15 11 2010 Curs

Mathematics for Economists and Social Sciences
Cristian Necul aescu

(Cristian Necul aescu) Academy of Economic Studies, room 2625, Calea Doroban Ti nr.
11-13, sector 1, Bucure Sti, Romnia
E-mail address, Cristian Necul aescu: math.fabiz.b.09.10@gmail.com
Dedicated to the memory of my Teachers and Professors: Dan Jebeleanu, Gheorghe Pntea, Aristide Halanay and Stefan
Mirica.
2000 Mathematics Subject Classication. Primary 05C38, 15A15; Secondary 05A15, 15A18
The Author thanks V. Exalted.
Abstract. Replace this text with your own abstract.
Contents
Part 1. Calculus 1
Chapter 1. Innite series 3
1.1. Introduction 3
1.2. Special cases 6
1.3. Convergence Tests for positive series 9
1.4. Convergence tests for general series 11
1.5. Convergence tests for alternating series 12
1.6. Some formulas and exercises 12
1.7. A Macroeconomical Example 12
1.8. Power Series 13
1.9. Taylors expansions 14
Chapter 2. Functions of several variables (2 lectures) 17
2.1. Introduction 17
2.2. Limits of a function at a point 19
2.3. Continuity 20
2.4. Derivatives 22
2.5. Higher order derivatives 25
2.6. Further results about dierentiable functions 26
2.7. Implicit functions 31
2.8. Taylor Polynomials 32
2.9. Applications in Economics 33
2.10. Extreme points 36
2.11. Unconstrained Local Optimization 38
2.12. Unconstrained optimization. Approximating functions by Least Square Method. 40
2.13. Constrained Optimization 44
Chapter 3. Ordinary dierential equations (1/2 lecture) 53
3.1. Classical elementary types of EODEs 54
3.2. More elaborate examples 56
3.3. Bernoulli equations 58
3.4. Change of variables in an EODE 60
3.5. Connections between EODE and Functional Equations 60
3.6. Connections with Dierence Equations 63
Chapter 4. Qualitative Results for EODE 65
4.1. Existence 65
4.2. Unicity 66
iii
iv Cristian Necul aescu
4.3. Global aspects 66
4.4. Solutions as functions with respect to the initial values and parameters 66
Chapter 5. Finite dierence equations (1/2 lecture) 71
Chapter 6. Improper integrals. Euler functions: Gama, Beta 73
Chapter 7. Applications of Calculus to economic modelling 75
Part 2. Probabilities (7 lectures) 77
Chapter 8. Events. Probability: classic and axiomatic denition. Field of events. Properties of
probability. 79
Chapter 9. Conditional probability. Probability of a union/intersection of events. Total probability
formula. Bayes formulas. Classical probability schemes. 81
Chapter 10. Denition of a random variable. Operations with random variables. Examples on the
discrete case. Cumulative distribution function: denition, properties. Functions of
random variables. 83
Chapter 11. Continuous random variables. Probability density function: denition, properties. 85
Chapter 12. Moments of random variables. Expectation and variance. Properties. Chebyshev
inequality. 87
Chapter 13. Discrete bivariate random variables: marginal distributions, moments, conditional
distributions, covariance, correlation. 89
Chapter 14. Discrete and classical distributions. Applications of probability theory to economic
modelling. 91
Chapter 15. Convexity 93
Appendix A. * High School Revision 95
A.1. Sets 95
A.2. Usual Number Sets. Countability 98
A.3. Minorants, majorants 101
A.4. Relations 102
A.5. Functions 103
A.6. Binary Logic 107
A.7. Database applications for Logic, Sets, Relations and functions 110
A.8. Sequences 112
A.9. Symbols 117
Appendix B. Topology 119
Appendix C. Functions of one variable 123
Appendix. Bibliography 125
Part 1
Calculus
CHAPTER 1
Innite series
"Divergent series are the invention of the devil,
and it is shameful to base on them
any demonstration whatsoever." Abel, 1828
The starting point for the main body of these Lecture Notes is the level of knowledge given in Mathe-
matics by "High School graduate, with the maximum concentration on Mathematics". Broadly speaking,
this means all "Precalculus", "Geometry and Trigonometry", "Analytic Geometry", "Linear Algebra
linear systems, matrices, determinants", "Abstract Algebra groups, elds, rings", "Calculus limits,
continuity, derivability, graphs of functions", "Calculus elementary integrals". In the Appendix it may
be found a brief review of some of these topics; still, you may nd useful to keep close appropriate high
school texts. During the lectures and seminars, each of you is welcomed to ask questions and to comment.
As Murphy says, "Science advances when the student asks and the teacher doesnt know the answer".
1.1. Introduction
Consider a sequence of real numbers denoted (c
a
)
aN
.
1.1.1. Denition (Formal). The symbol
o
a=1
c
a
1c)
= c
1
+c
2
+ +c
a
+ is called "series" or "real
series" or "real innite series";
the number c
a
is called "the [general] term of the series";
the number o
a
dened by o
a
= c
1
+c
2
+c
3
+ +c
a
=
a
I=1
c
I is called "the :
tI
order partial sum
of the series";
the sequence (o
a
)
aN
is called "the sequence of partial sums of the series".

1.1.2. Denition (Informal). A series is an "innite summation" or (more precise) a "discrete innite
summation" or a "countable innite summation".
1.1.3. Remark. Series as an abstract mathematical model may be found in "Macroeconomics" rep-
resenting "discrete dynamics" or "indenite discrete nancial ows"; a typical situation describes the
(expected) present value of a future accumulation process in which the accumulation will take place at an
indenite number of future moments (e.g. dividends, insurance). The detailed study of these situations
is beyond the purpose of the present text the interested reader may consult titles like [17] or [18]. You
may see at the end of this chapter a little Macroeconomic model.
1.1.4. Example. A series:
o
a=0
_
3
2
a
5
a
_
; The sign "
" comes from the capital greek letter "sigma".

The general term: c
a
= 3
2
a
5
a
.
3
4
!!! Pay attention at the rst term (which is not always 0 or 1), located at the bottom of the summation
symbol:
o
a= !!!
rst term
c
a
The sequence of partial sums of the series: o
a
=
a
I=0
c
I
=
a
I=0
3
2
I
5
I
; in this particular case we may
obtain an explicit form for o
a
:
a
I=0
3
2
I
5
I
= 3
a
I=0
_
2
5
_
I
= 3
1
_
2
5
_
a+1
1
2
5
= 5
_
1
_
2
5
_
a+1
_
= o
a
.
It may be seen that lim
ao
o
a
= 5.
1.1.5. Remark. Between the sequences (c
a
)
aN
and (o
a
)
aN
there are certain recurrence relations:
o
a+1
= o
a
+c
a+1
(or c
a+1
= o
a+1
o
a
), \: N
+
.
1.1.6. Denition (convergence/divergence). The symbol
o
a=1
c
a
is called "convergent" (we say "it
converges") if the sequence (o
a
)
aN
is convergent (converges); only in this case is the value o = lim
ao
o
a
called "the sum of the series";
the sequence (o
a
o)
aN
(the dierence between the partial sum and the sum) is "the remainder
sequence" and it vanishes (it tends toward 0);
o
a=1
c
a
is divergent (diverges) if (o
a
)
aN
is divergent (diverges).
1.1.7. Example. For the previous example, since lim
ao
o
a
= 5 we conclude that the series
o
a=0
_
3
2
a
5
a
_
converges and the sum is 5 (the value of the limit). We write
o
a=0
_
3
2
a
5
a
_
= 5.
1.1.8. Theorem. [Divergence test]
lim
ao
c
a
,= 0 =

aN
c
a
diverges.
IF the general term does not tend towards zero,
THEN the series diverges.
Proof. By contradiction: the statement (c
a
, 0 =

aN
c
a
diverges) is logically equivalent with the
statement (

aN
c
a
converges = c
a
0).
aN
c
a
converges
from denition
= o = lim
ao
o
a
= c
a
= o
a
o
a1

ao
o o = 0.
The behavior of a series (convergent or divergent) is a qualitative information, called "the nature
of the series". When convergent we may also talk about the sum of the series, which is quantitative
information [conditioned by the qualitative information]. A dierence between the two types of information
(quantitative and qualitative) is that usually the algorithms embedded in software products are built upon
the claim that the qualitative part is satised and so the usage of some software products for situations
where the qualitative part is not satised may lead to unexpected results. As a general rule, it is advisable
to separate the qualitative and quantitative studies.
5
1.1.9. Remark. There are some signicant dierences between nite and innite addition (summation);
some of them:
(1) While nite addition always exist, this is not the case with innite addition.
(2) While nite addition is commutative, the rearrangement of the terms of an innite addition may
alter both the qualitative and the quantitative results.
(3) While nite addition is asociative, careless grouping and regrouping of the terms of an innite
addition is false and may lead to unexpected results.
1.1.10. Example. Consider
o
a=0
(1)
a
. The series diverges because the general term doesnt tend
towards zero. Still the following false line of reasoning "nds the sum of the series":
o = 1 1 + 1 1 + 1 1 + 1 + =
o 1 = 1 + 1 1 + 1 + =
o 1 = (1 1 + 1 1 + 1 + ) = o =
= 2o = 1 = o =
1
2
.
The "result" is false and the unique mistake is "the notation" o =
o
a=0
(1)
a
which implicitly and falsely
assumes that a number o exists and is equal with the abstract symbol
o
a=0
(1)
a
.
1.1.11. Remark. Given a series, the inclusion/exclusion of a nite number of terms doesnt change the
nature of the series [Because a nite number of additions/substractions does not modify the existence of
a limit] [the series

aN
c
a
and

aN\0,1, ,I
c
a
have the same nature]. Still, it may change the value of the
sum, when it exists.
1.1.12. Remark. While nite addition is associative, innite addition is not always associative. This
means that innite grouping of the added objects sometimes changes the nature of the innite summation.
Example: "0 = 1". False line of reasoning:
1 = 1 + 0 + 0 + + 0 + =
= 1 + (1 + 1) + (1 + 1) + (1 + 1) + =
= (1 1) + (1 1) + + (1 1) + =
= 0.
[The line of reasoning again makes the (hidden) false assumption that there is a number o equal to the
abstract symbol
o
a=0
(1)
a
and falsely assumes that rearrangements are true for divergent series]
1.1.13. Remark. When convergent, the sum of a series is unique [because the limit of a sequence is
unique].
1.1.14. Remark (Algebraic operations with series, Thms. 3.47, 3.50, 3.51 [19]). When the series

aN
c
a
and

aN
/
a
are both convergent and c R, the series

aN
(c
a
+/
a
) and

aN
(cc
a
) are also convergent and
6
moreover, the following relations between the sums of series are valid:
aN
(c
a
+/
a
) =

aN
c
a
+

aN
/
a
.
aN
(cc
a
) = c

aN
c
a
.
1.1.15. Remark. In this result, the qualitative part is: "
aN
c
a
and

aN
/
a
are both convergent =
aN
(c
a
+/
a
) and

aN
(cc
a
) are also convergent" while the quantitative part is:
aN
(c
a
+/
a
) =

aN
c
a
+

aN
/
a
.
aN
(cc
a
) = c

aN
c
a
.
1.1.16. Remark. The proof is based on translating the convergences in terms of "denitions".
1.2. Special cases
1.2.1. Arithmetic sequence (arithmetic progression). is a sequence of numbers so that the
dierence between any two consecutive terms is constant (and is called "common dierence") (Alternative
characterization: For any three consecutive terms, the middle term is the arithmetic mean of boundary
terms)
c
a
= c
1
+ (: 1) d,
Arithmetic series:
a
I=1
c
I
=
a
I=1
(c
1
+ (/ 1) d) = :c
1
+
:(: 1)
2
d
[Used in nance, simple interest formulas]
1.2.2. Geometric sequence (geometric progression). is a sequence of numbers such that the
ratio between two consecutive terms is constant (Alternative characterization: For any three consecutive
terms, the middle term is the geometric mean of the extreme terms).
c
a
= c
1
:
a1
, : ,= 1.
Geometric Series:
a
I=1
c
I
=
a
I=1
c
1
:
I1
= c
1
1 :
a
1 :
.
aN
c
a
=
_
convergent, c (1. 1)
divergent, c R (1. 1)
In fact o
a
= 1 +c +c
2
+c
3
+ +c
a
=
_
_
_
1 c
a+1
1 c
. c ,= 1
:. c = 1.
So lim
ao
o
a
=
_
1
1 c
. c (1. 1)
does not exist or innite in rest.
[Used in Finance, compounded interest formulas]
1.2.3. Harmonic sequence (harmonic progression). is a sequence of numbers such that the
sequence of reciprocals is an arithmetic sequence:
c
a
=
1
c
1
+ (: 1) d
(such that any denominator is nonzero)
Harmonic series:
7
a
I=1
c
I
=
a
I=1
1
c
1
+ (/ 1) d
(no elementary formula available)
Interpretation: Given : (ordered) observations for a certain measurement (such that the observations
are comparable), say that an observation is a "record" if it is the greatest of all (up to it). Then the
expected number of records is 1 +
1
2
+
1
3
+ +
1
:
.
1.2.4. The number c. c =
o
a=0
1
:!
1.2.1. Theorem (Thm. 3.31, [19]). lim
ao
_
1 +
1
:
_
a
= c.
1.2.2. Theorem (Thm. 3.32, [19]). The number c is irrational.
1.2.3. Example (Achille and the Turtle (Zenon paradox); also see Section 1.3 [4]). Achilles (A) and
the Turtle (T) race together. It is assumed that Achilles speed is much bigger than the Turtles speed, so
common sense tells that even if Achille gives the Turtle an initial advantage, he will still win the race.
The following line of reasoning has been known since Ancient Greece as the "Zenon paradox":
Denote As speed
and Ts speed
T
(with

T
). Consider the advance given by A in the form of
distance o
0
. A starts the race only when T covers o
0
. Then A starts and until he also covers o
0
T already
covers another distance called o
1
. In the time needed by A to cover the new distance o
1
, T covers a new
distance o
2
, and so on. "Common sense" says that the distances o
a
even if they are increasingly smaller,
they are always strictly positive. This is interpreted in the following manner: "Achilles will never outrun
the Turtle, because the Turtle will always have a strictly positive distance in advance".
Ts total advantage is (the geometric series):
o
a=0
o
0
_
_
a
= lim
ao
o
0
1
_
_
a+1
1

T
=
o
0
T
[Al-
though the Turtles total advantage is an innite sum of strictly positive distances, the total value of the
sum is nite]
The time Achille needs to cover this distance is
o
0
T
which is equal with (the geometric series)
o
a=0
o
0
_
a
.
8
1.2.4. Example (Telescoping/collapsing series). Consider the series
o
a=1
1
:(: + 1)
. It is convergent and
is a "telescopic series" in the sense that the sum may be calculated "elementary", by successive cancellation:
1
/ (/ + 1)
=
1
/

1
/ + 1
. so that
a
I=1
1
/ (/ + 1)
=
a
I=1
_
1
/

1
/ + 1
_
=
=
1
1

1
2
+
1
2
1
3
+
+
+
+
1
:
1
: + 1
= 1
1
: + 1
= o
a
= 1
1
: + 1
.
= lim
ao
o
a
(so the series is convergent)
and lim
ao
o
a
= 1 (so the sum is 1)
CAUTION: The sum
a
I=1
_
1
/

1
/ + 1
_
has a nite number of terms so it is not wrong to write
a
I=1
1
/

a
I=1
1
/ + 1
.On the contrary, in the situation
o
a=1
_
1
:

1
: + 1
_
, because of the innite number of terms, it
is wrong to write
o
a=1
1
:

o
a=1
1
: + 1
; both series are divergent so that actually we have:
o
a=1
_
1
:

1
: + 1
_
" = "
o
a=1
1
:

o
a=1
1
: + 1
== 1" = ".
1.2.5. Example.
o
a=1
__
: + 2 2
_
: + 1 +
_
:
_
o
a=1
__
: + 2 2
_
: + 1 +
_
:
_
=
=
o
a=1
__
: + 2
_
: + 1 +
_
:
_
: + 1
_
=
= lim
ao
a
I=1
_
_
/ + 2
_
/ + 1 +
_
/
_
/ + 1
_
=
= lim
ao
__
: + 2
_
2 + 1
_
: + 1
_
= 1
_
2
1.2.6. Exercise. For the following telescoping series, establish their nature and if convergent nd the
sum:
(1)
o
a=1
1
_
: +
_
: + 1
=
9
(2)
o
a=1
1
:
2
+ 5: + 6
=
1
3
(3)
o
a=1
1
:
2
+ 4: + 3
=
5
12
(4)
o
a=1
ln
:
: + 1
(5)
o
a=1
3:
2
+: 1
:
2
2: + 3
1.2.5. Various series classications.
1.2.5.1. With respect to the convergence/divergence (and the type of divergence) of the sequence of
partial sums:
convergent
series divergent sum equal to
sum does not exist

1.2.5.2. With respect to the type of the general term:
general (c
a
R)
series positive (c
a
_ 0)
alternate (c
a
= (1)
a
/
a
, /
a
_ 0)
or c
a
c
a+1
< 0
1.3. Convergence Tests for positive series
The general term for positive series will be positive (c
a
_ 0) and strictly positive (c
a
0) only when
required by the involved operations. The sum of these series always exists, but it may be innite (+).
1.3.1. Theorem (Thm. 1.48, [4]). For a positive terms series, changing the order of the terms does
not change the nature of the series or the value of the sum.
Proof. Consider
o
a=1
c
a
with c
a
0 for all : and
o
a=1
/
a
a rearrangement of the rst series (that is,
the same terms in dierent order).
The sequence of the partial sums o
o
a
=
a
I=1
c
a
is an increasing sequence (because o
o
a+1
= o
o
a
+c
a+1
o
o
a
)
so it has a limit (which may be innite, denote it by o
o
).
The sequence of the partial sums o
b
a
=
a
I=1
/
a
is also an increasing sequence with limit o
b
.
Consider an arbitrary xed index :. Since /
1
, , /
a
is a rearrangement of the terms c
a
, there is j
a
the biggest index for which /
I
= c
a
k
(j
a
= max :
1
. . :
I
). Then o
b
a
_ o
o
j
n
_ o
o
so passing to limit for
: it follows that o
b
_ o
o
. A similar argument leads to o
o
_ o
b
so in fact o
o
= o
b
.
10
1.3.2. Theorem (First Comparison Test; Thm. 1.49, [4]). Consider two series with positive terms
aN
c
a
and

aN
/
a
so that there is an index :
0
N for which 0 _ c
a
_ /
a
, \: _ :
0
.
Then:
(1) If

aN
/
a
converges then

aN
c
a
converges;
(2) If

c
a
diverges then

aN
/
a
diverges.
Proof. Since the nature of the series does not change when substracting a nite number of terms,
it may be assumed that the inequality 0 _ c
a
_ /
a
is valid for all :. Then between the partial sums
sequences (which are increasing sequences for the present case) there is the relation o
o
a
_ o
b
a
for all :
which means that when o
b
a
is bounded o
o
a
is bounded too, and when o
o
a
is unbounded o
b
a
is unbounded
too.
Exercise: For the series

aN
1
3
a
+ 2
use the inequality 3
a
+ 2 _ 3
a
=
1
3
a
+ 2
_
1
3
a
and the rst
comparison test to study the nature of the series.
Exercise: For the series

aN
1
_
:
use the inequality
_
: +
_
: = 2
_
: _
_
: +
_
: + 1 =
1
_
:
_
1
_
: +
_
: + 1
and the rst comparison test to study the nature of the series.
1.3.3. Theorem (Ratio Comparison Test; Thm. 1.55, [4]). Consider two series with positive terms
aN
c
a
and

aN
/
a
so that there is an index :
0
N for which
c
a+1
c
a
_
/
a+1
/
a
\: _ :
0
.
Then:
(1) If

aN
/
a
converges then

aN
c
a
also converges;
(2) If

aN
c
a
diverges then

aN
/
a
also diverges.
Proof. Again consider that
c
a+1
c
a
_
/
a+1
/
a
for all :. By multiplying all the inequalities from : = 0 up
to : = / 1 it follows that
c
I
c
0
_
/
I
/
0
so that c
I
_
c
0
/
0
/
I
for all / and The Comparison Test may be applied
to conclude the proof.
1.3.4. Theorem (Limit Comparison Test; Thm. 1.52 [4]). If lim
ao
o
n
b
n
= ` (0. ) then the series
aN
c
a
and

aN
/
a
have both the same nature.
1.3.5. Theorem (:th Root Test / Cauchys test, Thm. 1.65, [4]). For the series

aN
c
a
, c
a
0.
If lim
ao
n
_
c
a
= 1 (0. ), then:
(1) For 1 < 1 the series converges;
(2) For 1 1 the series diverges;
(3) For 1 = 1 the test is inconclusive.
1.3.6. Theorem (Ratio Test / DAlemberts test, Thm. 1.62, [4]). For the series

aN
c
a
, c
a
0.
11
If lim
ao
c
a+1
c
a
= 1 (0. ), then:
(1) For 1 < 1 the series converges;
(2) For 1 1 the series diverges;
(3) For 1 = 1 the test is inconclusive.
1.3.7. Theorem (Integral Test, Thm. 1.57 [4]). Consider a function c() : [1. ) R
+
continuous and
decreasing. Then the series

aN
c(:) converges if and only if the improper integral
_
o
1
c(r) dr converges.
1.3.8. Theorem (Cauchy Condensation Test, Thm. 2.3 [4]). The series

aN
c
a
, c
a
0 and

aN
2
a
c
2
n
1.3.9. Theorem. The jseries

aN
1
:
j
with j R is:
(1) Convergent if j 1.
(2) Divergent if j _ 1.
1.3.10. Theorem (Schlmilch, Thm. 2.4 [4]). If c
a
0 is eventually decreasing and the sequence :
I
is strictly increasing such that
_
:
I+1
:
I
:
I
:
I1
_
I
is a bounded sequence, then the series

aN
c
a
, c
a
0 and
aN
(:
I+1
:
I
) c
a
k
1.3.11. Theorem (Raabes Test, Thm. 11, [12]). For a series

aN
c
a
with positive terms (c
a
0),
suppose the limit lim
ao
:
_
c
a
c
a+1
1
_
exist and is equal with 1. Then:
(1) If 1 1 then the series converges;
(2) If 1 < 1 then the series diverges.
(3) If 1 = 1 then the test is inconclusive.
1.4. Convergence tests for general series
1.4.1. Denition. The series

aN
c
a
is called absolute convergent when

aN
[c
a
[ is convergent (the series
of absolute values).
1.4.2. Remark. For a general series (with c
a
R) the series of absolute values is a positive terms
series, so the previous section applies to it.

