10 COS vary over equation (20.2), where coefficient a ca" wy an income sue Example 20.6 concerning the present value ° Tale varies. ” ear difference = hi The general firs oer (rahe ) (20.10) equation takes the form x, eat t b0 Chapter 20 / Difference Equations where a, depends on 1, Proceeding as before, we calculate x, exp licny first few values of 1, starting with a given Xo when 1 = 0. We have °F the x) =ayxothy rp = apxy + by = a2(ajXo + by) + by = 424)X0 + arb, +b, Then, omitung the details of the next two calculations, we have X3 = €34701X9 + 2a2b) + a3b2 + b3 X4 = 403020) Xo + 240302b) + asaybz + agb3 + by This is considerably more complicated than when a, was independent of 1, yet you should still be able to discern a pattern. Indeed, the successive coefficients of Xo are Qj. G)\G2, )G72Q3, A) G243a4 These can be expressed as (see Section B.4 for an explanation of the product notation) Tle fort =1.2,3.4 (20.11) sel In fact. the general formula for x, becomes a (I=.}so+ (TI) b+ (Ile) m+--+ (i-) ba +d: This can be written as slie)--Elits)> > st \secet Provided we agree that the product TIie,-14; of zero terms is 1. A formal proof of [20.12] is possible using mathematical induction. Example 20.6 (Compound Interest and PDVs with Variable Interest pa * can now modify our previous compound interest and present di value calculations in Section 20.2 to allow interest rates r, that vary fom Period to penod. The relevant difference equation becomes weds rwaity—e (= h2..) aSec. 20.3 / Linear Equations with aM Formula (20.12) yields arable Coetticient 761 w= [Ta+ | ' ; - mtd [Tarnjon-w a sal hel \ smb) Define the discount factor D, by D=— | Lf Thai +75 =[Jo+e a) sal Note that when r, = r for all s. discount factor | , » then D, = (1 +r)" i used in Section 20.2 (see (20.9]), Multiplying cach term oft) by D, sels 4 it Dw, = sane (l +7, _ w+ 5 [Rete (4 -&) | The +r But 1 Teaser) | ___niep er) Thandtr) (tn G+n0 tn Grr) _~___! =p Gen +n) 7 Hence, t Dyw, = wot DL Dele) CRA 4] tat The interpretation in terms of present discounted values (PDVs) is exactly the same as before (see formula [20.9)). In the special case of no deposits or withdrawals, one has 1 w, = wo/Di = wo J] a +n) kal 1, wo invested ininally becomes wo(l+ri) ) after two periods. and so on. So Indeed. introduce the just as one would expect After all n wo(l erndtnr after one period, the the “sero at factors have an entirely appropriate form. interest factor Ri defined by t Ds (51 == a+r) R= %, Il saked7162 Chapter 20 / Diflerence Equens"* Then formula [2] can be wntten as w, = Rowe +, Rely ~ er) - which is the appropriate generalization of formula [20 8) Problems 1. Work through the mortgage example in Example 20.5 once again whee in. terest rates are variable. Note that. in practice. variable interest ¢ have repayments that increase when the interest rate increases. and decrease when it decreases. Why is this? What would happen if there were 2 large unforeseen increase in interest rates without any increase in repayments? 20.4 Second-Order Equations So far this chapter has considered first-order difference equations. in which each value x, of a function is related to the value x,_; of the function in the previoss period only. Next we present a typical example from economics, where it is necessary to consider second-order difference equations. Example 20.7 (A Multiplier-Accelerator Model) Let Y, denote national income, C, total consumption, and /, total investment in a country at time rt. Assume that fort = 0.1. .... Y=C,+h 03] Cin) = AY, +b 2) tiet = (Cin — C,) 3] where a, b, and c are constants, Equation (1] simply states that national income is divided berween con- sumpuon and investment. Equation (2) is the assumption that consumpuoo in period 1 + is a linear function of national income in the previous P& ‘i nls “multiplier” part of the model. Finally, Equation (3) states stment in period 1 + 1 is proportional to the change in consumption from the previous period. The idea is that the existing capital stock provides ee meh capacity for production to meet current consumption. So