Further Equations

and Techniques
Chapter 5
 5.1 Introduction
Linear functions such as y  a0  a1 x and quadratic functions such as y  a0  a1 x  a2 x
2

describe a straight line and a U-shape, respectively.

The cubic functions describe an S-shape: e.g. the figure below is a graph of y  x 3
 5.2 The Cubic Function
Definition. The function P defined for all x by

Pn  x   an x n  an 1 x n 1  ...  a1 x  a0
where a0 , a1 ,...,are
an constants, and a,niscalled
0 the
general polynomial of degree n with coefficients a0 , a1 ,..., an .

Definition. A polynomial of degree 3, i.e. P3  x  is called a cubic polynomial.

Definition. A function of the form y  P3  x   a3 x  a2 x  a1 x  a0 is called a cubic

3 2

function.
Example 5.1
Consider a third-degree polynomial function
y  P3  x   a3 x 3  a2 x 2  a1 x  a0

and set a3  1, a2  a1  a0  0.

The resulting function is y  x3 .

Key features of y  x :
3

1) sign(y)=sign(x)

2) The curve reaches   very

rapidly

3) y=0 only if x=0, at one point

only
 Example 5.2
Setting a3  1 and a2  6 in the third-degree polynomial function results in y  x 3  6x 2.

Key features of y  x 3  6x 2 :

1) When x>0, the graph of y  x 3  6x

3 2

lies above the graph of y  x

2) When x<0, there are two opposing

2
effects: 6x is pushing the curve up,
3
while x (negative) is pushing the
curve down

3) The effect of x 3 starts dominating for

large negative x

4) There are two turning points

In economics we often deal with opposing effects

 Example 5.3
Setting a3  1, a2  6 and a1  15 results in y  x  6 x  15 x.
3 2

Key features of y  x  6 x  15 x :
3 2

1) The addition of 15x eliminates

the two turning points

2) When x<0, the downward effect

of 15x helps bring the curve
down so it never increases in x
 Example 5.4
Setting a3  1, a2  6, a1  3 and a0  10 results in y   x  6 x  3 x  10.
3 2

Key features of y   x  6 x  3 x  10:

3 2

1) Two turning points

2) The constant term a0  10 defines the

vertical intercept

3) Changing the value of the intercept

results in a vertical shift of the curve
 5.3 Graphical Solution of
Cubic Equations
Consider solving the equation  x  6 x  3 x  10  0.
3 2

1) Apply a formula (TOO complicated)

2) Guess factoring (HOW?)
3) Use graphical solution Graphical solution

1) See where the graph crosses the horizontal

axis to find the roots: x=-5, x=-2, x=1.

2) This method will not work if we make a

mistake with the domain of x: e.g. consider x>2

3) Iterative methods employed by computer

programs are based on the graphical solution
idea
A Cubic Equation with a Single Root
Cubic Equations: a Boundary Case
1) The curve is just
touching the horizontal
axis at one point x=-3,
so we say it is tangent
to the axis at that point.

2) Factoring out this

equation results in
x 3  4 x 2  3x  18   x  2  x  3
2

3) x=-3 is called a repeated

root
 General Polynomial Equations
Definition. An equation of the form Pn  x   an x n  an 1 x n 1  ...  a1 x  a0  0
is called a polynomial equation of degree n.

It can be shown that a polynomial equation of degree n has n roots, however, not all of
these roots are necessarily real.
 5.4 Application of the
Cubic Function in Economics
Short-run total cost functions are more realistically represented by the cubic functions
compared to quadratic or linear ones.

Consider TC  2q 3  15q 2  50q  50

1) Costs rise rapidly with output when

you produce either too much
(q>3.5), or too little (q<1.5)

2) The range of output 1.5<q<3.5 is

where this firm will most likely
decide to produce
5.5 The Rectangular Hyperbola
1
Consider a function y  .
x

This is a particular case of a

rectangular hyperbola.
1
Key properties of y  :
x
1) y and x vary inversely

2) In case x=0, y is not defined

3) The rectangular area defined

by the axes and a point on the
hyperbola has the same area
irrespectively of the position
of K
5.6 Limits and Continuity
1
Consider computing y  for increasingly large
x

values of x: e.g. x=1000, x=10000, x=1000000000...

Clearly, the corresponding value of y is going to be

getting increasingly smaller.

We say in this case that as x approaches plus

infinity, y approaches a limiting value, or limit, of
zero.

Notation: lim y  0
x  
 Asymptote
1
Consider what happens to y 
x
when x  .
It is easy to see that xlim y0
 
Definition. A curve is said to be asymptotic
to the x-axis if lim y  0.
x  

Definition. A curve is said to be asymptotic

to the y-axis if xlim y  
0 

Notation: x  0  means “x is approaching

zero from the right or from the left.”

1
The hyperbola y  has both x- and y-axes as its
x

horizontal and vertical asymptotes, respectively.