aN
c
a
is called conditionally convergent when it is convergent but not
absolute convergent.
1.4.4. Theorem. If a series converges absolute then it converges (in the ordinary sense).
Proof. Consider an absolute convergent series

aN
c
a
. Then

aN
[c
a
[ is convergent and:
0 _ c
a
+ [c
a
[ _ 2 [c
a
[ = the series

aN
(c
a
+[c
a
[) is with positive terms and is dominated by a
convergent series so by The Comparison Test it is convergent.
12
Then because the series

aN
(c
a
+[c
a
[) and

aN
[c
a
[ are convergent, so it is their dierence:

aN
(c
a
+[c
a
[)
aN
[c
a
[ =

aN
(c
a
+[c
a
[ [c
a
[) =

aN
c
a
.
1.4.5. Theorem (Abel). If

aN
c
a
converges and (/
a
)
aN
is a bounded monotone sequence then

aN
c
a
/
a
converges.
1.4.6. Theorem (Dirichlet). If

aN
c
a
has bounded partial sums and (/
a
)
aN
is monotone and lim
ao
/
a
=
0, then

aN
c
a
/
a
converges.
1.5. Convergence tests for alternating series

aN
c
a
is called alternating when c
a
= (1)
a
/
a
, /
a
0.
1.5.2. Theorem (Alternating series test / Leibniz, Thm. 1.75, [4]). If:
(1) :
0
N, \: _ :
0
, /
a+1
_ /
a
.
(2) lim
ao
/
a
= 0.
Then the alternating series

aN
(1)
a
/
a
, /
a
0 converges.
1.6. Some formulas and exercises
a
I=1
1 = :
a
I=1
/ =
:(: + 1)
2
a
I=1
/
2
=
:(: + 1) (2: + 1)
6
a
I=1
/
3
=
_
:(: + 1)
2
_
2
1 +r +r
2
+ +r
a
=
_
_
_
1 r
a+1
1 r
. r ,= 1
: + 1. r = 1
1 +r +r
2
+ +r
a
+ = lim
ao
(1 +r +r
2
+ +r
a
) =
_
1
1 r
. r (1. 1)
, or otherwise
o
a=1
2
a
+ 2 3
a
+ 5
a
3
a
+ 5
a
1.7. A Macroeconomical Example
Optional Macroeconomics Topic for Series: Chapter 3, Doepke, Lehnert, Sellgren MACROECO-
NOMICS, 1999.
13
1.7.1. Example. A typical Macroeconomics model, called "The households maximization problem",
may look like this:
max
c
t
1
t=1
o
t=1
,
t1
n(c
t
) .
subject to:
o
t=1
1 (
t
c
t
)
(1 +1)
t1
= 0.
It is beyond the goal of the present text to study such models. Here we just mention the economical
interpretations expressed by means of series:
t N
+
means "(discrete) time" ( 0 means "now", 1 means "a year from now" and so on); the
measurement unit for time may be "year" or a certain unspecied "period of time".
the discussion is about a "household", and not an individual; one dierence is that while an
individual lives a nite number of years, the household may be considered "to live forever" (an
indenite number of years).
the household uses a single commodity (say bananas) measured in quantities (kilos of bananas)
both for income and consumption;

t
is "the households income for period t" (kilos of bananas) (exogeneous)
c
t
is "the households consumption for the period t" (kilos of bananas)
1 is the price of one kilo of bananas (doesnt change over time :) );
the household has access to a "bananas market", where it may buy (at price 1), sell (at price
1) and invest money to buy bonds on the bananas market, which bear interest 1 (1 USD
invested gives the next period (1 +1) USD);
n() is an increasing function of consumption, called "the households consumption utility
function"
, [0. 1] is "the households discount factor" and it is a way to express how much the household
cares for the current consumption as oposed to future consumption
, = 0 means that the household only cares about current consumption;
, = 1 means that the household cares equally about current indenite future consumption;
, = 0.95 (a typical value) should mean that the household cares a little more about the
present than the future consumption.
With the above conventions, the initial problem says: "nd the maximum present utility and the
consumption strategy to attain this, while keeping equal the present values of all future income and all
future consumption".
1.8. Power Series
1.8.1. Denition. Given a sequence of real numbers (c
a
)
aN
and c R the series
o
a=0
c
a
(r c)
a
is a
power series around c and the numbers c
a
are the coecients of the power series.
1.8.2. Theorem. For the power series
o
a=0
c
a
(r c)
a
put c = lim
ao
n
_
[c
a
[ (if it exists) and 1 =
1
c
.
Then the power series converges if [r c[ < 1 and diverges if [r c[ 1 (1 is called the radius of
convergence). A similar result is valid when c = lim
ao
[c
a+1
[
[c
a
[
(if it exists) and 1 =
1
c
).
Proof. Apply the root test (or the ratio test).
14
1.8.3. Remark. For the values r = c 1 and r = c +1 there is no way to decide in advance so they
have to be studied separately for each case. The interval [[c 1. c +1][ is called "convergence domain"
and for each case it has to be decided if it is left/right open/closed.
1.9. Taylors expansions
1.9.1. Theorem (Taylor, Thm 5.15, [19]). Consider , () : [c. /] R and : N
+
.
If:
(1) The derivatives up to :th order exist and are continuous on [c. /] (for c and / consider lateral
derivatives),
(2) The (: + 1)th derivative exist on (c. /),
(3) c < , [c. /]
(4) The polynomial 1 () is dened by: 1 (r) =
a
I=0
,
(I)
(c)
/!
(r c)
I
[1 () is called The :th order
Taylor polynomial in c; 1 () coincides with , () in c, in the sense that 1
(I)
(c) = ,
(I)
(c),
\/ = 0. :].
Then: (c. ,) such that , (,) = 1 (,) +
,
(a+1)
()
(: + 1)!
(, c)
a+1
.
Proof. Consider the function q (r) = , (r) 1 (r)
, (,) 1 (,)
(, c)
a+1
(r c)
a+1
.
Then:
q
())
(r) = ,
())
(r) 1
())
(r)
, (,) 1 (,)
(, c)
a+1
(: + 1) :(: 1) (: , + 1) (r c)
a)
, \, = 0. :
q (c) = , (c) 1 (c)
, (,) 1 (,)
(, c)
a
(c c)
a
= 0.
q (,) = , (,) 1 (,)
, (,) 1 (,)
(, c)
a
(, c)
a
= 0.
q
())
(c) = ,
())
(c) 1
())
(c)
, (,) 1 (,)
(, c)
a
:(: 1) (: , + 1) (c c)
a)
= 0, \, = 0. :
q
(a+1)
(r) = ,
(a+1)
(r)
, (,) 1 (,)
(, c)
a+1
(: + 1)!.
From "The Mean Value Theorem" (TMVT) (for example Theorem 30.3 in [3]) for q () on [c. ,] there
is
1
(c. ,) such that q
t
(
1
) = 0.
From TMVT for q
t
() on [c.
1
] there is
2
(c.
1
) such that q
tt
(
2
) = 0.
From TMVT for q
(a)
() on [c.
a
] there is
a+1
(c.
a
) such that q
(a+1)
(
a+1
) = 0, meaning
,
(a+1)
(
a+1
) =
, (,) 1 (,)
(, c)
a+1
(: + 1)!.
For =
a+1
it follows , (,) = 1 (,) +
,
(a+1)
()
(: + 1)!
(, c)
a+1
.
15
1.9.2. Remark (Taylor Series). Suppose that the conditions in Taylors Theorem are satised for any
: N and that the remainder
,
(a+1)
()
(: + 1)!
(/)
a+1
converges to 0 as : (uniformly with respect to / in
[[c 1. c +1][. Then , (c +/) =
o
a=0
,
(a)
(c)
:!
/
a
, for / [[c 1. c +1][.
1.9.1. Some usual Taylor expansions. c
a
=
o
a=0
r
a
:!
, \r R
sin r =
o
a=0
(1)
a
(2: + 1)!
r
2a+1
, \r R
cos r =
o
a=0
(1)
a
(2:)!
r
2a
, \r R
c
a
=
o
a=0
ln
a
c
:!
r
a
, \r R
sinh r =
o
a=0
1
(2: + 1)!
r
2a+1
, \r R
cosh r =
o
a=0
1
(2:)!
r
2a
, \r R
(1 +r)
c
=
o
a=0
c(c 1) (c : + 1)
:!
r
a
, [r[ _ 1
_
1 +r = 1 +
1
2
r
1 1
2 4
r
2
+
1 1 3
2 4 6
r
3
1 1 3 5
2 4 6 8
r
4
+ , [r[ _ 1
3
_
1 +r = 1 +
1
3
r
1 2
3 6
r
2
+
1 2 5
3 6 9
r
3
1 2 5 8
3 6 9 12
r
4
+ , [r[ _ 1
ln (1 +r) =
o
a=0
(1)
a+1
:
r
a
, \r (1. 1]
1.9.3. Exercise.
o
a=1
: c
a
1.9.4. Example.
o
a=1
(:
3
+ 1) c
a
(: + 1)!
1.9.5. Solution.
o
a=1
(:
3
+ 1) c
a
(: + 1)!
=
o
a=1
(: + 1) (:
2
: + 1) c
a
(: + 1)!
=
=
o
a=1
(:
2
: + 1) c
a
:!
=
o
a=1
_
:c
a
(: 1)!

c
a
(: 1)!
+
c
a
:!
_
=
=
o
a=1
:c
a
(: 1)!

o
a=1
c
a
(: 1)!
+
o
a=1
c
a
:!
=
= c
o
1 +
o
a=1
:c
a
(: 1)!
c
o
a=1
c
a1
(: 1)!
=
= c
o
1 c c
o
+
o
a=1
(: 1 + 1) c
a
(: 1)!
=
= c
o
1 c c
o
+c +
o
a=2
(: 1 + 1) c
a
(: 1)!
=
16
= c
o
1 c c
o
+c +
o
a=2
_
(: 1) c
a
(: 1)!
+
c
a
(: 1)!
_
=
= c
o
1 c c
o
+c +c
2
o
a=2
c
a2
(: 2)!
+c
o
a=2
c
a1
(: 1)!
=
= c
o
1 c c
o
+c +c
2
c
o
+c (c
o
1) = c
o
1 +c
2
c
o
CHAPTER 2
Functions of several variables (2 lectures)
Recommended reviews/prerequisites:
From [3]:
Chapter 2 "OneVariable Calculus: Foundations"
Chapter 3: "OneVariable Calculus: Applications"
Chapter 4: "OneVariable Calculus: Chain Rule"
Chapter 5: "Exponents and Logarithms"
From [8]:
Chapter I: "Introduction to Analysis"
Chapter II: "Dierentiation of functions"
Chapter III: "The extrema of a function and the geometric applications of a derivative"
2.1. Introduction
[See also Chapters 12, 13, [3]] Vectorial functions with vectorial variable have the general form: , () :
1 R
a
R
n
. When : = 1, the function is a scalar one (with vectorial variable).
An usual interpretation of a function in Economics, as a production function, is:
: is the number of possible rawmaterials [or inputs].
R
a
is the set of all possible input bundles [quantities of rawmaterial].
1 is the set of all admissible/acceptable input bundles.
r 1 _ R
a
is the quantity of raw material.
: is the number of possible nite products.
R
n
is the set of all possible quantities of nite product.
, (r) R
n
is the quantity of nite product obtained from the input bundle r.
The notation , () is used to distinguish between the function itself and , (r) (which is an element
from codomain) and to suggest the number of relevant variables when studying the function. In [3] it
is suggested the notation r , (r), which is an alternative notation with the same role: to distinguish
between the function and some image.
The graph of the function is the set:
G(, ()) = G
)()
= (r. , (r)) ; r 1 R
a
R
n
Some function operations are operations inherited from the operations possible with codomain elements,
such as summation, multiplication with a scalar function and scalar product of two functions. Other
function operations are functionspecic, such as composition and limittaking.
2.1.1. Denition. For the functions , () : 1 R
a
1 R
n
, q () : 1 R
n
R
j
, the new function
obtained by composition is (q ,) () : 1 R
a
R
j
, dened by: (q ,) (r) = q (, (r)). This operation
is only possible when , (1) _ 1 (the range of , () is contained in the domain of q ()).
17
18
2.1.2. Denition. The function , () : 1 R
a
R
n
is called bounded (on the set 1) when , (1) is
bounded (as a set):
` 0. \r 1. |, (r)| _ `
(= the scalar function r |, (r)| is bounded).
2.1.3. Remark (Some important vectorial functions). All the following functions are considered on
corresponding appropriate algebraic structures (mostly linear spaces):
Linear functions (linear operators):
, () : R
a
R
n
. , (r) = r
( is a matrix and r is a column vector)
Bilinear functions:
, (. ) : R
a
R
n
R. , (r. ) = r
T
( is a matrix, r and are column vectors)

Quadratic functions:
, () : R
a
R. , (r) =
a
i=1
c
i)
r
i
r
)
= r
T
r.
Euclidian distance function:
d (. ) : R
a
R
a
R.
d (r. ) =
_
a
i=1
r
2
i
= |r| .
Euclidian scalar product:
. : R
a
R
a
R. r. =
a
i=1
r
i
i
(a particular form of quadratic function).
19
Graphs of functions:
CobbDouglas type:
4
x
2
0
y
2
4
0
0
2
z
4
, (r. ) =
_
r
z
y
0
-2
-4
-2
0
4
2
0
x
-2
-4
4
2
-4
2
4
, (r. ) =
3
_
r
2
-4
-2
x
-2
0
y
0
-2
-4
z
0
2
2
4
4
2
, (r. ) =
5
_
r
3
CES type:
0
0
0
-4
x y
-2
-2
-4
2
z
4
2
2
4
4
6
, (r. ) =
_
r
2
+
2
4
2
-2
-5
y x
4 0 2
0
-2
0
-4
5
z
-4
, (r. ) =
3
_
r
3
+ 2
3
4
2
0
0
z
-4
-2
4
x
2
0
y
2 4
, (r. ) = ln r + ln
-0.4
-4
-0.2
-2
x y
0
4
0.0
2 0
z
-2
0.2
-4
2
4
0.4
, (r. ) =
r
r
2
+
2
-3
-2
-4
-4
y
-2
z
x
0
0
4
4 2
2
3
, (r. ) =
r
_
r
2
+
2
-4
-4
y
-4
x
-2
-2
0 0
2
4
2
4
z
4
, (r. ) = r sin
1
2.2. Limits of a function at a point

For a function , () : 1 R
a
R
n
the discussion about limits has meaning only at accumulation
(limit) points of the domain 1.
Consider r
0
1
t
and a sequence (r
a
)
aN
such that:
1. r
a
1, \: N
2. r
a
,= r
0
, \: N
3. r
a
r
0
.
If the sequence (, (r
a
))
aN
is also convergent towards a value | (which may be an innite value), then
| is a limitpoint of , () at r
0
.
20
Denote by LIM
aa
0
, (r) = |; | is a limit point of , () at r
0
the set of all limit points of , () at r
0
.
Denote by liminf
aa
0
, (r) = inf LIM
aa
0
, (r) the lower limit of , () at r
0
and by limsup
aa
0
, (r) = sup LIM
aa
0
, (r)
the upper limit of , () at r
0
.
2.2.1. Denition. Consider , () : 1 R
a
R
n
and r
0
1
t
(a limit point of the domain). The
function , () has the limit | at point r
0
if:
\l 1 (|) ( in R
n
) . \ 1 (r
0
) ( in R
a
) . , (\ 1r
0
) _ l.
Notation lim
aa
0
, (r) = | [less ambiguous alternative notations are: lim
aa
0
a1
, (r) = | or lim
1aa
0
, (r) = |]
2.2.2. Remark (Equivalent denitions for the limit of the function).
With sequences: lim
aa
0
, (r) = | =
\r
I
r
0
. r
I
1r
0
. , (r
I
) |.
With o : lim
aa
0
, (r) = | =
\ 0. o
.
0. \r 1r
0
with |r r
0
| < o
.
. |, (r) || < .
2.2.3. Remark. When lim
aa
0
, (r), LIM
aa
0
, (r) =
_
lim
aa
0
, (r)
_
and liminf
aa
0
, (r) = limsup
aa
0
, (r) =
lim
aa
0
, (r).
2.3. Continuity
2.3.1. Denition. The function , () : 1 R
a
R
n
is called continuous at r
0
1 if
\l 1 (, (r
0
)) . \ 1 (r
0
) . , (\ 1) l.
[Equivalently] When r
0
1 is an isolated point of 1 the function is continuous at r
0
. When r
0
1
is not isolated continuity is the same as the following condition:
lim
aa
0
, (r) = , (r
0
) .
[The limit of the function at r
0
exist and is equal with the value of the function at r
0
]
2.3.2. Theorem (Thm. 13.4, [3]). Consider the functions , () . q () : 1 R
a
R
n
and the xed
scalar values c, ,. If , () and q () are both continuous on 1 then all the following new functions are also
continuous:
(, +q) (), (, q) (), ,. q (), |,| (), (c, +,q) ().
2.3.3. Theorem (Thm. 13.5, [3]). A vectorial function is continuous if and only if its components
(which are scalar functions) are continuous.
2.3.4. Theorem (Thm. 13.7, [3]). If two functions are continuous and their composition is possible,
then the composed function is also continuous.
21
2.3.5. Example. , (r. ) =
_
aj
a
2
+j
2
. (r. ) ,= (0. 0)
0. (r. ) = (0. 0)
is partial continuous at (0. 0) with respect to each
variable, in the sense that the following limits exists (also called iterated limits):
lim
a0
_
lim
j0
, (r. )
_
= 0 = , (0. 0)
and
lim
j0
_
lim
a0
, (r. )
_
= 0 = , (0. 0)
but fails to be continuous at (0. 0) because the limit
lim
(a,j)(0,0)
, (r. ) does not exist.
Proof. Choose the sequences r
a
=
c
:
,
a
=
/
:
, with c. / R
+
arbitrary xed. The sequences satisfy:
r
a
0 and
a
0, and also (r
a
.
a
) ,= (0. 0).
Then , (r
a
.
a
) =
c
:

/
:
_
c
:
_
2
+
_
/
:
_
2
=
c/
c
2
+/
2
which means that the value of the limit depends on c and
/ (by changing these values we obtain a dierent limit). So, lim
(a,j)(0,0)
, (r. ) does not exist.
-4
-0.4
-2
-0.2
z
0.0
x 0
4
2
0
0.2
y
-2
-4
2
4
0.4
, (r. ) =
aj
a
2
+j
2
2.3.6. Example. Partial continuity [Ex. 13.21, p. 295, [3]]: continuity with respect to a single
variable, all the other varibles being considered constant (in Economics: CETERIS PARIBUS). The
function , (r. ) = r sin
1
has limit at (0. 0) equal to 0 while the iterated limit lim

a0
_
lim
j0
, (r. )
_
fails to
exist.
The connection between continuity and partial continuity is not a simple one and only with supple-
mentary conditions may be said more about it.
2.3.7. Denition. Uniform continuity: , () : 1 R
a
R
n
is uniformly continuous on 1 if
\ 0. o
.
0. \r
0
1. .
\r 1. |r r
0
| < o
.
. |, (r) , (r
0
)| <
2.3.8. Remark. Continuity on compact sets:
22
(1) Any continuous function on a compact set is bounded on that set.
(2) Any continuous function on a compact set is uniformly continuous on that set.
(3) The image of a compact set through a continuous function is a compact set.
(4) A continuous scalar function on a compact set "reaches" its extreme values on that compact.
2.3.9. Denition. A set is connected if there is no pair of opened sets G
1
. G
2
with the properties:
G
1
' G
2
. G
1
,= O. G
2
,= O. ( G
1
) ( G
2
) = O.
(the set is not a disjoint union of opened sets; this is a generalization of the interval from the set R)
2.3.10. Remark. The image of a connected set through a continuous function is a connected set.
2.3.11. Denition. Functions which transforms connected sets in connected sets are called functions
with Darboux property (and they are not necesarily continuous)
2.4. Derivatives
A scalar function , () : 1 _ R R
n
is derivable at t
0
i:t (1) if the following limit exist and is nite:
lim
tt
0
, (t) , (t
0
)
t t
0
.
2.4.1. Example. The function , () : [2. 2] R
3
, dened by , (t) =
_
_
_
cos t
sin t
t
2:
_
_
_
(which represents a
helix, in parametric form) has the following graph:
-0.5
-1.0
-0.5
0.5
0.0
-0.5
x
0.0 -1.0
0.0
y
z
1.0
0.5
0.5
1.0
_
_
_
cos t
sin t
t
2:
_
_
_
For each t (2. 2), the derivative is ,
t
(t) =
_
_
_
sin t
cos t
1
2:
_
_
_
.
23
A vectorial function , () : 1 R
a
R
n
is dierentiable at r
0
i:t (1) if there is 1 (r
0
) ()
/(R
a
. R
n
) (a linear operator) such that
lim
aa
0
|, (r) , (r
0
) 1 (r
0
) (r r
0
)|
|r r
0
|
= 0.
The linear operator 1 (r
0
) () is called the (Frchet) dierential of the function , () at r
0
and is denoted
by ,
t
(r
0
) or d, (r
0
).
1 (r
0
) () : R
a
R
n
is represented as:
R
n
1
_
r
0
_
(dr)
.ct
= d,
_
r
0
_
dr =
_
_
_
_
(,
1
)
t
a
1
(r
0
) (,
1
)
t
a
2
(r
0
) (,
1
)
t
a
n
(r
0
)
(,
2
)
t
a
1
(r
0
) (,
2
)
t
a
2
(r
0
) (,
2
)
t
a
n
(r
0
)