investment fe needed when consumption increases. This is the “accelerator” pS model. The combined “multiplier-accelerator” model has been studied by several economists, notably P. A. Samuelson. petiod eee that consumption Co and investment Ja are known in the initial } Then by [1}. Yo = Co+Jp, and by [2]. C; = a¥o+b. From (3)Sec. 204 / we obtain Ir = (Ci ~ Co), and then e-Order Equations 763 yy C1. and fy are all known. Turni » (1 in tam gives ¥y = gs the value of /2, and [1] in tum 1S t0 [2] again, we ace +4). Hence, this way. we can obtain expressi Produces the value of 2, then [3] gives Co. Yo. and the constants a, b. ana: for C,, ¥;, and J, a Obviously, in increasingly complicated. + and c. However, the atieccdons desire a ved get Another method of s1 - tudying the Ir consists of eliminating two of the mikwown fusctow more enlightening. pith a cr jon in one unknown, Here ve use this me _ up with 00 vit eearO.1. Replace vib t n me tile Gl a =0. ..... Replace 1 with +1 i equations [1] to [3] 1 +2 in [1] to obtain in (2) and (3} and 7 with 22 =aYjuy +b 4 Tran = (Cra — Cnt) (31 Yoo2 = Cra2 + dinz (6) ncerting (4) and [2] into [5] yields Jz = act¥i4i 7) Insern thi ie a= . 1 this result and [4] into (6] gives ¥i-2 = a¥isa + beach — y,). Rearranging gives Yaga + )¥e1 tacks =O (=01--) 0) This is a second-order difference equation with ¥; as the unknown function. The next section sets outa general ‘method for solving such equations. Most second-order difference equations can be written in the form x2 = FG ape) = 0.1) (20.13) Suppose that f is defined for all possible values of the variables (7 ¥ wre) Suppose xp and x; have fixed valuee Lewing | = on por oe that n= Lewin: eli 1.13] yields 3 = ry FO. x0. 712) BO ie mg into (20:13) 6 Values of x; for allt sre uniquely Se et ceems of yg and x1. Hen® ‘we have the following result. in terms which is similar to Theorem 20.1 rem) Consider the ale of fined jeu son eur = ftete Hee te were [3 te tea oe i i a tn thre existe n wniguely derermined FEDS crn a uniquely mor =m764 Chapter 20 Diterence Equations hoice of Xo and x1, there is a differ In general. for each different ¢ ea ing unique solution of Equation [20.13]. Consequently. there are infinity rf ained, we can find any value of x, by g i" ready expl: Meany aie ake oft Eran so, the arguments Set out just after Thea Sey for developing a theory of first-order difference equations. are no less mi 1 difference equations of the second order for Consider again equation [20.13] and assume that fis defined on all of pi solution of the equation is then uniquely determined by its values for the firs, penods. By definition. the general (or complete) solution of (20.13) is a funeae, x, = g(t. A.B) (og that depends on two arbitrary constants, and has the property that an solution of [20.13] can be obtained from [20.14] by choosing appropriate y; ne, of A and B. Thus, [20.14] is the general solution of (20.13] provided that given arbitrary values of xp and x1. the system. 7 2(0.A,B)=x. (1, A.B) =H has unique solutions for A and B. Example 208 ‘The difference equation \ 1 Xian — gas — Ber =O is of second order. By direct substitution, it is easy to check that the functoe x, = A(1/2)' + B(—1/3)' satisfies the equation for all values of A and B. (How to find this particular function is explained in the next section.) Let and x, be arbitrary numbers. In this case, system [20.15] is A+B=xX0, $A It follows that A = 3x9 + $x; and B = 3x0 — §X1- Therefore. © = A(1/2)' + B(—1/3)' is the general solution of the given equation. - . We assumed in Theorem 20.2 that the function f in (20.13) was def : ple al of R?. Mf this is notte case for paniular difference equation a there is no solution at all (see. for example, Problem 5 in Section me Linear Equations The general second-order linear difference equation is oid X42 + OrXig1 + byXr = CrSe eC. 20.4 / Second-Order Equations 765 dc; are give where 4 b,. ane given functions of 1. The associated homogen: i Jequs equation Kiet Fda + bx, = 0 017 tained from [20:16] by replacing ¢) with 0. We ra? of ¢ both satisfy (20 Ey tes Je claim that if the two functions 4 = Au,” + Bu,” also saushes ic 1 also saushies 20. 