 Rectangular Hyperbola: General Form
c
Definition. A function of the form y   a where a,b,c are parameters, is called a
xb
c
Key features of y  a:
general-form rectangular hyperbola.
xb
1) The line y=3 is a horizontal
asymptote since
5
lim 33
x   x2

2) The line x=2 is a vertical

asymptote since
5
lim  3  
x 2 x2

3) The parameter c is equal to the

area defined by the asymptotes
and ANY point on the rectangular
hyperbola
 5.7 Rectangular Hyperbola:
Application in Economics
Consider a demand function described by a rectangular hyperbola:

15
p
qD
15
Key features of p  q D :

1) Consumers are never satiated with the good: lim qD  

p 0

2) Consumers buy the good no matter how expensive it is: as p   , q D

0

3) Total expenditure on that good is constant regardless of the price:

 15 
qD 
 qD 
  15
 
Rectangular Hyperbola: an Illustration
Variant of the Basic Version
Satiation property can be included by
making the demand curve intersect
the q-axis.

Total expenditure is no longer

constant:

pq D  15  2q D

“No matter what the price” property

can be modified by making the
hyperbola intersect the p-axis as well.
5.8 The Circle and the Ellipse
Consider an equation x  y  9.
2 2

This equation is describing an implicit

function y(x).

In general, implicit functions cannot

always be made explicit, i.e. put in the
form y=f(x).

However, in this case we can do it:

y   9  x2
 A Circle with Specific Center
Consider a circle of radius r with the center at a specific point (a,b).

In this case the circle will be described by the following equation:

 x  a  2   y  b 2  r 2

Example 5.7 Setting a=1, b=2, r=3 results in  x  1 2   y  2 2  9

Ellipse
The circle equation x  y  9 can be
2 2

modified to describe an ellipse:

x 2  y 2  xy  9

Definition. A curve described by the

equation
x 2  axy  y 2  c 2
where -2<a<2, is called an ellipse.
 5.9 Circle and Ellipse:
Application in Economics
Consider an economy that in the short run has fixed stocks of labor, capital, and other
production factors. This economy produces only two goods, X and Y.

Definition. A curve Y(X) where Y is the maximum amount of good Y that can be produced
given a specific amount of good X, is called a production possibilities curve.

Production possibilities curves are often conveniently described by an ellipse:

1) Points on the PPC are called efficient

production plans

2) Production plans inside the area bounded

by the PPC are called feasible production
plans
 5.10 Inequalities
The following rules are important regarding the inequalities:

Rule 5.1 When multiplying both sides of an inequality by a negative constant, the
direction of the inequality is reversed:
2  1  5  10  1

Rule 5.2 When inverting an inequality, the following rule applies:

1 1
 A B , A B  0

AB
 1  1 , A B  0
 A B

Raising both sides of an inequality into power does not obey any simple rule and should
be examined on a case-by-case basis.
 5.11 Graphical Solution of Inequalities
Example 5.20 Find values of x for which x  x  2 .
2

Rearranging the inequality to read x  x  2  0, we reduce the problem to finding

2

those intervals of x where the parabola’s branches lie above the x-axis:

2
1) Coefficient with x is positive,
so the branches are looking
upwards

2) The equation x  x  2  0
2

has two real roots: x=-2 and x=1

3) As a result, the parabola crosses

the x-axis at the roots, and the
left-hand-side of the inequality
will be positive to the left and
to the right of the roots.
 Strong and Weak Inequality
Definition. An inequality when the right-hand side can never be equal to the left-hand
side is called a strong inequality.

Definition. An inequality when the right-hand side can be equal to the left-hand side is
called a weak inequality.

Strong inequality example: x5

Weak inequality example: x5
 5.12 Inequalities:
Consumption Function
Consider the following relationship between income Y and consumption Ĉ:

ˆ  aY  b
C
where a and b are some positive parameters.

Definition. An increase in consumption due to one additional dollar (won, euro ...) is
called marginal propensity to consume, denoted as MPC.

It is straightforward to verify that in case of the linear consumption function above the
MPC is equal to parameter a.

Definition. The average amount of money spent on one unit of consumption is called
average propensity to consume, denoted as APC.
Cˆ
The definition above implies APC 
Y
 APC and MPC
Let us show that APC is always strictly greater than MPC.

Cˆ aY  b b
Indeed, by definition of APC, APC   a
Y Y Y
1) The graph of APC is a
rectangular
Consider the difference between MPC and APC: hyperbola
 b b
MPC  APC  a   a      0 2) The MPC line is a
 Y Y
horizontal asymptote
to APC
which implies that MPC is always strictly less than APC.
 Consumer Budget Constraint
Consider a consumer whose (monthly) income is equal to B.

If consumer buys X units of good X at a price pX , his expenditure on good X will be

equal to p X X.

In the same fashion, this consumer will spend pY Y on good Y.

We assume this consumer’s total expenditure p X X  pY Y never exceeds his income B:

p X X  pY Y  B
Definition. The weak inequality of the form above is called consumer budget
constraint.

Rational consumers spend all of their income, so p X X  pY Y  B .

In case consumers are not rational, they spend less than their incomes: p X X  pY Y  B
 Budget Constraint:
Graphical Representation
Consider the following budget:
2 X  5Y  100
Rearranging, we obtain:
100 2
Y  X  20  0.4 X
5 5
Definition. The line Y  20  0.4 X is
called a budget line.

Definition. The vertical intercept of

a budget line is called real income in
terms of good Y (in case good Y is
on the vertical axis).
pX
Definition. The ratio is called the
pY
opportunity cost of X in terms of Y.