(,
n
)
t
a
1
(r
0
) (,
n
)
t
a
2
(r
0
) (,
n
)
t
a
n
(r
0
)
_
_
_
_
. .
n lines and a columns
_
_
dr
1
.
.
.
dr
a
_
_
.
where the componenets of the matrix are called partial derivatives and they are dened as follows:
(,
i
)
t
a
j
_
r
0
_
=
J,
i
Jr
)
_
r
0
_
= lim
a
j
a
0
j
,
i
_
r
0
1
. . r
0
)1
. r
)
. r
0
)+1
. . r
a
_
,
i
_
r
0
1
. . r
0
)1
. r
0
)
. r
0
)+1
. . r
a
_
r
)
r
0
)
.
which is the derivative of the component ,
i
() viewed as a function of variable r
)
alone, and keeping all
the other variables constant and equal with the components from r
0
.
2.4.2. Example. Consider the function , (. ) : R
2
R
2
, dened by , (r. ) =
_
,
1
(r. )
,
2
(r. )
_
=
_
r
3
2r
2
+
3
3
r
3
+ 2r
2
3
+ 3
_
The graphics of the components:
0
0
-100
x y
-200
-2
-4 z
4
2
0
2
-2
4
-4
100
200
,
1
(r. ) = r
3
2r
2
+
3
3
y x
-4
-400
-2
-200
4
2
z
0 0
0
2 -2
4
200
-4
400
,
2
(r. ) = r
3
+ 2r
2
3
+ 3
The partial derivatives are:
J,
1
Jr
(r. ) = 3r
2
2
2
J,
1
J
(r. ) = 4r + 3
2
J,
2
Jr
(r. ) = 3r
2
+ 2
2
J,
2
J
(r. ) = 4r 3
2
The dierential of the function is:
24
d, (r. ) =
_
_
_
J,
1
Jr
(r. )
J,
1
J
(r. )
J,
2
Jr
(r. )
J,
2
J
(r. )
_
_
_
_
dr
d
_
=
=
_
_
_
J,
1
Jr
(r. ) dr +
J,
1
J
(r. ) d
J,
2
Jr
(r. ) dr +
J,
2
J
(r. ) d
_
_
_
=
=
_
(3r
2
2
2
) dr + (4r + 3
2
) d
(3r
2
+ 2
2
) dr + (4r 3
2
) d
_
2.4.3. Remark. For linear operators the following equivalent norm denitions are used:
|1| = inf ` _ 0; |1 (r)| 6 ` |r| . \r R
a
=
= sup
|a|=1
|1 (r)| = sup
|a|61
|1 (r)| .
2.4.4. Remark. 1. The dierential at a point, when exist, is unique.
2. The denition of the dierential at r
0
is equivalent with:
1 (r
0
) () /(R
a
. R
n
) . l 1 (r
0
) . . () : l R
n
with lim
aa
0
. (r) = 0.
such that , (r) = , (r
0
) +1 (r
0
) (r r
0
) +|r r
0
| . (r) .
2.4.5. Remark (Explicit dierentiability condition for 2 variables functions). , (. ) : 1 _ R
2
R
is dierentiable at (r
0
.
0
) i:t (1) if there are the numbers `j R, 0 and the function . (. ) :
1
.
(r
0
) 1
.
(
0
) R such that:
(1) lim
(a,j)(a
0
,j
0
)
. (r. ) = 0,
(2) , (r. ) = , (r
0
.
0
) +`(r r
0
) +j(
0
) +. (r. )
_
(r r
0
)
2
+ (
0
)
2
, \(r. ) 1
.
(r
0
)
1
.
(
0
) [when the condition is satised, the numbers ` and j are equal with the corresponding
partial derivatives).
2.4.6. Example. The function , (r. ) =
r
_
r
2
+
2
is continuous at (0. 0), has partial derivatives at
(0. 0) but it is not dierentiable at (0. 0).
0
0
x y
-2
-2
-4
-2
z
-4
0
2
2
4
4
2
, (r. ) =
r
_
r
2
+
2
25
A geometrical interpretation would be that while the surface accepts tangent lines at (0. 0), it doesnt
accept a tangent plane at (0. 0).
Proof. The partial derivatives at (0. 0) are:
J,
Jr
(0. 0) = lim
a0
, (r. 0) , (0. 0)
r 0
= 0,
J,
J
(0. 0) = lim
j0
, (0. ) , (0. 0)
0
= 0;
Suppose by contradiction that the function , (. ) is dierentiable at (0. 0). Then the following relation
would be satised:
, (r. ) = , (0. 0) +
J,
Jr
(0. 0) r +
J,
J
(0. 0) +. (r. )
_
r
2
+
2
.
so that we obtain . (r. ) =
, (r. )
_
r
2
+
2
=
r
r
2
+
2
. But since this function has no limit at (0. 0), we get a
contradiction.
2.5. Higher order derivatives
Secondorder partial derivatives:
J
2
,
Jr
i
Jr
)
(r) = ,
tt
a
i
a
j
(r) =
_
,
t
a
i
_
t
a
j
(r) [the secondorder partial deriva-
tive is obtained by partial derivating with respect to r
)
the partial derivative with respect to r
i
].
2.5.1. Example. For the function ,
1
(. ) : R
2
R
2
, dened by ,
1
(r. ) = r
3
2r
2
+
3
3, with
rstorder partial derivatives given by:
J,
1
Jr
(r. ) = 3r
2
2
2
J,
1
J
(r. ) = 4r + 3
2
and the dierential given by:
d,
1
(r. ) = (3r
2
2
2
) dr + (4r + 3
2
) d,
the secondorder partial derivatives are:
J
2
,
1
Jr
2
(r. ) = (3r
2
2
2
)
t
a
= 6r
J
2
,
1
JrJ
(r. ) = (3r
2
2
2
)
t
j
= 4
J
2
,
1
JJr
(r. ) = (4r + 3
2
)
t
a
= 4
J
2
,
1
J
2
(r. ) = (4r + 3
2
)
t
j
= 6
It may be seen that the secondorder mixed partial derivatives are equal [
J
2
,
1
JrJ
(r. ) =
J
2
,
1
JJr
(r. )].
The secondorder dierential is:
26
d
2
, (r. ) =
_
dr d
_
_
_
_
_
J
2
,
1
Jr
2
(r. )
J
2
,
1
JrJ
(r. )
J
2
,
1
JJr
(r. )
J
2
,
1
J
2
(r. )
_
_
_
_
_
dr
d
_
d
2
, (r. ) =
_
dr d
_
_
6r 4
4 6
_
_
dr
d
_
d
2
, (r. ) = 6r dr
2
8 drd + 6 d
2
2.5.2. Theorem (Young). If the secondorder partial derivatives are continuous, then
J
2
,
Jr
i
Jr
)
(r) =
J
2
,
Jr
)
Jr
i
(r).
Let , (. ) : A _R
2
R and (c. /)

.
2.5.3. Denition. The :
tI
degree Taylor polynomial for the function , (. ) at (c. /), is the 2variables
polynomial:
1
a
(r. ) = ,(c. /) +
1
1!
_
J,
Jr
(c. /)(r c) +
J,
J
(c. /)( /)
_
+
+
1
2!
_
J
2
,
Jr
2
(c. /)(r c)
2
+ 2
J
2
,
JrJ
(c. /)(r c)( /) +
J
2
,
J
2
(c. /)( /)
2
_
+...
+
1
:!
_
J
Jr
(r c) +
J
J
( /)
_
(a)
,(c. /)
1
a
(r. ) = ,(r. ) 1
a
(r. ) is the :
tI
order remainder.
2.5.4. Denition. The secondorder dierential:
d
2
, (c) =
a
i,)=1
J
2
,
Jr
i
J
)
(c) dr
i
dr
)
=
=
_
dr
1
dr
2
dr
a
_
_
_
_
_
_
_
J
2
,
Jr
1
Jr
1
(c)
J
2
,
Jr
a
Jr
1
(c)
.
.
.
.
.
.
J
2
,
Jr
1
Jr
a
(c)
J
2
,
Jr
a
Jr
a
(c)
_
_
_
_
_
_
_
_
_
_
dr
1
dr
2
.
.
.
dr
a
_
_
_
_
2.6. Further results about dierentiable functions
2.6.1. Remark. If the function , () : l R
a
R
n
is dierentiable at each point of l, then the
dierential on l is a new function with values at /(R
a
. R
n
):
d, () : l /(R
a
. R
n
) .
2.6.2. Theorem. If a function is dierentiable at a point, then it is also continuous at that point.
2.6.3. Remark. There are functions continuous at a point but not dierentiable. Example: , (r) = [r[
at r
0
= 0.
27
2.6.4. Remark. Existence of the derivative on an interval does not imply the continuity of the de-
rivative. Example: , (r) =
_
r
2
sin
1
r
. r ,= 0
0. r = 0.
has the derivative ,
t
(r) =
_
2r sin
1
r
cos
1
r
. r ,= 0
0. r = 0.
which is not continuous at 0. [,
t
(0) = lim
a0
, (r) , (0)
r 0
= lim
a0
r
2
sin
1
r
r
= lim
a0
r sin
1
r
= 0]
2.6.5. Remark. The existence of the partial derivatives does not imply continuity at that point.
Example: , (r. ) =
_
r
r
2
+
2
. (r. ) ,= (0. 0) .
0. (r. ) = (0. 0) .
2.6.6. Remark. Linear operators on nite dimensional spaces are continuous and dierentiable func-
tions. At each point, the dierential is the operator itself.
2.6.7. Remark. An operator 1 (. ) /(R
a
. R
n
; R
j
) (bilinear operator, 1 (. ) : R
a
R
n
R
j
) is
continuous and dierentiable at each point; moreover,
d1 (r
0
.
0
) (r. ) = 1 (r
0
. ) +1 (r.
0
) .
In particular, the square of the euclidean norm , (r) = |r|
2
has the dierential:
d, (r
0
) (r) = 2 r. r
0
.
2.6.8. Theorem (Chain rule). [The dierential of a composed function]
Consider l = i:t (l) R
a
. \ = i:t (\ ) R
n
, and the functions , () : l \ , q () : \ R
j
such
that , () dierentiable at r
0
l and q () dierentiable at , (r
0
). Then the composed function
/() = (q ,) () : l R
j
is dierentiable at r
0
and the connection between its dierential and the dierentials of the components
is given by:
d (q ,) (r
0
) = dq
_
,
_
r
0
__
d,
_
r
0
_
.
Proof. Since the function , () is dierentiable at r
0
and the function q () is dierentiable at , (r
0
)
we may write:
, (r) = , (r
0
) +,
t
(r
0
) (r r
0
) +|r r
0
| .
),a
0 (r) . \r l.
q () = , (r
0
) +q
t
(, (r
0
)) ( , (r
0
)) +| , (r
0
)| .
j,)(a
0
)
() . \ \.
with lim
aa
0 .
),a
0 (r) = 0 ( R
n
) and lim
j)(a
0
)
.
j,)(a
0
)
() = 0 ( R
j
) ;
by replacing with , (r) we get:
q (, (r)) = , (r
0
) +q
t
(, (r
0
)) (, (r) , (r
0
)) +|, (r) , (r
0
)| .
j,)(a
0
)
(, (r)) =
= , (r
0
) +q
t
(, (r
0
)) (,
t
(r
0
) (r r
0
) +|r r
0
| .
),a
0 (r)) +
+|,
t
(r
0
) (r r
0
) +|r r
0
| .
),a
0 (r)| .
j,)(a
0
)
(, (r)) _
_ , (r
0
) +q
t
(, (r
0
)) ,
t
(r
0
) (r r
0
) +
+|r r
0
|
_
q
t
(, (r
0
)) .
),a
0 (r) + (|,
t
(r
0
)| +|.
),a
0 (r)|) .
j,)(a
0
)
(, (r))
_
=
= , (r
0
) +q
t
(, (r
0
)) ,
t
(r
0
) (r r
0
) +|r r
0
| .
j),a
0 (r) .
where .
j),a
0 (r) = q
t
(, (r
0
)) .
),a
0 (r) + (|,
t
(r
0
)| +|.
),a
0 (r)|) .
j,)(a
0
)
(, (r))
and lim
aa
0 .
j),a
0 (r) = 0 ( R
j
)
28
2.6.9. Remark (The matrix form of the "Chain Rule"). d/(r
0
) 1(R
a
. R
j
) (a linear operator de-
scribed by an j : matrix):
R
j
d/
_
r
0
_
dr =
_
_
_
_
(/
1
)
t
a
1
(r
0
) (/
1
)
t
a
2
(r
0
) (/
1
)
t
a
n
(r
0
)
(/
2
)
t
a
1
(r
0
) (/
2
)
t
a
2
(r
0
) (/
2
)
t
a
n
(r
0
)

(/
j
)
t
a
1
(r
0
) (/
j
)
t
a
2
(r
0
) (/
j
)
t
a
n
(r
0
)
_
_
_
_
. .
j lines and a columns
_
_
dr
1
.
.
.
dr
a
_
_
d, (r
0
) 1(R
a
. R
n
) (a linear operator described by an j : matrix):
R
n
d,
_
r
0
_
dr =
_
_
_
_
(,
1
)
t
a
1
(r
0
) (,
1
)
t
a
2
(r
0
) (,
1
)
t
a
n
(r
0
)
(,
2
)
t
a
1
(r
0
) (,
2
)
t
a
2
(r
0
) (,
2
)
t
a
n
(r
0
)

(,
n
)
t
a
1
(r
0
) (,
n
)
t
a
2
(r
0
) (,
n
)
t
a
n
(r
0
)
_
_
_
_
. .
n lines and a columns
_
_
dr
1
.
.
.
dr
a
_
_
dq (n
0
) 1(R
n
. R
j
) ( a linear operator described by an :: matrix):
R
j
dq
_
n
0
_
dn =
_
_
_
_
(q
1
)
t
&
1
(n
0
) (q
1
)
t
&
2
(n
0
) (q
1
)
t
&
m
(n
0
)
(q
2
)
t
&
1
(n
0
) (q
2
)
t
&
2
(n
0
) (q
2
)
t
&
m
(n
0
)

(q
j
)
t
&
1
(n
0
) (q
j
)
t
&
2
(n
0
) (q
j
)
t
&
m
(n
0
)
_
_
_
_
. .
j lines and n columns
_
_
dn
1
.
.
.
dn
n
_
_
and the relation has the matrix form: (j :) = (j :) (::), namely:
_
_
_
_
(/
1
)
t
a
1
(r
0
) (/
1
)
t
a
2
(r
0
) (/
1
)
t
a
n
(r
0
)
(/
2
)
t
a
1
(r
0
) (/
2
)
t
a
2
(r
0
) (/
2
)
t
a
n
(r
0
)

(/
j
)
t
a
1
(r
0
) (/
j
)
t
a
2
(r
0
) (/
j
)
t
a
n
(r
0
)
_
_
_
_
_
_
dr
1
.
.
.
dr
a
_
_
=
=
_
_
_
_
(q
1
)
t
&
1
(, (r
0
)) (q
1
)
t
&
2
(, (r
0
)) (q
1
)
t
&
m
(, (r
0
))
(q
2
)
t
&
1
(, (r
0
)) (q
2
)
t
&
2
(, (r
0
)) (q
2
)
t
&
m
(, (r
0
))

(q
j
)
t
&
1
(, (r
0
)) (q
j
)
t
&
2
(, (r
0
)) (q
j
)
t
&
m
(, (r
0
))
_
_
_
_
_
_
_
_
(,
1
)
t
a
1
(r
0
) (,
1
)
t
a
2
(r
0
) (,
1
)
t
a
n
(r
0
)
(,
2
)
t
a
1
(r
0
) (,
2
)
t
a
2
(r
0
) (,
2
)
t
a
n
(r
0
)

(,
n
)
t
a
1
(r
0
) (,
n
)
t
a
2
(r
0
) (,
n
)
t
a
n
(r
0
)
_
_
_
_
_
_
dr
1
.
.
.
dr
a
_
_
2.6.10. Exercise. Given the functions n(r. ) and (r. ), nd the partial derivatives of the following
functions:
, (r. ) = n(r. )
(a,j)
.
q (r. ) =
_
n(r. ) + (r. ).
/(r. ) = arctan
&(a,j)
(a,j)
.
29
2.6.11. Exercise. If n(r. ) = c
a+j
2
and (r. ) = r
2
+, nd the partial derivatives of the functions:
, (r. ) = ln
_
n
2
(r. ) + (r. )
_
. q (r. ) = arctan
n(r. )
(r. )
.
2.6.12. Exercise. Verify that the given functions satisfy the given equations:
, (r. ) = ,
_
j
a
_
veries r,
t
a
+,
t
j
= 0.
, (r. . .) = ,(r. r
2
+
2
.
2
) veries r.,
t
a
.,
t
j
+ (r
2
2
) ,
t
:
= 0.
2.6.13. Remark. If , (r) = 1 (q
1
(r) . q
2
(r)), with 1 (. ) /(R
a
. R
n
; R
j
) and q
1
() : R
q
R
a
,
q
2
() : R
q
R
n
dierentiable at r
0
, then , () is dierentiable at r
0
and
d,
_
r
0
_
= 1
_
dq
1
_
r
0
_
. q
2
_
r
0
__
+1
_
q
1
_
r
0
_
. dq
2
_
r
0
_
_
. \ R
q
.
2.6.14. Theorem (DenjoyBourbaki). [The Mean Value Theorem, [10], vol. I, (8.5.1)] [Premier
thorme des accroissements nis] Consider 1 = (:
I
)
IN
[c. /], , () : [c. /] R
n
, q () : [c. /] R, such
that:
(1) , (), q () continuous on [c. /] and q () increasing on [c. /];
(2) , (), q () dierentiable on [c. /] 1;
(3) |d, (t)| 6 dq (t) . \t [c. /] 1.
Then:
|, (/) , (c)| 6 q (/) q (c) .
2.6.15. Theorem. If , () : [c. /] R
a
is continuous on [c. /], dierentiable on [c. /] 1 (1 countable)
and |,
t
(t)| _ `, \t [c. /] 1, then
|, (/) , (c)| 6 ` (/ c) .
[[10], vol. I, (8.5.2)]
Proof. Apply the Mean Value Theorem with q (t) = `t.
2.6.16. Theorem. If , () : [c. /] R
a
is continuous on [c. /], dierentiable on [c. /] 1 (1 countable)
and ,
t
(t) = 0 ( R
a
), then , () is constant on [c. /]. [mentioned as a comment at [10], vol. I, Ch. VIII,
Section 6, page 162, as an application of the Mean Value Theorem]
2.6.17. Theorem ([10], vol. I, Th. (8.5.4)). Consider l = i:t (l) convex R
a
and , () : l R
n
dierentiable on l. Then:
|, () , (n)| 6 | n| sup
a[&,]
|,
t
(r)| . \n. l.
Proof. Let n. l and q () : [0. 1] R
n
, q (t) = (1 t) n + t. Apply [[10], vol. I, (8.5.2)] for the
function /(t) = (, q) (t). We have q
t
(t) = n and
/
t
(t) = ,
t
(q (t)) q
t
(t) = ,
t
((1 t) n +t) ( n)
so that
|/
t
(t)| = |,
t
((1 t) n +t) ( n)| _ |,
t
((1 t) n +t)| |( n)| 6
6 |( n)| sup
t[0,1]
|,
t
((1 t) n +t)| = |( n)| sup
a[&,]
|,
t
(r)| .
30
Then
|, (n) , ()| = |/(1) /(0)| 6 (1 0) sup
t[0,1]
|/
t
(t)| 6 |( n)| sup
a[&,]
|,
t
(r)|
2.6.18. Corollary. Consider l = i:t (l) convex R

a
and , () : l R
n
dierentiable on l. If there
is ` _ 0 such that
|,
t
(r)| 6 `. \r l.
then
|, (r
1
) , (r
2
)| 6 ` |r
1
r
2
| . \r
1
. r
2
l.
[, () is Lipschitzian on l]
2.6.19. Theorem ([10], vol. I, Th. (8.6.2)). [Seconde thorme des accroissements nis] Consider l
open, convex in R
a
and , () : l R
n
dierentiable on l. Then
\c. / l and c [c. /] .
|, (/) , (c) ,
t
(c) (/ c)| 6 |/ c| sup
a[o,b]
|,
t
(r) ,
t
(c)| .
Proof. Consider c. / l and c [c. /], and the function q () : l R
n
dened by
q (r) = , (r) (,
t
(c)) (r) .
Then
q
t
(r) = ,
t
(r) ,
t
(c)
and, by Mean Value Theorem, we have
|q (/) q (c)| 6 |/ c| sup
a[o,b]
|q
t
(r)| .
which means
|, (/) , (c) ,
t
(c) (/ c)| 6 |/ c| sup
a[o,b]
|,
t
(r) ,
t
(c)| .
2.6.20. Corollary. Let 1 be open, convex in R