17) for all choi eS of constants A and B. In fact, x,.) = Au... + Bu js ob . = + Bu Inserting nd Xr=2 = AMrer (ia. Inserting these expression: ret 3 side of [20.17] yield pressions for x,.) and x)42 into the gully + Bula + 4 [awit + Bu? +b, [au + Bu] ~All 5. ios Beg mA [iy onl, + bal] + 8 [a2 + ant ~ ha jp was assumed that uf? and ul? satisfy [20.17], so the two expressions 1D the square brackets on the RHS of this last equation must both be 0; so, too. must the cnole RHS. Thus, we have proved that the function x, = Au, = Bu. satisfies (20.17) for all values of constants A and B. Suppose that somehow we manage to find two solutions u\'" and ul? of (20.17). Then x, = ‘Auf? + Bu? satisfies (20.17) for all values of _A and 8. Is this the general solution? No; in order to be sure that Au? — Bu really is the general solution of [20.17), we must also require that u{!” and uw” be hnearly independent—that is. that they are not proportional. Thus: The homogeneous difference equation X42 F arXi41 +50 = | tsthe general solution | (20.18) x, = Aus) + Buy? ‘bere u” and u®? are any two linearly independent solutions, and A and B : Theorem 20.2. 1 suffices to xy, there exist constants A _—_—_ e discussion followin: Proof In view of th " wales of 10 a0 prove that. for arbitrarily give! and B satisfying oy pall = Aus!) + Bul,’ = °° ui + Bay = system can be solved uniquely for A and B ‘According to Cramer's rule.766 Chapter 20 Difference Equations the determinant provided that wy yQ) ul) ul | we| a tT) “om 1c different from 0 To prove that W #0, we show that W = 0 feats in contradiction m rR = 0. then the columns in W are linearly dependent. Therefore there must exist numbers A; and 42, not both 0, such thar Ayah? + agul?? = 0 1) 2 Ayu”) + dau? = 0 Define i, = Ayu" + dou!” Then i; satisfies (20.17) (because u”” and 4° both ane solutions). Moreover, (2) tells us that Z = 0 and z, = 9 According to Theorem 20.2. there is only one function Z, that satisfies (20 17) and has Z = 0 and Z) = 0. Obviously. this must be Z, = 0 for all ; Hence. Aru” + tou,” = 0. Bur this contradicts the assumption that u!’ and u” are linearly independent. This contradiction tells us that W = 0 after all, Our next result concems the structure of the general solution of the nonhome- geneous equation [20.16]. Suppose we are able to find some Particular solutes ut of (20.16). If x, is an arbitrary solution of 20.16}. then it is easy to see that the difference x, — u} is a solution of the associated homogeneous equation [20.17] According to (20.18), therefore, we have x, — ut = Au!” + Bu. where u!” “rare (wo linearly independent solutions of (20.17), and A and & are arbicar constants. Hence: The nonhomogeneous difference equation FF Od + bie, = 6, has the general solution ‘her 1 Reason twit 2 lit Feneral solution of the associated homogeneous iu DY Zen i. . nonhomogeneous equation Oh an 48-4 particular solution of theeC. 20.4 / yy (and generalizes easily to the Second-Order Equations 767 sp? Case of n functions) a (2) | mo 40 | ~O=> ,! 2) uw 12) jul? | 1 and u®) are linearly independent (20.20) proof Suppose u,!” and uw) are j rare linearly de bers 4 and B. not both 0, such that Au‘! moe Then there exist num- particular. letting 1 = 0 and 1 = 1 gives uy" =O forall r= 0,1 In Au + By = 9. + Buy’ =0. Au + Bu 29 According to Theorem 13.7 of Section 13.8, thi: rding nl .8, this homoger i equations has a Senicivial solution iff the determinant be pont oD ne dexerminat i precisely the one in (20.20). So we have proved that fu" and uf? are linearly dependent, then the determinant in [20.20] is 0. We eonlade that if the determinant is not 0, then u”” and u®? are linearly independent Example 20.9 Find the general solution of reo — Sti41 + 6a, = 20-3 @=0,1....) a] Solution This is an equation of the form [20.16]. The associated homo- geneous equation is 2] pag — hg + Ot It is easy to verify that uy!” = 2! and 2? = 3" both satisfy (2]. (In the next section, we see how to make such a clever guess.) The functions 2’ and 3! are linearly independent because the determinant in [20.20] is 3-2 = 1. so x, = A2! + B3' is the general solution of (2) gests that a function of the type up = The form of the RHS of UT ino of undetermined coefficients at+b might be a solution. The following me ens can te wed fo find a and b. In fach Wet = a(t +1) +0 and uss a(t +2) +b. Inserting these into {1} yields a(t +2) +5 - Slat! + 1) +b] + 6(ar +) =2-3 : | we obtain for alt 1 =0.1...