a
, , () : 1 R
n
dierentiable on 1. If ,
t
(r) = 0.
\r 1 then , () is constant on 1.
2.6.21. Theorem ([10], vol. I, Th. (8.6.3)). Let l be open, convex in R
a
, and ,
a
() : l R
n
a
sequence of dierentiable functions such that:
(1) There is r
0
l such that the (numerical) sequence (,
a
(r
0
))
a
is Cauchy;
(2) \n l,
&
0 such that B
.
u
(n) _ l and
_
,
t
a
[
B
"
u
(&)
()
_
a
(the sequence of the restrictions on
the ball B
.
u
(n) of the derivates) converges unifornly.
Then, for each n l, the sequence
_
,
a
[
B
"
u
(&)
()
_
a
converges uniformly on B
.
u
(n). Moreover, if we
denote by , (r) = lim
ao
,
a
(r), \r l and by q (r) = lim
ao
,
t
a
(r), \r l, then q () = ,
t
() on l.
31
2.7. Implicit functions
2.7.1. Theorem (The Implicit function theorem). Let l = i:t (l) _ R
a
R
n
and /(. ) : l R
n
continuous dierentiable on l and (c. /) l such that:
(1) /(c. /) = 0,
(2)
J/
J
(. ) = 1
2
/(. ) : l /(R
n
. R
n
) is continuous on l,
(3)
J/
J
(c. /) = 1
2
/(c. /) /(R
n
. R
n
) is bijective (invertible).
Then : 0 and ,() : B
v
(c) R
n
such that:
(1) (a) (r. ,(r)) l, \r B
v
(c),
(b) ,() is continuous on B
v
(c),
(c) /(r. ,(r)) = 0, \r B
v
(c),
(d) ,(c) = /,
(e) ,() is unique.
Moreover, ,() is dierentiable at c and:
,
t
(c) =
_
J/
J
(c. /)
_
1
J/
Jr
(c. /) .
Proof. Let
1 :=
_
J/
J
(c. /)
_
1
/(R
n
. R
a
)
and
, (r. ) := (1 /) (r. ) . \r. l.
We have , (r. ) = = /(r. ) = 0 (because 1 is invertible).
Choose c. :. j such that we may apply to , (. ) the parametric version of contraction principle:
from continuity of
J/
J
(. ) it follows \
_
0.
1
|T|
_
. :
1
. j 0 such that:
_
B
v
1
(c) B
j
(/) l
_
_
_
0I
0j
(r
1
.
1
)
0I
0j
(r
2
.
2
)
_
_
_ <
.
2
. \(r
1
.
1
) . (r
2
.
2
) B
v
1
(c) B
j
(/)
From 8.6.2 we have the inequalities:
|, (r.
1
) , (r.
2
)| = |
1
2
1 (/(r.
1
) /(r.
2
))| =
=
_
_
1
_
1
1
(
1
2
)
_
1 (/(r.
1
) /(r.
2
))
_
_
_
_ |1|
_
_
_
1
1
(
1
2
)
_
(/(r.
1
) /(r.
2
))
_
_
=
= |1|
_
_
_
_
_
J/
J
(c. /) (
1
2
)
_
(/(r.
1
) /(r.
2
))
_
_
_
_
_
_
1
2
_
_
_
_
/(r.
1
) /(r.
2
)
J/
J
(r.
1
) (
1
2
) +
J/
J
(r.
1
) (
1
2
)
J/
J
(c. /) (
1
2
)
_
_
_
_
_
_
1
2
__
_
_
_
/(r.
1
) /(r.
2
)
J/
J
(r.
1
) (
1
2
)
_
_
_
_
+
_
_
_
_
_
J/
J
(r.
1
)
J/
J
(c. /)
_
(
1
2
)
_
_
_
_
_

32
2.7.2. Exercise. The functions n = c(r. ) and = (r. ) are implicitly dened by the relations:
n + = r +, rn + = 1. Find their partial derivatives.
2.8. Taylor Polynomials
Let , (. ) : = i:t () _R
2
R and (c. /) . If , (. ) is : times dierentiable at (c. /), then the
mixed partial derivatives of the same order are equal.
2.8.1. Denition. The polynomial:
1
a
(r. ) = ,(c. /) +
1
1!
_
0)(o,b)
0a
(r c) +
0)(o,b)
0j
( /)
_
+
+
1
2!
_
0
2
)(o,b)
0a
2
d
2
r + 2
0
2
)(o,b)
0a0j
drd +
0
2
)(o,b)
0j
2
_
+...
+
1
a!
_
0
0a
(r c) +
0
0j
( /)
_
(a)
,(c. /)
is called "Taylor polynomial of degree : of the function , (. ) at (c. /)" while
1
a
(c. /) = ,(c. /) 1
a
(c. /)
is the :th order remainder of the Taylor polynomial of degree :.
2.8.2. Theorem. Consider the function , (. ) : = i:t () _R
2
R :+1 times dierentiable in the
neighborhood _ \ 1 ((c. /)). Then \(r. ) \ , (c. ,) [r. c] [. /] such that:
R
a
(r. ) =
1
(: + 1)!
_
J
Jr
(r c) +
J
J
( /)
_
(a+1)
,(c. ,)
Proof. Let (r. ) \ and r (t) = c + (r c) t, (t) = / + ( /) t, t [0. 1] and the function:
1(t) = ,(r(t). (t)) = ,(c + (r c)t. / + ( /)t).
1(0) = ,(c. /), 1(1) = ,(r. ). The function 1 () is : + 1 times dierentiable on (0. 1), so we write the
Taylor formula for a single variable, with the remainder in Lagrange form:
1(t) = 1(0) +
t
1!
1
t
(0) +
t
2
2!
1"(0) +... +
t
a
:!
1
(a)
(0) +
t
a+1
(: + 1)!
1
(a+1)
(o). 0 < o < t.
For t = 1 we have:
1(1) = 1(0) +
1
1!
1
t
(0) +
1
2!
1"(0) +... +
1
:!
1
(a)
(0) +
1
(: + 1)!
1
(a+1)
(o). 0 < o < 1.
Also, for / = 1. 2. .... : + 1, we have
d
I
1(t) = (
o
or
dr(t) +
o
o
(t))
(I)
,(r(t). (t)) = (
o
or
(r c) +
o
o
( /))
(I)
(dt)
I
,(r(t). (t)).
It follows that
d
I
1(t)
dt
I
=
_
o
odr
(r c) +
o
odr
( /)
_
(I)
,(r(t). (t)).
and
d
I
1(0)
dt
I
= 1
(I)
(0) =
_
o
or
(r c) +
o
o
( /)
_
(I)
,(c. /).
Finally we get:
,(r. ) = ,(c. /) +
1
1!
_
o
or
(r c) +
o
o
( /)
_
,(c. /) +
1
2!
_
o
or
(r c) +
o
o
( /)
_
2
,(c. /) +...+
33
+
1
a!
_
o
or
(r c) +
o
o
( /)
_
(a)
,(c. /) +
1
(a+1)!
_
o
or
(r c) +
o
o
( /)
_
(a+1)
,(c. ,)
It follows 1
a
(r. ) =
1
(a+1)!
_
o
or
(r c) +
o
o
( /)
_
(a+1)
,(c. ,),
with c = c +o (r c), , = / +o ( /), 0 < o < 1.
2.8.3. Theorem. If the function , (. ) : = i:t () _R
2
R is : + 1 times dierentiable in a
neighborhood of (c. /), then there is a function . (. ) : R continuous and null at (c. /) such that
1
a
(r. ) =
1
a!
j
a
(r. ) .(r. ), where o(r. ) =
_
(r c)
2
+ ( /)
2
.
2.8.4. Remark. If (r. ) ,= (c. /). then
R
a
(r. )
j
a
(r. )
=
1
a!
.(r. ). and lim
(a,j)(o,b)
R
a
(r. )
j
a
(r. )
= 0, because
lim
(a,j)(o,b)
.(r. ) = .(c. /) = 0.
2.9. Applications in Economics
Common usage in Economics:
A distinction should be made between the name of the good and the quantity of the good. I will
distinguish between them by denoting A (capital letter) the name and by r (small letter) the quantity of
A.
Observe that I use the word "quantities" and not the word "units" for measurements. This is because
while the word "units" may sound better than "quantities", it is also misleading from the point of view
of Analysis and what is meant by "appropriate masurement units". Analysis refers to "innitesimal
modications" and not integers and moreover an appropriate measurement unit should be "indenitely
decomposable" in the sense that we should be able to refer to amounts as small as possible.
Since r, and , (r. ) are quantities, some measurement units should be chosen for each of them.
Some usual choices will be used for exemplication purposes.
A is money (capital) with measurement unit e (so that r is the quantity of e)
1 is labor with measurement unit wh (working hours) (so that is the quantity of working hours)
2 is nails (the production process uses capital and money to produce nails) with measurement unit kg
(of nails) (so that . is the quantity of kg of nails)
It should always be clear in what measurement units are we measuring dierent quantities.
2.9.1. Examples of usual production functions (from Economics):
34
CobbDouglas type: , () : R
a
+
R
+
.
, (r
1
. r
2
. . r
a
) = cr
c
1
1
r
c
2
2
r
c
n
a
CES [constant elasticity of substitution] type: , () : R
a
+
R
+
.
, (r
1
. r
2
. . r
a
) = c
_
a
i=1
c
i
r
j
i
_b
. 0 ,= j < 1
(for j = 0, n(r
1
. r
2
. . r
a
) = c
a
i=1
c
i
ln r
i
)
Perfect substitutes [linear] type: , () : R
a
+
R
+
.
, (r
1
. r
2
. . r
a
) =
a
i=1
c
i
r
i
Perfect complement type (Leontie): , () : R
a
+
R
+
.
, (r
1
. r
2
. . r
a
) = min
_
c
i
r
i
; i = 1. :
_
If , (. ) is a production function (so that r and are quantities of raw materials A and 1 used to
obtain the quantity , (r. ) of nite product 2).
Then:
The partial derivative
J,
Jr
(r
0
.
0
) is measured in (kg of nails)/e and it may be interpreted as the speed
of change in nails when money changes, around (r
0
.
0
). The usual naming convention in Economics is
"marginal product of A at (r
0
.
0
)" and actually it expresses literally the following approximation:
, (r.
0
) , (r
0
.
0
) +
J,
Jr
(r
0
.
0
) (r r
0
)
Note that from the perspective concerning the measurement units, the (usual) interpretation of
J,
Jr
(r
0
.
0
)
as an estimator of "the change in output due to a one unit increase in capital" is misleading because the
measurement units are dierent: while "the change in output" is , (r.
0
) , (r
0
.
0
) and is measured in
(kg of nails), the quantity
J,
Jr
(r
0
.
0
) is measured in (kg of nails)/e.
Of course the confusion comes from identifying the distinct objects
J,
Jr
(r
0
.
0
)
(kg of nails)/e
and
J,
Jr
(r
0
.
0
)
(kg of nails)/e
1
e
and it may be addressed by accepting a convention to make a distinction when appropriate, but still the
situation leads to signicant ambiguities.
In a similar manner,
, (r
0
. ) , (r
0
.
0
) +
J,
J
(r
0
.
0
) (
0
)
, (r. ) , (r
0
.
0
) +
J,
Jr
(r
0
.
0
) (r r
0
) +
J,
J
(r
0
.
0
) (
0
)
The confusion may be further increased by the following facts:
the approximations are valid only inside the convergence domains for the attached Taylor expan-
sions
the "quality of approximation" decreases with future operations applied (the more the operations
applied, the worse the quality of approximation)
The need to think dr[= r r
0
] in integer terms contradicts its signicance as "small", "innitez-
imal", "local".
35
2.9.1. Denition. A function n() : R
a
R is called an utility function if it represents a preference
relation, in the sense that r % == n(r) _ n()
2.9.2. Elasticity for singlevariable functions.
2.9.2. Denition. Percentage change of a function , () at r
2
compared to the base fromr
1
:
, (r
2
) , (r
1
)
, (r
1
)
[The dierence between the two states as a fraction of the initial state r
1
] [it is a dimensionless value].
2.9.3. Denition. Mean value of a function at r:
, (r)
r
[the average] [it is measured in (kg of nails)/e].
2.9.4. Denition. Derivative of a function at r (when exist): ,
t
(r
0
) = lim
aa
0
, (r) , (r
0
)
r r
0
. [Speed at
r
0
] [also measured in (kg of nails)/e]
2.9.5. Denition. 1| (, () . r) =
r,
t
(r)
, (r)
=
r
, (r)

d, (r)
dr
=
d (ln , (r))
dr
[Possible interpretation: the
elasticity of , () with respect to r (at a certain xed value for r) is the percentage change in , ()
corresponding to a one per cent increase in r] [the ratio between the speed and the average] [dimensionless
value ].
2.9.6. Remark. General Economical terminology:
[1| (, () . r)[ 1 (, () is elastic)
[1| (, () . r)[ = 1 (, () is unitary elastic)
[1| (, () . r)[ < 1 (, () is inelastic)
[1| (, () . r)[ = 0 (, () is completely inelastic)
2.9.7. Remark. Calculation Rules:
1| ((, q) () . r) = 1| (, () . r) +1| (q () . r)
1|
__
,
q
_
() . r
_
= 1| (, () . r) 1| (q () . r)
1| ((, q) () . r) =
, (r) 1| (, () . r) q (r) 1| (q () . r)
, (r) q (r)
1| ((, q) () . r) = 1| (, () . q (r)) 1| (q () . r)
1| (,
1
() . , (r
0
)) =
1
1| (, () . r
0
)
[if , () is invertible]
1| (. r) = 0 [ is a constant]
1| (r
c
. r) = c [c is a constant]
1| (sin r. r) = r cot r
1| (cos r. r) = r tan r
1| (tan r. r) =
r
sin r cos r
1| (cot r. r) =
r
sin r cos r
1| (ln r. r) =
1
ln r
1| (log
o
r. r) =
1
ln r
2.9.8. Exercise. Prove the statements from the above remark.
36
2.9.3. Elasticity for manyvariables functions.
2.9.9. Denition. Mean value with respect to the i
tI
variable at r:
, (r)
r
i
[measured in (kg of
nails)/(unit of A
i
)]
2.9.10. Denition. 1|
i
x
i
_
,
_
a
1
. .
a
n
_
. r
_
=
r
i
J,
Jr
i
(r)
, (r)
[the partial elasticity of the function , ()
at r with respect to the i
tI
variable] [the ratio between the speed with respect to i and the average with
respect to i]
1|
)
t
j
_
1
_
,
1
_
t
1
. .
t
m
_
. . ,
a
_
t
1
. .
t
m
__
. t
_
=
a
i=1
1|
i
x
i
_
1
_
a
1
. .
a
n
_
. r
_
1|
)
t
j
_
,
i
_
t
1
. .
t
m
_
. t
_
[chain
rule]
2.10. Extreme points
2.10.1. Denition (Extreme points and extreme values concepts). Consider , () : A _R
a
R and
r
0
.
(1) The point r
0
is a (global) minimum point for , () if the following condition holds:
,
_
r
0
_
_ , (r) . \r .
The value , (r
0
) is the (global) minimum value of , () on .
(2) The point r
0
is a (global) maximum point for , () if the following condition holds:
,
_
r
0
_
_ , (r) . \r .
The value , (r
0
) is the (global) maximum value of , () on .
(3) The point r
0
is a local minimum point for , () if the following condition holds:
\ A
_
r
0
_
. ,
_
r
0
_
_ , (r) . \r \.
The value , (r
0
) is a local minimum value of , () on .
(4) The point r
0
is a local maximum point for , () if the following condition holds:
\ A
_
r
0
_
. ,
_
r
0
_
_ , (r) . \r \.
The value , (r
0
) is a local maximum value of , () on .
(5) The point r
0
is an unconstrained local minimum point for , () if r
0
is an interior point of
and a local minimum point for , ().
(6) The point r
0
is an unconstrained local maximum point for , () if r
0
is an interior point of
and a local maximum point for , ().
(7) The least upper bound of the function , () on is denoted by inf
a
, (r) and it is the least upper
bound (possibly innite) for the set , () (inf
a
, (r) = inf , ()).
(8) The greatest lower bound of the function , () on is denoted by sup
a
, (r) and it is the greatest
lower bound (possibly innite) for the set , () (sup
a
, (r) = sup , ()).
37
inf
a
, (r) = c ==
1. c _ , (r), \r
2. \, c, r
o
, , (r
o
) < ,.
2.10.2. Theorem (Thm. 2.1, [14]). Consider , () : _ R
a
R, closed ( =

).
Assume there is , R such that the set
o
= r ; , (r) _ , is nonempty and bounded. [i.e. the
,level set is relatively compact]
Then there is at least a point r
0
such that , (r
0
) = inf
a
, (r) (the function attains its minimum).
Proof. Consider c = inf
a
, (r) and observe that , (r) _ c \r .
If , < c then
b
would be empty, a contradiction with the hypotheses, so it has to be that , _ c.
If , = c, since the set
o
is nonempty, there are points with the required quality and the proof is
nished for this this case.
Consider , c.
If c is not an accumulation point for the set , (), then c should be an isolated point for , (). Then
c , () so there is a point r
0
such that c = , (r
0
) (in this case, r
0
is also an isolated point for ).
If c is an accumulation point for the set , (), then consider a sequence (r
a
)
aN
such that r
a

\: N and , (r
a
) c. Because , c, and the codomain is separated (as a topological space), the
sequence (, (r
a
))
aN
will eventually satisfy , (r
a
) _ , (i.e.: :
0
N such that \: _ :
0
, , (r
a
) _ ,)
so the sequence (r
a
)
aN
may be considered such that r
a
, \: N, , (r
a
) c and , (r
a
) _ , (i.e.
r
a

o
, \: N). Since
o
is bounded, the sequence (r
a
)
aN
is also bounded and has a subsequence
(r
a
k
)
IN
convergent to a value r
0
(because the sequence is from the set
o
which is included in the
closed set ). Since the function , () is continuous, , (r
0
) = lim
Io
, (r
a
k
) = c, so the function , () attains
its minimum value c at the point r
0
.
a
R and c = inf
a
, (r). Assume there is
/ c such that \, < / the set
o
is compact. Then there is r
0
such that , (r
0
) = c (, () attains its
minimum value). [Observe that the previous continuity requirement for , () is replaced by the compactity
requirement not for just one level set
o
, but for all level sets
o
]
Proof. For ,. ,
1
(c. /] with , < ,
1
the sets
o
and
o
1
are nonempty, compact and
o
_
o
1
, so
that the intersection

o(c,b]
o
is nonempty. Then for r
0

o(c,b]
o
it happens that , (r
0
) _ ,, \, (c. /]
which means , (r
0
) _ c = inf
a
, (r), so that in fact , (r
0
) = c.
A consequence of the previous results is usually used:
a
R. If , () is continuous and is
compact then there are points r
0
, r
1
such that , (r) [, (r
0
) . , (r
1
)], \r . [When the function
is continuous and the domain is compact both the minimum and the maximum values of the function are
attained]
a
R such that the function is continuous
in a neighborhood of the compact set
0
_ . If , (r) , \r
0
then the inequality also holds for a
neighborhood of
0
.
Proof by contradiction
38
2.11. Unconstrained Local Optimization
Consider , () : _ R
a
R and r
0
i:t ().
The derivative of , () at r
0
in the direction / is the linear form ,
t
(r
0
; ) : R
a
R, ,
t
(r; /) =
a
i=1
J,
Jr
i
(r
0
) /
i
= ,
t
(r) / is the derivative of the function q (t) = , (r
0
+t/) at t = 0 (
J
Jt
(q (r
0
+t/))
t=0
).
The second derivative of , () in the direction / is the quadratic form,
tt
(r; /) =
a
i=1
a
)=1
J
2
,
Jr
i
Jr
)
(r
0
) /
i
/
)
=
/
t
_
J
2
,
Jr
i
Jr
)
(r
0
)
_
i,)=1,a
/ = /
t
,
tt
(r) /, where ,
tt
(r) =
_
J
2
,
Jr
i
Jr
)
(r
0
)
_
i,)=1,a
is the Hessian of , () at r
0
.
The quadratic form ,
tt
(r; /) is the second derivative of q (t) = , (r
0
+t/) at t = 0 (
J
2
Jt
2
(q (r
0
+t/))
t=0
).
2.11.1. Theorem (Thm. 3.1, [14]). Consider a class C
2
function , () : _ R
a
R and r
0
i:t ().
If r
0
is an unconstrained local minimum, then ,
t
(r
0
) = 0 and ,
tt
(r
0
) is nonnegative.
2
function , () : _ R
a
R and r
0
i:t ().
If ,
t
(r
0
) = 0 and ,
tt
(r) is positive, then o. : 0 such that , (r) _ , (r
0
) +:|r r
0
|, \r and
|r r
0
| < o.
A solution r
0
of the system ,
t
(r) = 0 is called critical (stationary) point, and the corresponding
value of the function , (r
0
) is called critical value. A critical point r
0
is called nondegenerate if ,
tt
(r
0
) is
nonsingular (the determinant is nonzero).
2
function , () : _ R
a
R and r
0
i:t ()
a nondegenerate critical point. The point r
0
is a local minimum if and only if ,
tt
(r
0
) is nonnegative. The
point r
0
is a local maximum if and only if ,
tt
(r
0
) is nonpositive.
2.11.4. Remark. Procedure for 2 variable function:
(1) Solve (1CC) :
_
,
t
a
(r. ) = 0
,
t
j
(r. ) = 0
(2) For each solution of (1CC) system,
(a) Calculate the Hessian: H
)
(r. ) =
_
,
tt
a
2
(r. ) ,
tt
aj
(r. )
,
tt
ja
(r. ) ,
tt
j
2
(r. )
_
(b) Decide:
det H
)
(r. ) ,
tt
a
2
(r. ) (r. )
0 < 0 maximum
0 0 minimum
< 0 saddle (no extreme)
= 0 the method doesnt decide
2.11.5. Remark. For the general case: for each stationary point consider the quadratic function
,(c) =
a
i,)=1
J
2
,
Jr
i
J
)
(c) c
i
c
)
.
If:
(1) ,() is negative denite, then c is an extreme point, namely a local interior maximum point for
, ().
39
(2) ,() is positive denite, then c is an extreme point, namely a local interior minimum point for
, ().
(3) ,() is not dened, then c is not a local interior extreme point (it is a saddle point)
(4) ,() is nonnegative or nonpositive denite, then the procedure cannot decide.
2.11.6. Remark. The Hessian H
)
() is the matrix of the quadratic function:
H
)
(c) =
_
J
2
,
Jr
i
Jr
)
(c)
_
i,)=1,a
=
_
_
_
_
_
_
J
2
,
Jr
1
Jr
1
(c)
J
2
,
Jr
a
Jr
1
(c)
.
.
.
.
.
.
J
2
,
Jr
1
Jr
a
(c)
J
2
,
Jr
a
Jr
a
(c)
_
_
_
_
_
_
The Hessian (and hence the quadratic form ,()) is positive if an only if all the determinants are
positive \, = 1. :,
)
0 and negative if and only if \, = 1. :, (1)
)
)
0, where
)
=
J
2
,
Jr
1
Jr
1
(c)
J
2
,
Jr
)
Jr
1
(c)
.
.
.
.
.
.
J
2
,
Jr
1
Jr
)
(c)
J
2
,
Jr
)
Jr
)
(c)
.
2.11.7. Example. The following function has a unique local minimum point.
, (. ) : R
2
R, , (r. ) = 5r
2
+ 4r +
2
6r 2 + 6
-4 -2
-4
x
-2
y
0 0
0
2
4
2 4
z
100
200
300
, (r. ) = 5r
2
+ 4r +
2
6r 2 + 6
_
,
t
a
(r. ) = (5r
2
+ 4r +
2
6r 2 + 6)
t
a
= 10r + 4 6
,
t
j
(r. ) = (5r
2
+ 4r +
2
6r 2 + 6)
t
j
= 4r + 2 2
=
= (1CC)
_
10r + 4 6 = 0
4r + 2 2 = 0
=
_
5r + 2 = 3
2r + = 1
= (1. 1)
_
_
,
tt
a
2
(r. ) = (10r + 4 6)
t
a
= 10
,
tt
aj
(r. ) = (10r + 4 6)
t
j
= 4
,
tt
ja
(r. ) = (4r + 2 2)
t
a
= 4
,
tt
j
2
(r. ) = (4r + 2 2)
t
j
= 2
= d
2
, (r. ) = 10dr
2
+ 8drd + 2d
2
40
The Hessian is H (r. ) =
_
10 4
4 2
_
; H (1. 1) =
_
10 4
4 2
_
, det H (1. 1) = 20 4 = 16 0 so the
point (1. 1) is a local extremum and since ,
tt
a
2
(r. ) = 10 0, the point is a local minimum. The local
minimum value of the function is , (1. 1) = 5 4 + 1 6 + 2 + 6 = 4.
2.11.8. Example. For the following function, the critical point is not an extremum one:
, (. ) : R
2
R, , (r. ) = r
2
2
(which has the following graph)
-4
20
-2
10
z
4
2
0
-10
y
0
-2
-4
x
4
-20
2
0
, (r. ) = r
2
2
_
,
t
a
(r. ) = (r
2
2
)
t
a
= 2r
,
t
j
(r. ) = (r
2
2
)
t
j
= 2
= (1CC)
_
2r = 0
2 = 0
= (0. 0) critical point.
_
_
,
tt
a
2
(r. ) = (2r)
t
a
= 2
,
tt
aj
(r. ) = (2r)
t
j
= 0
,
tt
ja
(r. ) = (2)
t
a
= 0
,
tt
j
2
(r. ) = (2)
t
j
= 2
= H (r. ) =
_
2 0
0 2
_
, H (0. 0) =
_
2 0
0 2
_
, det H (0. 0) = 4 < 0
so the critical point (0. 0) is not a local extremum one.
2.12. Unconstrained optimization. Approximating functions by Least Square Method.
Assume that : observations were made and the values (r
1
.
1
), (r
2
.
2
), (r
a
.
a
) have been obtained.
There are : observations
There are 2 variables: r [with values r
1
, , r
a
] and [with values
1
, ,
a
]
The variable r is called "control variable" and it is considered "errorfree"
The variable is called "response variable"
Usually it is assumed that the values of the variable are imprecise, "contaminated", or that they
contain small random perturbations
It is considered a theoretical model = , (r; o), where o stands for a list of parameters.
The method nds a value
^
o for parameters which is best from a certain point of view.
The simplest example: , (r; c. /) = cr + /, with o = (c. /) [the linear model]; so, we are looking
for the line that "ts best" the observations, and the line is = cr +/.
The method to nd which value is best measures the vertical distance between each point (r
i
.
i
)
and the corresponding point on the line (r
i
. cr
i
+/): (cr
i
+/
i
)
2
.
The distance between the line and the observations is considered to be the sum of all squared
vertical distances:
41
1 (c. /) =
a
i=1
(cr
i
+/
i
)
2
.
Find the point which minimizes 1 (. ):
_
_
J1
Jc
(c. /) = 2
a
i=1
(cr
i
+/
i
) r
i
J1
J/
(c. /) = 2
a
i=1
(cr
i
+/
i
)
=
= (1CC) :
_
_
J1
Jc
(c. /) = 0
J1
J/
(c. /) = 0
=
_
_
2
a
i=1
(cr
i
+/
i
) r
i
= 0
2
a
i=1
(cr
i
+/
i
) = 0
=
_
_
_
a
i=1
r
2
i
_
c +
_
a
i=1
r
i
_
/ =
a
i=1
r
i
i
_
a
i=1
r
i
_
c +
_
a
i=1
1
_
/ =
a
i=1
i
=
=
_
_
^ c =
:
_
a
i=1
r
i
i
_
_
a
i=1
r
i
__
a
i=1
i
_
:
_
a
i=1
r
2
i
_
_
a
i=1
r
i
_
2
^
/ =
_
a
i=1
r
2
i
__
a
i=1
i
_
_
a
i=1
r
i
__
a
i=1
r
i
i
_
:
_
a
i=1
r
2
i
_
_
a
i=1
r
i
_
2
.
_
_
J
2
1
Jc
2
(c. /) = 2
a
i=1
r
2
i
0
J
2
1
J/
2
(c. /) = 2:
J
2
1
JcJ/
(c. /) =
J
2
1
J/Jc
(c. /) = 2
a
i=1
r
i
=
The Hessian: H (c. /) =
_
_
_
2
a
i=1
r
2
i
2
a
i=1
r
i
2
a
i=1
r
i
2:
_
_
_
det H (c. /) = 4:
a
i=1
r
2
i
4
_
a
i=1
r
i
_
2
_ 0 from the CauchyBuniakowskiSchwarz inequality [with
i
= 1]; moreover, it is strictly greater than zero under the assumption that the values r
i
are dierent, for
dierent values of i.
From (oCC) it follows that the point
_
^ c.
^
/
_
is a strict global minimum point.
Obs [the CauchyBuniakowskiSchwarz inequality]:
\: N, \r
i
,
i
R
_
a
i=1
r
i
i
_
2
_
_
a
i=1
r
2
i
__
a
i=1
2
i
_
.
Proof:
Observe that (r
i
t +
i
)
2
_ 0 \t R
then r
2
i
t
2
+ 2r
i
i
t +
2
i
_ 0 \t R
summing from 1 to ::
42
_
a
i=1
r
2
i
_
t
2
+ 2
_
a
i=1
r
i
i
_
t +
a
i=1
2
i
_ 0 \t R
The last expression is a quadratic function in the variable t which is positive for all t, so the discriminant
should be less than or equal with 0 (otherwise there are two real distinct roots and the function will be
negative between them)
= 4
_
a
i=1
r
i
i
_
2
4
_
a
i=1
r
2
i
__
a
i=1
2
i
_
_ 0 so
_
a
i=1
r
i
i
_
2
_
_
a
i=1
r
2
i
__
a
i=1
2
i
_
which completes the proof.
The line = ^ cr +
^
/ is the line which best ts the data (the regression line).
The value 1
_
^ c.
^
/
_
is the error of the evaluation.
Econometrics language:
: the sample size (the number of observations)
i the subscript used to index observations (the i
tI
observation)
A the variable considered independent (with observed values r
1
, , r
a
) (there may be more than
one independent variable) (the explanatory variable) (the control variable) (the predictor variable) (the
regressor) (the covariate)
r =
1
:
a
i=1
r
i
is the sample average of the observed A values.
1 the variable considered dependent (on A) (with observed values
1
, ,
a
) (the explained variable)
(the response variable) (the predicted variable) (the regressand)
=
1
:
a
i=1
i
is the sample average of the observed 1 values.
the pairs (r
i
.
i
) are the observed dependencies.
The model is = cr +/
The best t is = ^ cr +
^
/ (where
_
^ c.
^
/
_
is the solution of (1CC) system)
For each i, ^
i
= ^ cr
i
+
^
/ is the predicted value
^ n
i
=
i
^
i
is the observed error (the residuals)
The model aims "to explain 1 in terms of A"
Issues of the explanation:
1. There will never be an exact relationship of the form 1 = cA +/. How do we include in the model
the possiblity that other (unknown) factors may aect 1 as well?
2. How do we nd the best linear functional relationship between A and 1 ?
3. How can we be sure that a "ceteris paribus"type relationship is captured?
Properties:
1.
a
i=1
(r
i
r) = 0
Proof: From denition.
2.
a
i=1
(r
i
r) r
i
=
a
i=1
(r
i
r)
2
Proof:
a
i=1
(r
i
r) r
i
=
a
i=1
(r
i
r) (r
i
r + r) =
a
i=1
(r
i
r)
2
+
a
i=1
(r
i
r) r =
a
i=1
(r
i
r)
2
.
43
3.
a
i=1
(
i
) r
i
=
a
i=1
(r
i
r) (
i
).
Proof:
a
i=1
(
i
) r
i
=
a
i=1
(
i
) (r
i
r + r) =
a
i=1
(
i
) (r
i
r)+
a
i=1
(
i
) r =
a
i=1
(
i
) (r
i
r).
4.
^
/ = r^ c
Proof:
From (1CC) it follows that the values
_
^ c.
^
/
_
satisfy the relation:
_
a
i=1
r
i
_
^ c +:
^
/ =
a
i=1
: : = r^ c +
^
/ = =
^
/ = r^ c.
5.
a
i=1
^ n
i
= 0
Proof:
^ n
i
=
i
^ cr
i

^
/ so from (1CC) it follows:
a
i=1
^ n
i
=
a
i=1
_
i
^ cr
i
^
/
_
=
a
i=1
(
i
^ cr
i
+ r^ c) =
a
i=1
(
i
) + ^ c
a
i=1
( r r
i
) = 0.
6.
a
i=1
r
i
^ n
i
= 0
Proof:
a
i=1
r
i
^ n
i
=
a
i=1
r
i
(
i
^
i
) =
a
i=1
r
i
_
i
^ cr
i
^
/
_
=
a
i=1
r
i
i
^ c
a
i=1
r
2
i

^
/
a
i=1
r
i
=
=
a
i=1
r
i
i
^ c
a
i=1
r
2
i
( r^ c)
a
i=1
r
i
=
a
i=1
r
i
i

a
i=1
r
i
^ c
_
a
i=1
r
2
i
r
a
i=1
r
i
_
=
=
a
i=1
r
i
i

a
i=1
r
i
^ c
_
a
i=1
r
2
i
r
a
i=1
r
i
_
=
=
a
i=1
r
i
i

a
i=1
r
i
1
:
_
:
_
a
i=1
r
i
i
_
_
a
i=1
r
i
__
a
i=1
i
__
= 0
= 0 =
a
i=1
_
^ cr
i
+
^
/
i
_
r
i
=
a
i=1
(^ cr
i
+ r^ c
i
) r
i
=
a
i=1
(^ c (r
i
r) +
i
) r
i
=
=
_
a
i=1
(r
i
r) r
i
_
^ c =
a
i=1
(
i
) r
i
we have
a
i=1
(r
i
r) r
i
=
a
i=1
(r
i
r) (r
i
r + r) =
a
i=1
(r
i
r) (r
i
r) + r
a
i=1
(r
i
r) =
a
i=1
(r
i
r)
2
and
a
i=1
(
i
) r
i
=
a
i=1
(
i
) (r
i
r + r) =
a
i=1
(
i
) (r
i
r) + r
a
i=1
(
i
) =
a
i=1
(r
i
r) (
i
).
So:
_
a
i=1
(r
i
r)
2
_
^ c =
a
i=1
(r
i
r) (
i
) = ^ c =
a
i=1
(r
i
r) (
i
)
a
i=1
(r
i
r)
2
(the sample covariance between A
and 1 divided by the sample variance of A)
1 (c. /) =
a
i=1
(cr
i
+/
i
)
2
=
a
i=1
_
cr
i
^ cr
i
+ ^ cr
i
+/
^
/ +
^
/
i
_
2
=
a
i=1
__
^ cr
i
+
^
/
i
_
+r
i
(c ^ c) +/
^
/
_
2
=
44
=
a
i=1
_
^ cr
i
+
^
/
i
_
2
+
a
i=1
_
r
i
(c ^ c) +
_
/
^
/
__
2
+ 2
a
i=1
_
^ cr
i
+
^
/
i
__
r
i
(c ^ c) +/
^
/
_
=
= 1
_
^ c.
^
/
_
+
a
i=1
_
r
i
(c ^ c) +
_
/
^
/
__
2
+2 (c ^ c)
a
i=1
_
^ cr
i
+
^
/
i
_
r
i
. .
=0 from FOC
+2
_
/
^
/
_
a
i=1
_
^ cr
i
+
^
/
i
_
. .
=0 from FOC
=
= 1
_
^ c.
^
/
_
+
a
i=1
_
r
i
(c ^ c) +
_
/
^
/
__
2
which shows directly that the smallest value is attained when
c = ^ c and / =
^
/.
2.13. Constrained Optimization
2.13.1. Theorem ([3], Th. 18.1; Necessary Optimality Conditions for Two Variables and One Equality
Constraint). Consider the class C
1
functions , (. ) . /(. ) : R
2
R and (^ r. ^ ) a solution of the problem
max
(a,j)
, (r. ) .
subject to /(r. ) = c.
such that (^ r. ^ ) is not a critical point of /(. )
1
. Then, there is a real number
^
` such that the point
_
^ r. ^ .
^
`
_
is a critical point of the function
1(r. ; `) = , (r. ) `[/(r. ) c] .
[The function 1(. ; ) is called "Lagrangian function"]
Proof. Assume that (^ r. ^ ) is a constrained maximum.
Consider the system of two equations in (r. ) given by:
_
, (r. ) = , (^ r. ^ )
/(r. ) = c
and the (extended) Jacobian matrix at (^ r. ^ ),
_
,
t
a
(^ r. ^ ) ,
t
j
(^ r. ^ )
/
t
a
(^ r. ^ ) /
t
j
(^ r. ^ )
_
.
If the rank of this matrix is two, then by applying The Implicit Function Theorem we would get for each
(c. ,) in a certain neighborhood of (, (^ r. ^ ) . c) (which neighborhood contains (, (^ r. ^ ) . c) as an interior
point) a solution (r
c,o
.
c,o
) of the system
_
, (r. ) = c
/(r. ) = ,
.
In particular, for an 0 suciently small there is a solution (r
.
.
.
) of the system
_
, (r. ) = , (^ r. ^ ) +
/(r. ) = c.
,
which means that /(r
.
.
.
) = c ((r
.
.
.
) satises the constraint) and , (r
.
.
.
) = , (^ r. ^ ) + , (^ r. ^ )
((r
.
.
.
) is better than (^ r. ^ )) which is a contradiction with the assumption that (^ r. ^ ) is a constrained
maximum.
So, the matrix
_
,
t
a
(^ r. ^ ) ,
t
j
(^ r. ^ )
/
t
a
(^ r. ^ ) /
t
j
(^ r. ^ )
_
cannot have rank two [and because of NDCQ it has to be of rank
one]. This implies the existence of a constant
^
` such that
_
,
t
a
(^ r. ^ ) ,
t
j
(^ r. ^ )
_
=
^
`
_
/
t
a
(^ r. ^ ) /
t
j
(^ r. ^ )
_
,
1
This condition is called "Non Degenerate Constraint Qualication" [NDCQ]
45
which means that
_
,
t
a
(^ r. ^ ) =
^
`/
t
a
(^ r. ^ )
,
t
j
(^ r. ^ ) =
^
`/
t
j
(^ r. ^ )
. Finally, this together with /(^ r. ^ ) = c means that
_
^ r. ^ .
^
`
_
is a critical point for the function 1(. ; ).
2.13.2. Theorem ([3], Th. 19.7; Sucient Conditions for Two Variables and One Equality Constraint).
Under the same conditions as above, assume that
_
^ r. ^ .
^
`
_
is a critical point of the Lagrangean function
such that the (bordered) determinant
0 /
t
a
(^ r. ^ ) /
t
j
(^ r. ^ )
/
t
a
(^ r. ^ ) 1
tt
a
2
_
^ r. ^ .
^
`
_
1
tt
aj
_
^ r. ^ .
^
`
_
/
t
j
(^ r. ^ ) 1
tt
ja
_
^ r. ^ .
^
`
_
1
tt
j
2
_
^ r. ^ .
^
`
_
0. Then (^ r. ^ ) is a
constrained local maximum.
2.13.1. Procedure for 2 variables functions: [ojt] , (r. ) constrained by q (r. ) = 0
1. Form the Lagrange function:
1(r. ; `) = , (r. ) `q (r. )
2. Find the critical points of q (. ).
3. Apply (1CC) for 1(. ; ) to obtain:
(C1CC) :
_
_
_
1
t
a
(r. ) = 0
1
t
j
(r. ) = 0
q (r. ) = 0
For each solution
_
^ r. ^ ;
^
`
_
of (C1CC) such that (^ r. ^ ) is not a critical point of q (. ):
3. Dierentiate the constraint: q
t
a
(^ r. ^ ) dr +q
t
j
(^ r. ^ ) d = 0
4. Establish the signature of the quadratic form:
(dr. d) 1
tt
a
2
_
^ r. ^ ;
^
`
_
dr
2
+ 21
tt
aj
_
^ r. ^ ;
^
`
_
drd +1
tt
j
2
_
^ r. ^ ;
^
`
_
d
2
j
0
x
(^ a,^ j)oa+j
0
y
(^ a,^ j)oj=0
if positive denite, then the point is a constrained local maximum
if negative denite, then the point is a constrained local minimum
if otherwise (included the case when the point (^ r. ^ ) is critical for q (. )), the method cannot decide
Alternative method: The bordered Hessian
_
_
_
_
_
_
_
0
Jq
Jr
(^ r. ^ )
Jq
J
(^ r. ^ )
Jq
Jr
(^ r. ^ )
J
2
1
Jr
2
_
^ r. ^ ;
^
`
_
J
2
1
JrJ
_
^ r. ^ ;
^
`
_
Jq
J
(^ r. ^ )
J
2
1
JJr
_
^ r. ^ ;
^
`
_
J
2
1
J
2
_
^ r. ^ ;
^
`
_
_
_
_
_
_
_
_
2.13.3. Example. , (r. ) = r subject to r + = 1
q (r. ) = r +; no critical points
1(r. ; `) = r +`(r + 1)
J1
Jr
(r. ; `) = +`
J1
J
(r. ; `) = r +` =
46
(C1CC) :
_
_
_
+` = 0
r +` = 0
r + = 1
=
_
_
= `
r = `
2` = 1 = ` =
1
2
= solution
_
1
2
.
1
2
;
1
2
_
(CoCC) :
Alternative 1: dierentiate the constraint
r + 1 = 0 = dr +d = 0[
(a,j)=(12,12)
= dr +d = 0 = d = dr.
[Calculate the secondorder dierential for the function (r. ) 1(r. ; `
0
)]
d
2
(a,j)
1(r. ; `) = 1
tt
a
2
(r. ; `) dr
2
+ 21
tt
aj
(r. ; `) drd +1
tt
j
2
(r. ; `) d
2
=
= 2drd
d
2
(a,j)
1
_
1
2
.
1
2
;
1
2
_
= 2drd[
oj=oa
= 2dr
2
< 0 (negative form) so the point
_
1
2
.
1
2
_
is a conditional
local interior maximum.
Alternative 2: bordered Hessian
_
_
_
_
_
_
_
0
Jq
Jr
(r
0
.
0
)
Jq
J
(r
0
.
0
)
Jq
Jr
(r
0
.
0
)
J
2
1
Jr
2
(r
0
.
0
; `
0
)
J
2
1
JrJ
(r
0
.
0
; `
0
)
Jq
J
(r
0
.
0
)
J
2
1
JJr
(r
0
.
0
; `
0
)
J
2
1
J
2
(r
0
.
0
; `
0
)
_
_
_
_
_
_
_
=
_
_
0 1 1
1 0 1
1 1 0
_
_
the determiant is:
3
=
0 1 1
1 0 1
1 1 0
= 2 0 so the point
_
1
2
.
1
2
_
is a conditional local interior maximum.
10
y
0
10
10
-10
x
z
-10
-10
0
0
2.13.4. Example. Find the extremes of the function , (. . ) : (0. )
3
R, ,(r. . .) = r., subject
to r + +. = 3.
Solution: The problem is
[ojt] r.
:.t.
_
r + +. = 3
r. . . 0
The Lagrangian function:
1(r. . .; `) = r. `(r + +. 3); calculate its partial derivatives:
47
1
t
a
(r. . .; `) =
J
Jr
(r. `(r + +. 3)) = ` +.
1
t
j
(r. . .; `) =
J
J
(r. `(r + +. 3)) = ` +r.
1
t
:
(r. . .; `) =
J
J.
(r. `(r + +. 3)) = ` +r
The (1CC) system:
_
_
. ` = 0
r. ` = 0
r ` = 0
r + +. 3 = 0
= r = = . and ` = r
2
=
2
= .
2
; so we have ` 0 and r = = . =
_
`
from which we get 3
_
` 3 = 0 =
_
` = 1 = ` = 1
so, we have a single solution (1. 1. 1; 1).
The secondorder partial derivatives of the function (r. . .) 1(r. . .; 1) are:
1
tt
a
2
(r. . .; 1) = 0
1
tt
j
2
(r. . .; 1) = 0
1
tt
:
2
(r. . .; 1) = 0
1
tt
aj
(r. . .; 1) =
J
2
JrJ
(r. (r + +. 3)) = .
1
tt
a:
(r. . .; 1) =
J
2
JrJ.
(r. (r + +. 3)) =
1
tt
ja
(r. . .; 1) =
J
2
JJr
(r. (r + +. 3)) = .
1
tt
j:
(r. . .; 1) =
J
2
JJ.
(r. (r + +. 3)) = r
1
tt
:a
(r. . .; 1) =
J
2
J.Jr
(r. (r + +. 3)) =
1
tt
:j
(r. . .; `) =
J
2
J.J
(r. `(r + +. 3)) = r
The partial derivatives of the constraint:
J
Jr
(r + +. 3) = 1
J
J
(r + +. 3) = 1
J
J.
(r + +. 3) = 1
Alternative 1: the bordered Hessian is
_
_
_
_
0 1 1 1
1 0 .
1 . 0 r
1 r 0
_
_
_
_
which at the critical point is
_
_
_
_
0 1 1 1
1 0 1 1
1 1 0 1
1 1 1 0
_
_
_
_
and the determinant is 3 < 0 so that
the point (1. 1. 1) is a constrained local maximum.
Alternative 2: dierentiate the constraint r + +. 3 = 0 to obtain dr +d +d. = 0.
Calculate the secondorder dierential of the function (r. . .) 1(r. . .; 1) taking into account the
constraint dierentiation dr +d +d. = 0, at the point (1. 1. 1; 1):
48
d
2
1(1. 1. 1; 1)[
oa+oj+o:=0
= 2drd + 2drd. + 2dd.[
oa+oj+o:=0
=
= 2 (drd dr(dr +d) d (dr +d)) =
= 2 (dr
2
+drd +d
2
) which is a negativedenite quadratic form, so that we get the same conclu-
sion.
49
2.13.5. Example.
_
max : (/r
c
1c
),
subject to: jr + = 1.
The problem has a (neo)classical interpretation in Microeconomics:
(r. ) /r
c
1c
[the function to be optimized] is a "CobbDouglastype production function",
r is "the labor input" [the quantity of labor per unit of time, for example measured in terms
of working hours or in terms of labor monetary value]; it may be assumed that r [0. r
max
]
[r cannot be bigger than a certain given quantity denoted by r
max
]
is "the capital input" [the quantity of investment per unit of time, measured in monetary
value]; it may be assumed that [0.
max
] [ cannot be bigger than a certain given quantity
denoted by
max
]
The values r
max
and
max
are endogeneous, in the sense that they may be given independently
by technological/market conditions. Since the production problem takes place in a given
period of time, it is only natural to accept that input quantities are limited.
/r
c
1c
is "the output" [the quantity of output per unit of time, measured for example in
monetary value]
/ 0 represents "total factor productivity"
: is an unitary price for the output!!!
c (0. 1) represents "the output elasticity of labor" while 1 c represents "the output
elasticity of capital"; since c + (1 c) = 1, the production has "constant returns to scale"
It should be mentioned that this line of interpretation has been criticized
[e.g. http://mises.org/journals/qjae/pdf/qjae7_1_10.pdf]
j 0 and 0 are unit prices of the inputs, while 1 0 is the available budget.
To summarize, all the parameters /, c, r
max
,
max
, j, , 1 are endogeneous.
We apply the procedure to nd the maximum:
(1) The constraint has no critical point, so that NDCQ holds.
(2) Since / 0, max (/r
c
1c
) = / max (r
c
1c
)
(3) The Lagrange function is:
1(r. ; `) = r
c
1c
`(jr + 1) .
(4) We calculate the rstorder partial derivatives of the Lagrangian:
1
t
a
(r. ; `) =
J
Jr
(r
c
1c
`(jr + 1)) = cr
c1
1c
j`,
1
t
j
(r. ; `) =
J
J
(r
c
1c
`(jr + 1)) = (1 c) r
c
c
`;
we observe that since the exponents c 1 and c are negative, the expressions are not valid
for r = 0 or = 0.
(5) We consider the 1CC system:
_
_
_
cr
c1
1c
j` = 0
(1 c) r
c
c
` = 0
jr + 1 = 0
50
for which we consider the solutions from (0. r
max
) (0.
max
). The solution is:
_
_
c
j
_
r
_
c1
= ` =
1 c
_
r
_
c
= r =
c
j (1 c)
jr + 1 = 0 = j
c
j (1 c)
+ 1 = 0 =
=
_
c
1 c
+ 1
_
= 1 = =
1(1 c)
=
= r =
c
j (1 c)