-. After simplifying the LHS, we © =01 2at _3q+2b=2!-3 for all ant term, WE conclude that 2a Equating the coefficients af and the const eS STE solu of 3, Thus. ¢ = and that —3a+ 2b =~"768 Chapter 20 / Ditterence Equations [1]. According to (20.19), the general solution of (1) is x, = AZ + BS +t ‘There is no universally applicable method of discovering the two lineay, tions of {20.17} that we need in order to find the general tome indent solu a However, in the special case when the coefficients a, ang >, ate of the equation a : both constants independent of 1, then it is always possible to find the two ‘olution, required. The next section shows how to do this. Problems 1. Prove by direct substitution that the following functions of ¢ are solutions of the associated difference equation (A and B are constants): ax SAFU, X41 =X +2 b. x, = A3! + B4, Kya — TX41 + 122, = 0 2. Prove that x, = A + Br is the general solution of x,.2— 2x.) +2, =0. 3, Prove that x, = A3' +B! is the general solution of x;+2—Tx/41 + 12r, =0. (See Problem 1(b).) . 4. Prove that x, = A2/+B12'+1 is the general solution of x,-2—42,.1+4z, = 1 Harder Problems 5. Consider the difference equation wae ex, se" OL... @ #0) a. Find the general solution &, of the associated homogeneous equation expressed as a function of r and Zo. b. Prove that is @ particular solution of the given nonhomogeneous equation, and find. 19 tum, the general solution of the given equation. 20.5 Second-Order Equations with Constant Coefficients Consider the homogeneous equation Hr + ax,,) + bx, = 0 (20.20) where a and are arbitrary constants, b s 0, and x, is the unknown functe? —1968 Equations with Const. tant ing to (20.18). finding th wens p18, fing nai . eeeal Solution of (20.21) Teq ot nem tires us to di weed in some of the previous exay ne pe oe ‘Mt. On the b; mple: asis of ex cunprise that we try to find solutions of poze it should come i an sl +l = mem! and X.5 = mit? S ‘aving the form x, = m! pont ra = mi? " x) =m! Then uy (20.211 yields m'(m? + am + b) " So inserting these ‘ ded m satisfies the equation + then Coetticienss 769 msm’. =0.1 expressions satisfies (20.21} m +am+b=0 120.22) ‘This equation is called the characteristic equation of the difference equation. Its solutions are : m=—ta+ (20.23) Generally, there are three different cases to consider. which are summed up in the following frame: ——— ‘The general solution of Xpa2 + AX + bx, =0- ‘with b = 0) is determined as follows L For 4a? — > 0, when the characteristic equation has two different real roots, the solution is —_—— 1 ig x, = Am, + Bm, m2=—30% 49 > * wigs: i ‘one real double 2 For La — » = 0. when the characteristic equation has "Oot, the solution is 1 m=-ta x, = (A+ Bim. ° . ‘ has no real roots. 3. For 4a? ~ b < 0, when the characteristic equation ‘he solution is, with @ € [0.7], 5 cosd = -a/(2V0) % = Ar' cos(@t + w). ravb. . real and different, so Th : implest Then my and m> A is case La? — b > 0 is the simple in [20.20] ’ 4 determinant ™ and mare solutions of [20.21]. Th ua? uy jd | emo—miee = m2 yo [71m 1770 Chapter 20 / Diflerence Equations So the two solutions are linearly independent. and the general solution ig iven in I. cong wen aa oo. then m = —4a is a double root of [20.22]. This m +am+b = (m+ 4a)’. In addition to m'. the function tm! also satises pn (see Problem 6). Moreov' the determinant in [20.20 indicated in 2. If fa? -b < 0. the roots of [20.22] are complex. The suggested Solution can 1, way. According to Problem 3 in Section C.1, er, these two functions are linearly independent bee! se ] is equal to m. The general solution is, therefore a be expressed in anothe! Ar! cos(6t + @) = Cir! cos(6t) + Cor sin(6r) be] provided we define C) = Acosw and C2 = —A sinw. The two functions x" — r'cos(@t) and u?? = r'sin(@t) are linearly independent. Indeed, determinan (20.20) is ! 