1(1 c)
=
1c
j
=
= ` =
c
j
_
r
_
c1
=
c
j
_
_
_
_
1c
j
1(1 c)
_
_
_
_
c1
=
c
j
_
c
j (1 c)
_
c1
=
= ` =
c
c
c1
j
c
(1 c)
c1
.
= ^ r =
1c
j
, ^ =
1(1 c)
,
^
` =
c
c
c1
j
c
(1 c)
c1
.
(6) When "the availability conditions" are satised [that is, the solution satises ^ r < r
max
and
^ <
max
], we check the secondorder conditions:
(a) we calculate the secondorder partial derivatives for the function (r. ) 1
_
r. ;
^
`
_
:
1
tt
a
2
_
r. ;
^
`
_
=
J
2
Jr
2
_
r
c
1c
^
`(jr + 1)
_
= r
c2
1c
c(c 1),
1
tt
aj
_
r. ;
^
`
_
=
J
2
JrJ
_
r
c
1c
^
`(jr + 1)
_
=
r
c1
c
c(c 1),
1
tt
ja
_
r. ;
^
`
_
=
J
2
JJr
_
r
c
1c
^
`(jr + 1)
_
=
r
c1
c
c(c 1),
1
tt
j
2
_
r. ;
^
`
_
=
J
2
J
2
_
r
c
1c
^
`(jr + 1)
_
=
r
c
c+1
c(c 1),
so that the Hessian of the function (r. ) 1
_
r. ;
^
`
_
is:
H
_
r. ;
^
`
_
=
_
_
_
_
r
c2
1c
c(c 1)
r
c1
c
c(c 1)
r
c1
c
c(c 1)
r
c
c+1
c(c 1)
_
_
_
_
;
(b) since the partial derivatives of the constraint are
J
Jr
(jr + 1) = j, and
J
J
(jr + 1) = , the bordered Hessian is:
51
0 j
j r
c2
1c
c(c 1)
r
c1
c
c(c 1)

r
c1
c
c(c 1)
r
c
c+1
c(c 1)
=
= c(1 c) (j
2
r
c
1c
+
2
r
c2
1c
+ 2jr
c1
c
) 0; we conclude that the point (^ r. ^ )
is a constrained local maximum.
(c) we dierentiate the constraint: jdr +d = 0
(d) we nd the nature of the quadratic form d
2
(a,j)
1
_
r. ;
^
`
_
joa+qoj=0
=
= c(1 c) r
c2
1c
dr
2
+ 2c(1 c) r
c1
c
drd c(1 c) r
c
c1
d
2
[
joa+qoj=0
oj=
j
oa
=
= c(1 c) r
c2
1c
dr
2
+2c(1 c) r
c1
c
dr
_
dr
_
c(1 c) r
c
c1
_
dr
_
2
=
= c(1 c)
_
r
c2
1c
+ 2
j
r
c1
c
+r
c
c1
j
2
2
_
dr
2
< 0 and we conclude that the point
(^ r. ^ ) is a local constrained maximum.
(7) When "the availability conditions" are not satised [that is, ^ r _ r
max
or ^ _
max
], the (1CC)
system doesnt have any solution.
(8) The (1CC) system doesnt cover the boundary points (just the interior points), so they should
be discussed separately; we discuss the boundary of the budget line intersected with the rectangle
[0. r
max
] [0.
max
].
The budget line jr + = 1 has the intercept at the point
_
0.
1
_
and the rintercept
at
_
1
j
. 0
_
. We have several situations:
52
intercept rintercept Boundary points
1)
1
<
max
1
j
< r
max
_
0.
1
_
,
_
1
j
. 0
_
2)
1
<
max
1
j
= r
max
_
0.
1
_
,
_
1
j
. 0
_
= (r
max
. 0)
3)
1
<
max
1
j
r
max
_
0.
1
_
,
_
r
max
.
1 jr
max
_
4)
1
=
max
1
j
< r
max
_
0.
1
_
= (0.
max
),
_
1
j
. 0
_
5)
1
=
max
1
j
= r
max
_
0.
1
_
= (0.
max
),
_
1
j
. 0
_
= (r
max
. 0)
6)
1
=
max
1
j
r
max
_
0.
1
_
= (0.
max
),
_
r
max
.
1 jr
max
_
7)
1

max
1
j
< r
max
_
1
max
j
.
max
_
,
_
1
j
. 0
_
8)
1

max
1
j
= r
max
_
1
max
j
.
max
_
,
_
1
j
. 0
_
= (r
max
. 0)
9)
1

max
1
j
r
max
_
1
max
j
.
max
_
,
_
r
max
.
1 jr
max
_
[if jr
max
+
max
1]
(9) Each situation from above may accept two subcases, depending on the (1CC) solution satisfying
"the availability conditions"; each case should be considered separately. Since we are only inter-
ested in nding constrained maximum, we observe that all boundary points with at least one null
component correspond to a null value of the production function. So we have just the cases 3),
6), 7), 8) and 9) to consider.
1)
(10) We gather all the possible candidates for a maximum:
The solutions from the (1CC) system (if they exist), which are in the set (0. r
max
) (0.
max
)
^ r =
1c
j
, ^ =
1(1 c)
CHAPTER 3
Ordinary dierential equations (1/2 lecture)
Consider a function , (. ) : 1 _ R R
a
R.
3.0.6. Denition. The abstract symbol written (in alternative forms):
dr
dt
= , (t. r) .
_ r = , (t. r) .
t
= , (r. ) .
r
t
(t) = , (t. r (t)) .
is called explicit ordinary dierential equation [EODE].
3.0.7. Denition. The function ,() : 1 _ R R
a
is called a solution of the EODE if:
(1) 1 _ R is an interval [the domain of the solution is "uninterrupted"]
(2) G
,
= (t. ,(t)) ; t 1 _ 1 [The graph of the solution is contained in the domain of the vector
eld].
(3) For all t 1, ,
t
(t) = , (t. ,(t)) [the solution identically satises the equation].
3.0.8. Remark. (1) Traditionally in ordinary dierential equations theory, the function , (. ) is
called vectorial eld or vector eld, the variable t is called independent variable (and usually
suggests a time variable) and r is called dependent variable.
(2) Because the equation takes place in :dimensions, sometimes it is called a system of : dierential
equations.
(3) The situation where the equation contains higherorder derivatives is also called explicit ordinary
dierential equation.
(4) The word "explicit" refers to the fact that the derivative of the dependent variable is an explicit
function of the dependent variable and the independent variable (as opposed to "implicit ordinary
dierential equation", in the sense of "Implicit Function Theorem"; as an example of ordinary
dierential equation which is not explicit, consider the equation (r
t
)
2
= t
2
which actually contains
two EODEs: r
t
= t and r
t
= t)
(5) The word "ordinary" suggests that the derivation sign refers to a single variable (onedimensional
variable).
(6) When the derivations are with respect to several variables, the symbol is called partial dierential
equation [PDE].
(7) When the symbol uses (instead of derivation) alternative forms of integration, it is called integral
equations.
(8) When both signs (integration and dierentiation) are used, the symbol is called integrodierential
equation.
(9) When the values involved in the symbol are allowed to take complex values, the symbol is called
complex dierential equation.
53
54
(10) When the objects are considered to be random variables (in probabilities/statistics), the symbol
is called stochastic (ordinary/partial) dierential equation.
(11) The term "equation" is used to suggest that "a solution" is desirable to be found and/or studied
and it should be distinguished between "equations" which are "numerical" in the sense that the
possible solution(s) are numbers and the present situation where the object(s) to be found is(are) a
function(functions) (so that all the three components of the solution should be found: the domain,
the codomain and the graph).
(12) The meaning of the rst point from the denition is the following: for the solution, domains of the
form [1. 2] '[3. 4] or (1. 2) '(2. 3) are not accepted, while domains like [1. 4] or (1. 3) are accepted.
(13) Classical topics of study in ODE are the following:
(a) Existence of solutions.
(b) Unicity of solutions.
(c) Explicit nding of solutions.
(d) Qualitative theory (the study of the solution as a function of initial conditions and/or para-
meters) (Comparative statics in Economics).
(e) Stability.
(f) Topics related to dynamic optimization, like:
(i) Stabilizability.
(ii) Attainability/Reachability.
(iii) Variational Calculus.
(iv) Optimal Control.
3.0.9. Denition. The symbol
_
r
t
= , (t. r) .
r (t
0
) = r
0
is called an explicit ordinary dierential equation with initial condition or a Cauchy problem (CP). The
function ,() is a solution for the (CP) if it is a solution and moreover, if ,(t
0
) = r
0
; this particular
solution will sometimes be denoted by ,(; t
0
. r
0
) (a function depending on the independent variable t and
also with parameters t
0
and r
0
)
3.1. Classical elementary types of EODEs
It is assumed that all the functions involved meet the requirements for existence, unicity and smoothness
of the solution. In this section, the material is presented with minimum of details/complications; the
presentation favours the understanding of a solving procedure instead of remembering/using a certain
formula.
r
t
(t) = , (t) has as solution the primitive of the function , (): ,(t) =
_
, (t) dt +(.
Example:
r
t
= t
= r (t) =
_
tdt +C =
t
2
2
+C.
Verication:
J
Jt
_
t
2
2
+C
_
= t.
The (CP): r
t
(t) = , (t), r (t
0
) = r
0
has the solution ,(t) =
_
t
t
0
, (t) dt +r
0
.
Equations with separable variables: r
t
= , (t) q (r)
55
r
t
= , (t) q (r) =
r
t
q (r)
= , (t) =
_
dr
q (r)
=
_
, (t) dt + C [the meaning is:
_
r
t
(t) dt
q (r (t))
=
_
, (t) dt +C]
Example:
+ r
t
= 5r =
r
t
r
= 5 = ln [r[ = 5t + ln [C[ = r (t) = C c
5t
.
Verication:
J
Jt
(C c
5t
) = 5Cc
5t
= 5r (t).
+ r
t
= r + 3 =
r
t
r + 3
= 1 = ln [r 3[ = t + ln [C[ = r (t) = 3 +C c
t
Verication:
J
Jt
(3 +C c
t
) = Cc
t
= (3 +C c
t
) + 3
Firstorder [in the dependent variable] equations: r
t
= c (t) r +/ (t), r (t
0
) = r
0
Procedure (constant variation):
(1) Consider (and solve) the homogeneous attached equation:
r
t
= c (t) r =
r
t
r
= c (t) = ln [ r[ =
_
c (t) dt + ln [C[ = r (t) = C c
R
o(t)ot
= C c
R
t
t
0
o(t)ot
[C is a constant]
(2) Search for the solution of the initial equation of the form: r (t) = C (t) c
R
t
t
0
o(t)ot
[C (t) now
is a function this is the reason for the name of the procedure]
(a) Replace the form in the initial equation:
C
t
(t) c
R
t
t
0
o(t)ot
+C (t) c (t) c
R
t
t
0
o(t)ot
= c (t) C (t) c
R
t
t
0
o(t)ot
+/ (t) =
=C
t
(t) c
R
t
t
0
o(t)ot
= / (t) = C
t
(t) = / (t) c
R
t
t
0
o(t)ot
= C (t) =
_
t
t
0
/ (:) c
R
s
t
0
o(t)ot
d:+
1
(b) Assemble the solution: r (t) =
_
_
t
t
0
/ (:) c
R
s
t
0
o(t)ot
d: +1
_
c
R
t
t
0
o(t)ot
=
_
t
t
0
/ (:)
c
R
s
t
0
o(t)ot+
R
t
s
o(t)ot
R
s
t
0
o(t)ot
d: +1 c
R
t
t
0
o(t)ot
=
= r (t) =
_
t
t
0
/ (:) c
R
t
s
o(t)ot
d: +1 c
R
t
t
0
o(t)ot
.
(c) Find the value of the constant 1 from the initial condition: r
0
= r (t
0
) = 1 =
= r (t) =
_
t
t
0
/ (:) c
R
t
s
o(t)ot
d: +r
0
c
R
t
t
0
o(t)ot
.
Example:
r
t
= r +t =
= r
t
= r = r (t) = C c
t
= r (t) = C (t) c
t
=
= C
t
(t) c
t
C (t) c
t
= C (t) c
t
+t =
= C
t
(t) = t c
t
= C (t) =
_
tc
t
dt = c
t
(t 1) +1 =
= r (t) = (c
t
(t 1) +1) c
t
= t 1 +1c
t
.
Verication:
J
Jt
(t 1 +1c
t
) = 1 1c
t
= (t 1 +1c
t
) +t.
56
3.2. More elaborate examples
3.2.1. Denition. The object
(3.2.1) r
t
= c (t) / (r)
is called separable variables equation, where c () : 1 _ R R and / () : J _ R R are continuous
functions with 1, J real intervals.
3.2.2. Proposition. [The structure of solutions for 3.2.1]
(1) For each ~ r J such that / (~ r) = 0, the function ,(t) = ~ r, t 1 is a solution for 3.2.1 (called
stationary solution).
(2) Consider:
(a) J
0
= r J; / (r) ,= 0,
(b) a primitive for c (), denoted () : 1 R,
(c) a primitive for
1
/[
J
0
()
, denoted 1() : J
0
1(J
0
).
Then 1
1
(); moreover, ,() : 1
1
_ 1 J
0
is a solution for 3.2.1 ==
C R. \t 1
1
. ,(t) = 1
1
((t) +C) .
Proof.
3.2.3. Proposition (Existence and Unicity of solutions for 3.2.1). (1) \(t
0
. r
0
) 1 J, 1
0

1 (t
0
), ,() : 1
0
J solution for 3.2.1 such that ,(t
0
) = r
0
.
(2) \(t
0
. r
0
) 1 J
0
, 1
0
1 (t
0
), !,() : 1
0
J
0
solution for 3.2.1 such that ,(t
0
) = r
0
.
Proof.
Solving procedure for 3.2.1:
I.: Solve the equation / (r) = 0. For each solution, consider the attached stationary solutions of
3.2.1.
II.: On J
0
"separate the variables": r
t
= c (t) / (r) =
r
t
/ (r)
= c (t) and "integrate in both parts";
obtain the general solution in implicit form [when nished, the EODE problem is considered
solved]. If an initial point is given, determine the constant C as a function of the initial point.
III.: Solve/study the implicit problem and nd the general solution in explicit form.
3.2.4. Example. [continuously compounded interest rate]
The equation: r
t
= cr, r (t
0
) = r
0
.
Interpretation:
t time in years.
t independent variable; t
0
is the initial value of the independent variable.
c [parameter] the annual rate of interest (continuously compounded).
r (t) the quantity of money in the bank account at time t; r dependent variable; r
0
is the initial
value of the dependent variable [the initial amount of money].
Solving procedure:
, (t. r. c) = cr; / (r) = r, c (t) = c.
,(t) = 0 is a (stationary) solution, obtained from solving / (r) = 0.
J
0
= R
+
; (t) = ct, 1(r) = ln [r[, 1() : R
+
R
57
[solutionshort version]
r
t
r
= c = ln [r[ = ct + ln [/[ = r (t) = /c
ot
= r
0
= /c
ot
0
= ,(t) =
r
0
c
o(tt
0
)
[details] ,(
t
.
t
0
.
a
0
;
o
) : R R R R R, ,(t. t
0
. r
0
; c) = r
0
c
o(tt
0
)
[verication]
J,
Jt
(t. t
0
. r
0
; c) = c r
0
c
o(tt
0
)
= c,(t. t
0
. r
0
; c), \t R = t ,(t. t
0
. r
0
; c) is a
solution.
Numerical situation: for c
_
1
20
.
1
50
_
, nd the time needed to double the initial monetary
amount.
Consider t
0
= 0; 2r
0
< r
0
c
ot
== 2 < c
ot
== ln 2 < ct ==
ln 2
c
< t
For c =
1
20
[5% interest rate] = 20 ln 2 - 13.863 years.
For c =
1
50
[2% interest rate] = 50 ln 2 - 34.657 years.
3.2.5. Example. Extension: when approaching reality, we easily get outside the "classical theory".
Consider a composed period, with two dierent rates: the rst period with length t
1
and rate c
1
after
which the second period with length t
2
and rate c
2
.
The model is given by the EODE:
r
t
= , (t. r. t
1
. t
2
. c
1
. c
2
) where , (t. r. t
1
. t
2
. c
1
. c
2
) =
_
c
1
r. 0 _ t _ t
1
c
2
r. t
1
< t _ t
2
which is a vector eld
discontinuous on [0. t
2
], with t
1
. t
2
. c
1
. c
2
parameters [for convenience, denote all parameters by j =
(t
1
. t
2
. c
1
. c
2
)]
For the rst period: r
t
= c
1
r, r (0) = r
0
= ,(t. 0. r
0
; c
1
) = r
0
c
o
1
t
.
The second period starts when the rst period ends, at (t
1
. ,(t
1
. 0. r
0
; c
1
)), and follows the path
,(t
1
+t. t
1
. ,(t
1
. 0. r
0
; c
1
) ; c
2
), with t [0. t
2
].
The nal point for the second period is ,(t
1
+t
2
. t
1
. ,(t
1
. 0. r
0
; c
1
) ; c
2
). The function:
(t. 0. r
0
; t
1
. t
2
. c
1
. c
2
) =
_
,(t. 0. r
0
; c
1
) . t _ t
1
,(t
1
+t. t
1
. ,(t
1
. 0. r
0
; c
1
) ; c
2
) . t
1
< t _ t
2
is a solution of the initial EODE: r
t
= , (t. r. t
1
. t
2
. c
1
. c
2
). Since the vector eld is discontinuous, none of
the classical results applies to this situation. The solution is continuous and the derivative does not exist
at t = t
1
. Still, we have existence and unicity of the solution for any r
0
.
3.2.6. Example. An EODE with nonzero solutions which only exists on proper intervals:
A population with growth rate proportional with the square of its volume [growth rate proportional
with the number of pairs within the population, ignoring the gender or a nongender population]
The model is r
t
= cr
2
, r (0) = r
0
= ,(t) = 0 is a solution and for r
0
,= 0 we have
r
t
r
2
= c = r
1
=
ct + 1 = r (t) =
1
ct 1
=
1
1
= r
0
= 1 =
1
r
0
= r (t) =
1
ct +
1
r
0
=
r
0
1 cr
0
t
. The domain of
the solution have to be chosen from either
_
.
1
cr
0
_
or
_
1
cr
0
.
_
, namely the one that contains 0; it
may be seen that anyway the domain is a proper interval (it cannot be R) and it depends on both initial
conditions and parameters.
58
For c < 0: ,(; 0. r
0
) :
_
1
cr
0
.
_
R, ,(t; 0. r
0
) =
r
0
1 cr
0
t
[a population which exists for ever,
vanishes towards innity but initially had an innite volume of population].
For c 0: ,(; 0. r
0
) :
_
.
1
cr
0
_
R, ,(t; 0. r
0
) =
r
0
1 cr
0
t
[a population which lives a nite time
from t = 0 i.e.
1
cr
0
units of time, when it reaches an innite volume].
We consider several particular extreme situations arising from the Solow model, [[?], Chapter 1].
3.2.7. Example. The equation r
t
= cr
23
, r (0) = r
0
with c 0 may be interpreted in the following
way:
r is a monetary amount representing the "percapita investment", with r
0
the initial amount.
r cr
23
is a CobbDouglas type production function in intensive form.
To keep the connection with the Solow model, this is an extreme situation when the rate of capital
depreciation, the rate of population growth and the rate of knowledge growth are all neglected (are
considered null). The model may be interpreted as the evolution of percapita investment in the absence
of population and knowledge growth, and without depreciation.
r
t
= cr
23
= ,
1
(t) = 0, \t R stationary solution and r
t
r
23
= c = 3r
13
= ct + C and
3r
13
0
= C = ,
2
(t. r
0
) =
_
ct
3
+r
13
0
_
3
, \t R.
We have two distinct solutions, ,
1
(t) = 0 and ,
2
(t. 0) =
c
3
t
3
27
such that ,
1
(0) = ,
2
(0. 0) = 0 so that
there is no unicity at r (0) = 0. But because of the behavior in (0. 0) any other solution may be prolonged
in innite distinct ways:
,
2,I
(t) =
_
_
_
ct
3
+r
13
0
_
3
. t
_
3r
13
0
c
. +
_
0. t
_
/.
3r
13
0
c
_
_
ct
3
+
c/
3
_
3
. t (. /) .
3.2.8. Example. r
t
= cr
13
= r
t
r
13
= c =
3
2
r
23
= ct+C =
3
2
r
23
0
= C = ,(t) =
_
2
3
ct +r
23
0
_
32
etc
3.3. Bernoulli equations
Theory:
Procedure:
Population dynamics:
3.3.1. Example. Logistic Growth:
r
t
= Cr
_
1
r
1
_
, r (0) = r
0
r (t) _ 0 the number of individuals at time t
59
r
0
the initial number of individuals
C the growth rate of the population
1 the level of population sustainable by the social conditions (the carrying capacity of the environment)
C
_
1
r
1
_
per capita growth rate
stationary solutions: r (t) = 0, r (t) = 1
Consider t such that r (t) ,= 0. Then r
t
= Cr C
r
2
1
: r
2
[Bernoulli equation] = r
t
r
2
= Cr
1
C
1
;
denote (t) =
1
r (t)
=
t
(t) =
r
t
(t)
r
2
(t)
=
t
(t) = C (t) +
C
1
[scalar ane equation] =
=
t
= C = (t) = 1 c
Ct
= [variation of constant procedure] we look for solutions of the form
(t) = 1 (t) c
Ct
=
t
(t) = 1
t
(t) c
Ct
C1 (t) c
Ct
= C (t) +
C
1
= 1
t
(t) c
Ct
=
C
1
= 1
t
(t) =
C
1
c
Ct
=
= 1 (t) =
1
1
c
Ct
+/ = (t) =
_
1
1
c
Ct
+/
_
c
Ct
=
1
1
+/c
Ct
=
= r (t) =
1
(t)
=
1
1 +/1c
Ct
; for t = 0, r
0
=
1
1 +/1
= r
0
+/r
0
1 = 1 = / =
1 r
0
r
0
1
=
= r (t) =
r
0
1
r
0
+ (1 r
0
) c
Ct
=
= ,(t; 0. r
0
) =
r
0
1
r
0
+ (1 r
0
) c
Ct
\t R and this expression also contains both stationary solutions.
As a graphical illustration, choose 1 = 10 and C = 1. We have the following possibilities for r
0
:
r
0
Range Remarks
0 0 no population
2 (0. 10) population below the carrying capacity
12 (10. ) population above the carrying capacity
As it may be seen from the picture, starting with no population gives no population, starting with
a value below the carrying capacity of the environment gives the classical oshape growing population,
while starting with a population above the carrying capacity gives a decreasing population. A coherent
scenario for the last variant is as follows: while a population evolves "normally" [that is, with a population
below the carrying capacity of the environment], at a certain moment the carrying capacity drops abruptly
[for example an earthquake, or ood, or an economic crisis, or some other moreorless catastrophic event
able to decrease the current carrying capacity]; in this case the population changes from increasing to
decreasing. Drawn with dots is a trajectory modied as a result of a change of the carrying capacity from
10 to 5.
60
0 1 2 3 4 5 6 7 8 9 10
0
2
4
6
8
10
12
14
x
y
LotkaVolterra equations of two populations in competition:
r
t
1
= C
1
r
1
(1 /
1
r
1
d
2
r
2
)
r
t
2
= C
2
r
2
(1 /
2
r
2
d
1
r
1
)
C
1
, C
2
the growth rates
/
1
, /
2
related to available quantity of nutrients
d
1
, d
2
govern the type of relation between the two populations
3.4. Change of variables in an EODE
3.5. Connections between EODE and Functional Equations
An information hidden in a phrase like "the general solution is..." is that there are no other types of
solutions.
3.5.1. Homogeneous functions of one variable: I will consider several alternatives depending on
the acceptance of the value 0 for the letters involved. In [6] c is considered c _ 0 while in Microeconomics
books like [13], [15] and [20] it is considered c 0. Is it any dierence between these alternatives? I
will not consider the additional cases obtained from dierent versions of the codomain. Depending on the
constant / _ 0 and ignoring the above discussion, the solutions of the following functional equations are
(generically) called functions homogeneous of degree /.
I. [r 0, c 0] [this is a case usually not considered] Find the functions , () : R
+
+
R which satises
the relation
(3.5.1) , (cr) = c
I
, (r) . \r. c R
+
+
.
where / R
+
is a given constant.
Solution:
For / = 0:
, (cr) = , (r) = , (c) = , (1) [const] = , (r) = C [the general solution is the constant function]
For / 0:
Replace r = 1 in [3.5.1] to obtain , (c) = c
I
, (1). The general solution is , (r) = cr
I
.
61
II. [r _ 0, c 0] [This is a case usually considered in Microeconomics] [Considered in [20], page 17,
section 1.11 "homogeneous of degree / function" and the conditions about r and / are unclear] Find the
functions , () : R
+
R which satises the relation
(3.5.2) , (cr) = c
I
, (r) . \r R
+
. c R
+
+
.
where / R
+
Solution:
For / = 0:
, (cr) = , (r) = , (c) = , (1) [const] = , (r) = C, for r 0. For r = 0 we have , (0) = , (0) which
is satised by any constant. So the general solution is: , (r) =
_
C. r 0
C
0
. r = 0.
with the constants C and
C
0
arbitrary. Of course, the particular solution with C = C
0
is valid and it is the only type of continuous
solution.
To verify this, evaluate , (cr) =
_
C. cr 0
C
0
. cr = 0.
c0
=
_
C. r 0
C
0
. r = 0.
= , (r), \r R
+
.
For / 0:
I
, (1). So , (r) = Cr
I
, for r 0.
For r = 0 we obtain , (0) = c
I
, (0), \c R
+
+
which leaves only the alternative , (0) = 0. Since
lim
a0
Cr
I
= 0 for any possible choice of C and / we get the general solution , (r) = Cr
I
, \r R
+
.
III. [r 0, c _ 0] [this is a case usually not considered] Find the functions , () : R
+
+
R which
satises the relation
(3.5.3) , (cr) = c
I
, (r) . \r R
+
+
. c R
+
.
where / R
+
In this form, the problem is badly posed since for c = 0 the relation , (0) = 0 , (r) is not satised
[because , (0) is not dened].
IV. [r _ 0, c _ 0] [this is a case considered in [6]] [considered also in [20], page 15 section 1.10
"Costant returns to scale" it may be inferred that r _ 0] Find the functions , () : R
+
R which satises
the relation
(3.5.4) , (cr) = c
I
, (r) . \r R
+
. c R
+
.
where / R
+
Solution:
For / = 0:
, (cr) = , (r) = , (c) = , (1) [const] = , (r) = C, for r _ 0. So the general solution is: , (r) = C.
For / 0:
I
, (1). So , (r) = Cr
I
, for r _ 0.
Alternative study with EODE:
In the following, just the case I will be considered. To study this problem with EODE, it means that
we have to derive the relations with respect to each letter, c and r. A diculty which appears from the
start is that the classical denition of the derivative of a function at a point is given for points which are
interior points for the domain, so that no matter what case we consider, the derivation may only be done
for r 0 and c 0. We look for functions as smooth as required for the involved operations.
I. For / = 0, , (cr) = , (r); partially dierentiate [3.5.1] with respect to each variable:
62
=
_
_
J
Jr
: c,
t
(cr) = ,
t
(r)
J
Jc
: r,
t
(cr) = 0.
Since r 0, from the second relation we nd that the derivative for all
positive values should be zero [which is also acceptable from the point of view of the rst relation], so that
the function is constant, , (r) = C, \r R
+
+
.
For / 0:
Consider , () C
1
and partially dierentiate [3.5.1] with respect to each variable:
=
_
_
J
Jr
: c,
t
(cr) = c
I
,
t
(r)
J
Jc
: r,
t
(cr) = /c
I1
, (r) .
Eliminate ,
t
(cr) from both equations to obtain [taking into account that both r and c are strictly
positive]:
rc
I1
,
t
(r) = /c
I1
, (r) = r,
t
(r) = /, (r) .
Solve the equation r,
t
(r) = /, (r):
, (r) = 0 is a particular solution;
in a neighborhood of a point r
0
0 such that , (r
0
) 0 we have:
,
t
(r)
, (r)
=
/
r
= ln , (r) = / ln r + ln C = , (r) = Cr
I
.
So in all cases, for r 0 and c 0 we have , (r) = Cr
I
.
3.5.2. Cauchys equations:
(3.5.5) Type I: , (r +) = , (r) +, () . \r. R.
[[1], section 2.1.1]
From [[1], section 2.1.1, Theorem 1, Theorem 2]:
Cauchys equation [type I] has solutions of the following type:
[smooth solution] , (r) = cr is a solution
[Hamel solution] [nonsmooth solution] For each "Hamel basis"
1
1 and each r R there is a
unique :
a
N, unique /
a
I
1 and :
a
I
Q, / = 1. :
a
such that r =
a
x
I=1
:
a
I
/
a
I
. For each possible
arbitrary choice of , (/) for / 1, a distinct solution is obtained.
If a solution is continuous at one point, it is continuous everywhere [and is of the type , (r) = cr]
Alternative study with EODE: Assume that a C
1
function satises , (r +) = , (r) +, (), \r. R.
Derivating with respect to leads to:
,
t
(r +) = ,
t
(), \r. R, so for = 0 we get ,
t
(r) = ,
t
(0) =const = , (r) = cr + /; when
replaced, it follows / = 0 so that the solution is , (r) = cr.
(3.5.6) Type II: , (r +) = , (r) , () . \r. R.
J
J
= ,
t
(r +) = , (r) ,
t
()
j=0
= ,
t
(r) = , (r) ,
t
(0) = , (r) = Cc
)
0
(0)a
; by replacing, we get C = 0
or C = 1. We get the smooth solution , (r) = c
Ia
.
1
From [[1], section 2.1.1]: there is an uncountable set B _ R [Hamel basis, Hamel, 1905] such that any real number x
can be uniquely represented as a nite linear combination of its elements, with rational scalars.
63
(3.5.7) Type III: , (r) = , (r) +, () . \r. R.
3.5.3. Jensens Equation: ,
_
r +
2
_
=
, (r) +, ()
2
3.5.4. DAlamberts functional equation: , (r +) +, (r ) = 2, (r) , ()
3.5.5. Pexiders Equations: I. , (r +) = q (r) +/() . \r. R.
3.6. Connections with Dierence Equations
3.6.1. Theorem. Given a linear dierence equation LDE [with constant coecients], the linear with
constant coecients EODE with the characteristic equation with roots the logarithms of the roots of the
characteristic equation of LDE which has as such that the solutions have the same values on the grid
points.
CHAPTER 4
Qualitative Results for EODE
4.1. Existence
4.1.1. Denition. A vector eld , (. ) : 1 _ R R
a
R
a
has:
(1) The Existence of Local Solutions (ELS) property at (t
0
. r
0
) 1 if: there is an interval 1
0
1 (t
0
)
and a function ,() : 1
0
R
a
which is a solution of the CP (, (. ) . t
0
. r
0
) (This type of solution
is called a "local solution").
(2) The Unicity of Local Solutions (ULS) property at (t
0
. r
0
) 1 if: for any two local solutions
,
)
() : 1
)
1 (t
0
) R
a
, , = 1. 2 of the CP (, (. ) . t
0
. r
0
) there is 1
0
1 (t
0
) such that
,
1
[
1
0
1
1
1
2
() = ,
2
[
1
0
1
1
1
2
().
(3) If in the previous we drop the interval 1
0
we obtain what is called "The Global Unicity of Local
Solutions (GULS) property at (t
0
. r
0
) 1" [if ,
1
[
1
1
1
2
() = ,
2
[
1
1
1
2
()] [the local solutions
coincide on their common domain].
(4) The Existence and Unicity of Local Solutions (EULS) property at (t
0
. r
0
) 1 if there is an
interval 1
0
1 (t
0
) such that any two local solutions coincide on 1
0
.
When the domain has a special form, 1 = 1 G _ R R
a
, where 1 is an interval, we have
two more notions:
(5) The Existence of a Global Solution (EGS) property at (t
0
. r
0
) 1 if: there is a function ,() :
1 R
a
solution of the CP (, (. ) . t
0
. r
0
) (this type of solution is called a "global solution").
(6) The Existence and Unicity of a Global Solution (EUGS) property at (t
0
. r
0
) 1 if: there is a
function ,() : 1 R
a
solution of the CP (, (. ) . t
0
. r
0
), which is unique.
4.1.2. Proposition. Consider a continuous vector eld , (. ) : 1 _ R R
a
R
a
.
If: ,
1
() : (c. /) R and ,
2
() : (/. c) R are solutions such that
lim
t,b
,
1
(t) = lim
tb
,
2
(t) = r
0
.
Then: ,() : (c. c) R, dened by ,(t) =
_
_
_
,
1
(t) . t (c. /)
r
0
. t = /
,
2
(t) . t (/. c)
is a solution.
4.1.3. Proposition. [The Integral equation attached to an EODE] Consider a continuous vector eld
, (. ) : 1 _ R R
a
R
a
. Then:
,() : 1 R
a
is a solution of
dr
dt
= , (t. r) if and only if
a.: ,() continuous and G
,()
= (t. ,(t)) ; t 1 _ 1
b.: ,() veries:
,(t) = ,(t
0
) +
_
t
t
0
, (:. ,(:)) d:. \t
0
. t 1.
65
66
4.1.4. Theorem. [Peanos Theorem; ELS] If 1 = i:t (1) and , (. ) is continuous then for each
(t
0
. r
0
) 1 the CP (, (. ) . (t
0
. r
0
)) has the ELS property.
4.1.5. Example. [A continuous vector eld without ULS] , (t. r) = 3r
23
.
4.1.6. Example. [A discontinuous vector eld without ELS] , (t. r) = c(t) =
_
0. t Q
1. t R Q
4.1.7. Example. []
4.2. Unicity
4.2.1. Lemma. [BellmanGronwall] If n(), () : 1 _ R R
+
are continuous, ` R, t
0
1 and
n() veries:
n(t) _ ` +
t
_
t
0
n(:) (:) d:
. \t 1.
then n() also veries:
n(t) _ ` c
t
R
t
0
(c)oc
.
4.2.2. Denition. The vector eld , (. ) : 1 _ R R
a
R
a
is called locallyLipschitz with respect
to the second variable (LL(II)) at (t
0
. r
0
) 1 if: there is 1
0
1 ((t
0
. r
0
)) and 1 0 such that
|, (t. r) , (t. )| _ 1|r | . \(t. r) . (t. ) 1
0
1.
4.2.3. Theorem. [CauchyLipschitz; EULS] If 1 = i:t (1) and , (. ) is continuous and LL(II) then
for each (t
0
. r
0
) 1 the CP (, (. ) . (t
0
. r
0
)) has the EULS property.
4.3. Global aspects
4.3.1. Theorem. [Global Unicity of local solutions] ULS == GULS
4.4. Solutions as functions with respect to the initial values and parameters
4.4.1. Denition. A local ow at (t
0
. r
0
) 1 for the vector eld , (. ) is a function c(. . ) :
1
1
1
0
G
0
1 (t
0
. t
0
. r
0
) R
a
such that
\(t. ) 1
0
G
0
, c(. t. ) : 1
1
R
a
is a solution of the CP (, (. ) . (t. ))
4.4.2. Theorem. [Existence and Unicity of the continuous local ow] If 1 = i:t (1) _ R R
a
,
, (. ) : 1 R
a
continuous (wrt both arguments) and LLII, then:
\(t
0
. r
0
) 1, 1
0
= 1
1
1
0
G
0
1 (t
0
. t
0
. r
0
) and ! c(. . ) : 1
0
R
a
continuous local ow at
(t
0
. r
0
).
67
T. (Teorema de punct x pentru contractii) Fie (A. d) spatiu metric complet si e 1 : A A o
contractie (adic a c (0. 1) astfel nct d (1 (r) . 1 ()) _ cd (r. ) . \r. A ). Atunci:
1. 1 este continu a.
2. \r
0
A. sirul denit prin relatia de recurent a r
a+1
= 1 (r
a
) este convergent.
3. Limita sirului este unicul punct x al functiei 1 si are loc
d (r
a
. r) 6
c
a
1 c
d (r
0
. r
1
) .
Dem:
1. Fie (r
a
)
aN
un sir convergent la r
0
. Atunci are loc
d (1 (r
a
) . 1 (r
0
)) 6 cd (r
a
. r
0
)
ao
0 = lim
ao
1 (r
a
) = 1 (r
0
) .
2. Fie : :; au loc relatiile:
d (r
a
. r
n
) = d (1 (r
a1
) . 1 (r
n1
)) 6 cd (r
a1
. r
n1
) 6 6 c
n
d (r
an
. r
0
) 6
6 c
n
(d (r
0
. r
1
) +d (r
1
. r
2
) + d (r
an1
. r
an
)) 6
6 c
n
d (r
0
. r
1
) (1 +c + c
an1
) 6
c
m
o(a
0
,a
1
)
1c
.
Din faptul c a c (0. 1) =sirul este Cauchy, deci (pentru c a spatiul este complet) convergent; se noteaz a
cu r limita sa. 1 ind continu a, are loc prin trecere la limit a n relatia de recurent a
1 ( r) = r.
adic a limita sirului este punct x al functiei. Din faptul c a functia este contractie, rezult a c a dac a ar exista
dou a puncte xe atunci
d (1 ( r
1
) . 1 ( r
2
)) = d ( r
1
. r
2
) 6 cd ( r
1
. r
2
) = r
1
= r
2
.
deci punctul x este unic. Mai mult, are loc
d (r
a
. r
n
) 6
c
n
d (r
0
. r
1
)
1 c
ao
= d ( r. r
n
) 6
c
n
d (r
0
. r
1
)
1 c
.
(Principiul contractiilor, Banach, varianta parametrizat a) Fie , : 1
v
(r
0
) 1
j
(
0
) R
a
R
n
R
n
continu a si astfel nct c (0. 1) cu propriet atile:
1.
|, (r.
1
) , (r.
2
)| 6 c|
1
2
| . \
1
.
2
1
j
(
0
) . \r 1
v
(r
0
) ;
2.
|, (r.
0
)
0
| 6 j (1 c) . \r 1
v
(r
0
) .
Atunci exist a o unic a aplicatie continu a , : 1
v
(r
0
) 1
j
(
0
) cu proprietatea
, (r. ,(r)) = ,(r) . \r 1
v
(r
0
) .
Dem: Fie
,
0
(.) : B
v
(r
0
) R
n
. ,
0
(r) :=
0
. \r B
v
(r
0
) .
,
a+1
(.) : B
v
(r
0
) R
n
. ,
a+1
(r) := , (r. ,
a
(r)) . \r B
v
(r
0
) . \: N;
Se demonstreaz a c a:
(i) ,
a
(B
v
(r
0
)) B
j
(
0
) . \: N;
68
(ii) (,
a
(.))
a
este sir Cauchy uniform pe B
v
(r
0
) ;
(iii) ,(B
v
(r
0
)) B
j
(
0
) ;
(i) ,(.) este unic a cu aceste propriet ati;
(i) ,
a
(B
v
(r
0
)) B
j
(
0
) . \: N; se demonstreaz a prin inductie:
pentru : = 0. ,
0
(r) =
0
= armatia este adev arat a;
pentru : = 1. ,
1
(r) = , (r. ,
0
(r)) = , (r.
0
) si are loc
|,
1
(r) ,
0
(r)| = |,
1
(r)
0
| = |, (r.
0
)
0
|
2.
< j (1 c) < j =
= ,
1
(r) B
j
(
0
) .
Pentru cazul general, au loc:
|,
2
(r) ,
1
(r)| = |, (r. ,
1
(r)) , (r. ,
0
(r))| _ c|,
1
(r) ,
0
(r)|
|,
3
(r) ,
2
(r)| = |, (r. ,
2
(r)) , (r. ,
1
(r))| _
_ c|,
2
(r) ,
1
(r)| _ c
2
|,
1
(r) ,
0
(r)|
.................................
|,
a+1
(r) ,
a
(r)| _ c
a
|,
1
(r) ,
0
(r)| .
de unde
|,
a+1
(r)
0
| _ |,
a+1
(r) ,
a
(r)| + +|,
3
(r) ,
2
(r)| +
+|,
2
(r) ,
1
(r)| +|,
1
(r)
0
|
_ |,
1
(r)
0
| (c
a
+ +c + 1) < |,
1
(r)
0
|
o
a=0
c
a
=
|,
1
(r)
0
|
1 c
< j
= ,
a
(B
v
(r
0
)) B
j
(
0
) .
(ii) Sirul (,
a
(.))
a
este sir Cauchy uniform pe B
v
(r
0
) pentru c a
|,
a+j
(r) ,
a
(r)| _ |,
a+j
(r) ,
a+j1
(r)| + +|,
a+1
(r) ,
a
(r)| _
_ |,
a+1
(r) ,
a
(r)|
_
c
j1
+ +c + 1
_
<
<
c
a
|,
1
(r) ,
0
(r)|
1 c
< jc
a
ao
0 \j N.
Mai mult, din faptul c a functiile ,
a
(.) sunt continue iar limita este Cauchy uniform a, urmeaz a c a sirul
de functii este uniform convergent (din faptul c a spatiul vectorial care contine codomeniul este complet)
c atre o functie continu a ,(.) : B
v
(r
0
) R
n
.
(iii) ,(B
v
(r
0
)) B
j
(
0
) pentru c a
|,
a+1
(r)
0
| <
|,
1
(r)
0
|
1 c
.
de unde
|,(r)
0
| = lim
ao
|,
a+1
(r)
0
| _
|,
1
(r)
0
|
1 c
_ j.
Trecnd la limit a n relatia de recurent a
,
a+1
(r) = , (r. ,
a
(r)) . \r B
v
(r
0
)
69
urmeaz a c a
,(r) = , (r. ,(r)) . \r B
v
(r
0
) .
(i) Unicitatea functiei ,(.) rezult a din faptul c a, dac a ar exista o alt a functie (notat a c(.) ) care s a
satisfac a
c(r) = , (r. c(r)) . \r B
v
(r
0
) .
atunci ar avea loc
|,(r) c(r)| = |, (r. ,(r)) , (r. c(r))| _ c|,(r) c(r)|
de unde rezult a ,() = c(), pentru c a c (0. 1) .
CHAPTER 5
Finite dierence equations (1/2 lecture)
The rstorder linear dierence equation:
r
a+1
= c
a
r
a
+/
a
. : N.
where r
0
, c
a
and /
a
are given.
r
1
\
= c
0
r
0
+/
0
[ c
1
c
a1
r
2
\
= c
1
r
1
\
+/
1
[ c
2
c
a1