0 | Lysine = Vbv/1 — cos?6 rcos@ rsin@ —— = Vb V/1—a7/4b = vb — ja? > 0 Moreover. direct substitution can be used to show that both these functions satisfy [20.21], although the algebra required is quite heavy. We see that when the characteristic equation has complex roots, the solution of [20.21] involves oscillations. Quantity Ar’ is the amplitude at time 7 and r is called the growth factor. The number 6/27 is called the frequency of the oscille- tion and w is its phase. Note that when |r| < 1, then |Ar!|—> 0 as 1—> oo and the os cillations are called damped. If |r| > 1, the oscillations are called explosive, and in the case |r| = 1, we have undamped oscillations, Note also that the amplimde aod the phase, in general, both depend on the initial conditions (the values of xq andi) whereas the frequency and the growth factor are independent of the initial cond tions and depend only on the coefficients @ and b in the original difference equation- Let us now consider some examples of difference equations of the form (20.21). Example 20.10 Find the general solutions of (2) 142 — 3.9%;41 +3.78x) = 0 (b) x42 — OXra1 9X = (©) X42 — F141 + = 0 Solution (a) The characteristic equation is m? — 3.9m + 3.78 = 0, wih sole mm, = 1.8 and m2 = 2.1, so the general solution is x, = A(1.8)' + B(2.1)'Sec. 20.5 / Secong. Orde" Equations wits o (b) The characteristic equation ism Constant Coeticents 771 m 5 a double " le root. The general soluion "2" on is =0,som=3 Hm A+ Bry ray roe a equation is m? — m 4 1 nd co86 = 1/2, 0.0 = Ly “Tapeoal toe is fom Acox(}ar + 0 The frequency is (7/3) oscillations are ene = 1/6, and the growth factor is 1, $0 the The Nonhomogeneous Case Let us now consider the nonhomogeneous equation X42 FOX 4) +x, =C, — (b #0) (20.24) ‘According to [20.19], the general solution of (20.24) is oy = Aull) + Bu? + up (20.25) where Au(?+ Bu‘? is the general solution of the associated homogeneous equanon (20.21), and uf is a particular solution of (20.24). We know how to find Aus) > Bu2), How do we find u;? In some cases, it is easy. For example, consider the ft aa ec, where ci a constant, sta [2024] mbes yan + aka + O% =c — (cis.aconstant) (20.26) scary tind aston fe or = 6. ES OE AE Then hua) = ra? = C, $0 ion of x; = C ito the equa rape neers that is. € yb). It follows that if 140+ > = cAl+e stn of (20.28) rt 4atb=0.n0 constant function satisfies {20.26}. To handle this case, see Problem 5.) Consider more generally the case in which cr ! tion of terms in the forin a’ a" cos(bt)s products method undetermined coefficients cap Pe . of such tems. wi 00 fhe function c, in (20:24) bappens Used to obtain a special solunon of ( ° est must be modified.” I : function © 'o satisfy the homogeneous m in (20.24) is & linear combina sin(bt) equation, _ Joba Wiley. general details 10 Difference Equanons. ot we Gol et Equanons ‘and Simularions. Prendice New York, 1961, Sec. 34. oF. B: were r Hil, Eplowond cuts. New Jere: 196TT2 chaover # perence Equations je 20.11 . ph SH Sxy FON eA HE HS Solve the equation Fre Salution The associated homogeneous equation has m? as its characteristic equation, with the two roots m) = 2 and 6x5 general solution is, therefore, A2! + B3' To find a panicle wan try to adjust undetermined coefficients C, D. E, and F so that ION, ve uta ca + DO + Ere F is a solution, (You cannot pur E = 0.) We get ye ee dtr sica't! + Dir + + E+ hen ] ca + DE+ +6(C4! + DP + Er+ Fyadiecas Expanding and rearranging yield 2c4' opr + (6D +26) + (-D~3E+ 2A aH +e +3 Because the four functions 4', 2, r,and I are Tinearly independent. this cax hold for all : = 0, 1. --- only if 2C = 1, 2D = 1, -6D +2E = 0. at -D-3E+2 = 3, so that C = 1/2, D=1/2, E =3/2. and F=4 Te general solution of the equation is, therefore, yp = AD + BI + H+ bet per4 The method of finding a special solution of [20.24] that was used in the las e usually will not work unless the right-hand side is of the form expla! before. Stability Suppose an economy evolves according to some difference equant difference equations). If the right number of initial condiuions is sre aft is a unique solution of the system. ‘Also, if one or more initial cont changed, the solution changes. An important question js this: Will solute he initial conditions have any effect on the long-run Pe jor of OF iso vr will the effect “die out” asf —» oo? In the latter case. me systed? ue Stable. On the other hand, if small changes in the initial conditions Open to significant differences in the behavior of the solution im the Long egy, system is unstable. Because an initial stace cannot be pinpointed ‘io oat reer seal oY in the sense indicated before is o uirement for a to yield meaningful long-run rediction®. ‘Consider in particular the rae Jongpogene os aitferers® fon (or syst oer dar taxe tox = | (DFO8 Euateng oe g272r3} SOTMOM OF (8) 5 inthe form = Constan, * 773 : AS aul? + Bu ye gation [*) is called globany " . Peal solution Aut” + Bu® of ge Potialy aby, {oe} pat for all values of ASsociated (Stable A and B homogeneous emg Om if the Oas cular. 1 00, for all vat io 5 085 1 00 (Choose Aa yp A 8, en, ; + 9 (choose A = 0, B= 1). On the + B= 0), and u?! + 0 as i other - rarely sufficient for Au! + Bu” vo apmoath Oar poe 22 ome We claim that uf") + 0 and 4? . > Oars oj gts of m? +.am-+ b = 0 are both less than 1. (A bref usin weap numbers, including a definition of the modulus of a complex number, is given in section C.3. Note that if m is a real number, then the modaius is equal to the absolute value of m.) Suppose the characteristic polynomial has complex roots ma=atiB. Then o = —a/2 and B = y/b— 4a”. So the modulus of either root is equal to |m| = qian f= \/la+b- je? = vb. We aged or at the two solutions r' cos(@t) and r sin(@t) approach 0 as t approaches infinity r= Vb < l—thatis, b <1. : my ¢ mz, then the two If the characteristic polynomial has eee aot a Oand jutions are u!!) = mt and uf? = m. In 1. Finally, if the cbaracersie o ‘ iff ym] < 1 and [ral < y independent 1 > Qasr > iff im ee, at ine < val has 2 real double 700% ™ = 40 nd suficint con ons are mand 1! Again, inl < 2 (Ceri im es . vn 0 ast > ml = 1/8, ; these two solutions 10 #PPFO ihe ote of 8 ia not approach 0 ast 7 ast Then |im!| = tml = 8/5 ° Thus: (2027) E if poth 70° Eiuation [x} is stable if and only - te "sam + b= 0 have moduli $7 acts je 10 vf of eh te 0 i . pility aeni 008 To determine the St" 4 give Onece"* characteristic roots: 4, hax) +bx, = er774 cnaprer 20 / Ditterence EqaPOrs condinions are necessary and sufficiest. consider firs saw that [+] is stable iff b < 1. Thus. the the ca, conditions . the meats, 30.28) are sufficient. In the complex case. the #72pb Of the sn (20.28) a lot imtersect te mas. 1 parocalar, f(1) = [wa a +6 must both be positive. But 1+a+b>Oandi-g.,.° re equivalent to jai < 1 +6 so the 1 conditions are alse, £ er cic 10 asks you to analyze the case of real FO0%s. and prove (2028) m gy, case. Example 20.12 Check the stability of the equation: To see why these of complex roots. Then we ty, -in = Eran — pro ~ gh =O In this case, a = —1/6 and b = —1/6. 50 ial = 16 ag 14+5= 5/6. ‘Thos, according to (20-28}, the equation is stable. This xm clusion can be confirmed by looking at the general solution of the associated homogencous ion, which is x, = A(1/2) +B(—-1/3)' (see Example 204 in Section 20.4). Clearly, x, > 0 irrespective of the values of A and 2. so the given equation is stable. Bee ee stabilicy ofthe model in Example 20.7 of Section 20.4, wih c xt c positive. Yraz a +e)¥ret + ac¥, = Solution From [20.28]. it follows that the equation is stable iff a(1—<) < 1 +ac and ac < |—that is, iff a < 1 and ac < 1 (See also Problem 3. Problems Find the general solutions of the difference equations in Problems | and 2. Le X42 — 641 + 8x, = 0 Db. x,43 — 8x.) + 16x, = © 42+ Bie +32, = 0 @. 3x02 +24, = Dea tert Bre $4 9-2 be ee Baie 2 =F BET 3. In Example 20.13, we studied the difference equation Yer a(t.) +acy, =b Assume that a > 0.c > 0, anda #1. a. Find a special solution of the equation.