\

\

r
a1
\
= c
a2
r
a2
\
+/
a2
[ c
a1
r
a
= c
a1
r
a1
\
+/
a1

r
a
= r
0
a1
I=0
c
I
+
a1
I=0
_
/
I

a1
i=I+1
c
i
_
[formula 10.2 in [2]; see also formulas 10.3 and 10.4]
[It should be much easier/ecient to rebuild the procedure each time it is needed than to remember
by hard the formula]
Examples:
r
a
= 2r
a1
=
r
1
\
= 2 r
0
[ 2
a1
r
2
\
= 2 r
1
\
[ 2
a2
[2 = : (: 2) : 2]

\

\
[: 2 2]
r
a1
\
= 2 r
a2
\
[ 2
1
[: 1 1]
r
a
= 2 r
a1
\

r
a
= 2
a
r
0
r
a
= 4r
a1
+ 21, r
0
= 1
71
72
r
1
\
= 4 r
0
+ 21 [ 4
a1
r
2
\
= 4 r
1
\
+ 21 [ 4
a2
[2 = : (: 2) : 2]

\

\
[: 2 2]
r
a1
\
= 4 r
a2
\
+ 21 [ 4 [: 1 1]
r
a
= 4 r
a1
\
+ 21

r
a
= 4
a
+
a1
I=0
_
21 4
I
_
= 4
a
+ 21
4
a
1
4 1
= 4
a
+ 7 (4
a
1) = 8 4
a
7.
CHAPTER 6
Improper integrals. Euler functions: Gama, Beta
For an introduction in integrals and economic applications, see:
"Blume Simon Mathematics for Economists With answers 1994", Appendix A4, pages 887893
From "Berck Strom Sydsaeter Economists Mathematical Manual 2005":
Chapter 9 "Integration"
Formulas for integrals on a noncompact domain: 9.459.49;
Formulas for the gamma function: 9.539.60;
Formulas for the beta function: 9.619.62.
From "Demidovich B. (ed.) Problems in mathematical analysis Mir 1970": Chapter V, Sec. 3 (Im-
proper integrals), ex. 1606, 1608, 1609,
The integral
(c) =
o
_
0
c
a
r
o1
dr, c (0. ) is called the gamma integral.
The integral
1(j. ) =
1
_
0
r
j1
(1 r)
q1
dr, j. (0. ) is called the beta integral.
6.0.3. Theorem. For any c (0. ), the integral (c) is convergent.
6.0.4. Theorem. For any j. (0. ), the integral 1(j. ) is convergent.
6.0.5. Theorem (Properties of the gamma integral). (1) () is a class C
o
(0. ) convex func-
tion.
(2) * (1) = 1.
(3) * (: + 1) = :!, \: N.
(4) *
_
1
2
_
=
_
:.
(5) * (c) 0 \c (0. ).
(6) * (c + 1) = c (c), \c (0. ).
(7) * For c (0. 1), (c) (1 c) =
:
sin (:c)
.
(8) * (c)
_
c +
1
2
_
= (2c) [Legendres formula].
(9) lim
o0
c (c) = 1.
(10) lim
oo
(c + 1)
c
a
c
o
_
2:c
= 1 [Stirlings formula]
(11)
(a)
(c) =
_
o
0
c
a
r
o1
(ln r)
a
dr
(12) [Various important results, provable by using the properties of the gamma function]
(a) lim
oo
(c +t)
c
t
(c)
= 1,
73
74
(b) lim
no
(:+:)!
:! :
a
= 1,
(c) lim
no
1 3 (2:1)
2 4 (2:)

_
: = 1 [Wallis formula],
(d) :
no
(c)
_
c +
1
n
_

_
c +
n1
n
_
= (2:)
m1
2

_
: (:c) [Gauss formula]
6.0.6. Theorem (Properties of the beta function). (1) * 1(j. ) 0.
(2) * 1(j. ) =
(j) ()
(j +)
.
(3) 1(. ) is a class C
o
((0. ) (0. )) function.
(4) * 1(j. ) = 1(. j).
6.0.7. Theorem (Integrals reductible at Euler functions). (1) * [The Poisson integral]
o
_
0
c
a
2
dr =
_
:
2
.
(2) ** For j. 0,
2
_
0
sin
2j1
r cos
2q1
rdr =
1
2
1(j. ).
(3) **
o
_
0
c
a
2
r
a1
dr =
1
2
_
:
2
_
.
(4) ** For c 0, , 0, c 1,
o
_
0
c
oa
r
c
dr =
1
oo
1

_
c+1
o
_
(5) * [Fresnels integrals]
o
_
0
cos r
_
r
dr =
o
_
0
sin r
_
r
dr =
_
:
2
.
(6) **
b
_
o
(r c)
n
(/ r)
a
dr = (/ c)
n+a+1
1(:+ 1. : + 1)
(7) *
b
_
o
_
(r c) (/ r)dr =
:
8
(/ c)
2
.
(8) *
b
_
o
1
_
(r c) (/ r)
dr = :.
(9) ** For [t[ < 1,
2
_
0
tan
t
rdr =
:
2

1
cos
t:
2
.
CHAPTER 7
Applications of Calculus to economic modelling
75
Part 2
Probabilities (7 lectures)
CHAPTER 8
Events. Probability: classic and axiomatic denition. Field of events.
Properties of probability.
79
CHAPTER 9
Conditional probability. Probability of a union/intersection of events. Total
probability formula. Bayes formulas. Classical probability schemes.
81
CHAPTER 10
Denition of a random variable. Operations with random variables.
Examples on the discrete case. Cumulative distribution function: denition,
properties. Functions of random variables.
83
CHAPTER 11
Continuous random variables. Probability density function: denition,
properties.
85
CHAPTER 12
Moments of random variables. Expectation and variance. Properties.
Chebyshev inequality.
87
CHAPTER 13
Discrete bivariate random variables: marginal distributions, moments,
conditional distributions, covariance, correlation.
89
CHAPTER 14
Discrete and classical distributions. Applications of probability theory to
economic modelling.
91
CHAPTER 15
Convexity
A _ R
a
is called convex if \c. / A, [c. /] _ A.
Convexity implies that all goods/commodities are measured with measures that are perfect divisible.
93
APPENDIX A
* High School Revision
Mathematical terminology is a complex domain. There are dierent schools (eg AngloSaxon, French,
Russian, Chinese), dierent languages and dierent periods of time that impose dierent and alternative
notations and concepts. The following material is intended to be a review as well as an initial declaration
of notations, symbols and concepts in order to enable dialogues like "That object we dont use it like this...
we are used with this convention... because the other one is wrong... from this point of view...". For the
malicious inclined, it may be called "symbolese" :).
Mathematics is about proving your statements, and not about persuading, convincing or believing.
Formulas are shorthands for proven statements under certain conditions and its a mistake to apply a
formula without checking the conditions under which it is valid.
For all the results that follow it should be distinguished between qualitative and quantitative results.
One reason why making this distinction is that while usually computer/software is able to reach most
quantitative results (even much better than humans do), they (the computer/software) have diculties to
establish qualitative results.
A.1. Sets
It is dicult (if not impossible) to give a formal denition to the "set" notion. Instead, an imperfect
description will be used, which is "a set is a collection of objects" (to give a hint about the imperfection
of this description, try answering the questions: "What is a collection?"; "What is an object?"). Formally
speaking, the "set" notion will be considered "a primitive notion" (that is, a notion for which we have
some intuition but we do not dene it formally); the reader interested in more information may consult
more advanced texts, like [5] or [9].
A.1.1. Apartenence: we call "apartenence" and denote by "" the relation between an arbitrary
object c and a set ; there are two mutually exclusive possibilities:
either c (the object is an element of the set ),
Ex:
c = 2, = 2. 3. 4, 2 2. 3. 4
or else
c , (the object is not an element of the set )
Ex:
c = 5, = 2. 3. 4, 5 , 2. 3. 4
A.1.2. Inclusion: we call "inclusion" and denote by "_" the relation between two arbitrary sets
and 1; there are three possibilities:
_ 1 [read: is included in 1] [\r . r 1] (each element of is also an element of 1)
(alternative writing: 1 _ [read: 1 includes ]) (1 is also called "a subset of ")
[Ex: 2. 3 _ 2. 3. 4]
95
96 Cristian Necul aescu
or
1 _
or
Neither _ 1, nor 1 _ [ * 1 `1 1 * ]
Ex:
= 2. 3. 4, 1 = 2. 3. 5, 2. 3. 4 * 2. 3. 5 `1 2. 3. 5 * 2. 3. 4
A.1.3. Equality of sets: we call two sets and 1 "equal" if _ 1 `1 1 _ (the sets have
exactly the same elements). There are two possibilities:
= 1 (the sets are equal)
,= 1 (the sets are dierent) (the sets are not equal)
A.1.4. Strict inclusion: we call "strict inclusion" and denote by "" the relation between two
arbitrary sets and 1 dened by:
1 == _ 1 `1 ,= 1.
A.1.5. The powerset of a set: we call "the powerset of " and we denote by T () the collection
of all subsets of :
T () = ; _ .
A.1.6. Operation with sets:
Set Union: ' 1 = r; r C1 r 1
Set Intersection: 1 = r; r `1 r 1
Set Dierence: 1 = r; r `1 r , 1
Cartesian product of sets: 1 = (r. ) ; r `1 r 1
A.1.1. Remark (Properties of set operations). Let , 1, C T () and denote C = (the
complement of with respect to ). Properties of set operations:
(1) ' = (unions idempotency);
(2) ' = (unions last element property);
(3) = (intersections idempotency);
(4) = (intersections neutral element);
(5) ' O = (unions neutral element);
(6) O = O (intersections rst element);
(7) ' 1 = 1 ' (unions commutativity);
(8) 1 = 1 (intersections commutativity);
(9) ' (1 ' C) = ( ' 1) ' C = ' 1 ' C (unions associativity);
(10) (1 C) = ( 1) C = 1 C (intersections associativity);
(11) ' (1 C) = ( ' 1) ( ' C) (unions distributivity with respect to intersection);
(12) (1 ' C) = ( 1) ' ( C) (intersections distributivity with respect to union);
(13) ' ( 1) = ;
(14) ( ' 1) = ;
(15) ' C = ;
(16) C = O;
(17) CC = ;
(18) C ( ' 1) = C C1; C(
i1
i
) =

i1
C
i
(De Morgans relations);
FABIZ Lecture Notes 97
(19) C ( 1) = C ' C1; C(
i1
i
) =

i1
C
i
(De Morgans relations);
(20) 1 = C1 (set dierence);
(21) (1 ' C) = ( 1) C;
(22) (1 C) = ( 1) ' ( C);
(23) ( ' 1) C = ( C) ' (1 C);
(24) ( 1) C = (1 C) = ( C) 1;
(25) (1 ' C) = ( 1) ' ( C);
(26) (1 C) = ( 1) ( C);
(27) (1 C) = ( 1) ( C);
Readers interested in an applicable introduction should also consult [7] (especially for applications in
databases)
A.2. Usual Number Sets. Countability
Set Denition Name
N 0. 1. 2. . :. The set of natural numbers (nonnegative integers)
Z 0. 1. 1. 2. 2. . :. :. The set of integers
Q
_
o
b
; c Z. / N
+
_
The set of rationals (fractions)
R To be dened later The set of real numbers
C c +/i; c. / R The set of complex numbers
N
,=
Z
,=
Q
,=
R
,=
C
3 Z N,
3
2
Q Z,
_
2 R Q.
Proof. By contradiction: Suppose
_
2 Q. Then there are c. / N such that
_
2 =
c
/
= 2/
2
= c
2
= 2 divides c = c = 2/ = 2/
2
= 4/
2
= /
2
= 2/
2
= 2 divides / = the fraction
c
/
may be simplied by
2. So if
_
2 were a rational number, it would be possible to simplify it by 2 an indenite number of times,
which is a contradiction.
A.2.1. Decimal structure of numbers: we briey discuss the possible types of decimal structure
for real numbers.
Number: Number of decimals Type Example
Fraction [ Q] nite 1. 2
innite simple periodical 0. (3)
innite mixed periodical 0. 2 (3)
Nonfraction [ R Q] innite nonperiodical :. c. ln 2
A.2.1. Theorem. Consider c 1. . 9. Then 0. (c) =
c
9
:
Proof. r = 0. (c) = 0. cccccccc =
1
10
(c. (c)) =
1
10
(c + 0. (c)) =
=
1
10
(c +r) = 10r = c +r = 9r = c = r =
c
9
.
0. (0) =
0
9
= 0, 0. (9) =
9
9
= 1.
In a similar manner we get 0. (c
1
c
I
) =
c
1
c
I
10
I
1
=
c
1
c
I
99 9
. .
I times
Irrational numbers have a nonperiodical decimal representation.
Some examples:
: = 3. 141592653589793238462643383279502 884197169399375105820974944592307816406286208998628...
c = 2. 7182818284590452353602874713526624977572470936999595749669676277240766303535475945713...
ln 2 = 0. 693147180559945309417232121458176568075500134360 2552541206800094933936219696947156...
A.2.2. Denition. A set A is countable when there is a bijection between A and N.
A.2.3. Denition (Alternative). A set is countable when it may be organized as a sequence in which
each term may be attained after a nite number of steps.
N is countable because N = 0. 1. 2. . :. and each term may be attained after a nite number
of steps.
A.2.4. Remark. Even if a set is countable there are "bad ways" to organize the set as a sequence. For
example, if the set of natural numbers is organized as a sequence in which the rst term are all the even
numbers and then all the odd numbers, then the odd numbers cannot be reached after a nite number of
steps (so, even if the set is countable, some counting methods may be bad from the alternative denition
point of view)
Z is countable because Z = 0. 1. 1. 2. 2. . :. :. :
c
0
= 0. c
1
= 1. c
2
= 1. c
3
= 2. c
4
= 2.
(alternate negative numbers with positive numbers)
Q is countable:
Cantor procedure. It is enough to prove the statement for the positive rational subset, because
then the same procedure may be applied for the negatives and a procedure similar with that of counting
the set Z to obtain a good counting procedure for the whole set Q.
The Cantor counting procedure for positive rationals:
Organize the positive rational numbers into a table in which the line is occupied by the fractions with
numerator i and the column , is occupied by the fractions with denominator ,. The table has innite
number of lines and columns but has nite secondary diagonals.
1
1
1
2
1
2
6
1
3

1
:

3
2
1
5
2
2
2
3

2
:

4
3
1
3
2
3
3

3
:

:
1
:
2
:
3

:
:

Secondary diagonals are:
1
1
1
2
1
2
3
2
1
6
1
3
5
2
2
4
3
1

Counting along the secondary diagonals leads to a sequence with the desired property (each term may
be attained after a nite number of steps).
A.2.5. Theorem. R is not countable:
Proof. Prove that the interval [0. 1] ( R) is not countable, by contradiction: suppose that [0. 1] is
countable. Then it would exist a numerical sequence (r
a
)
aN
such that [0. 1] = r
1
. r
2
. . r
a
. .
Construct the sequence of closed intervals (1
I
)
IN
in the following manner: put 1
0
= [0. 1];
1) Cut the interval 1
0
= [0. 1] in three parts [0. 1] =
_
0.
1
3
'
_
1
3
.
2
3
'
_
2
3
. 1
all of them closed and with

equal lengths and choose from them as 1
1
an interval which does not contain r
1
.
The interval 1
1
has the following properties:
a) 1
1
= [c
1
. /
1
] [0. 1] (1
1
is a closed interval included in [0. 1]).
b) /
1
c
1
=
1
3
.
c) r
1
, 1
1
.
2) For each / 1 apply for the interval 1
I1
the procedure from step 1) (the interval 1
I1
replaces the
interval [0. 1]) to obtain the interval 1
I
with the properties:
a) 1
I
= [c
I
. /
I
] 1
I1
(1
I
is a closed interval included in 1
I1
)
b) /
I
c
I
=
b
k1
o
k1
3
.
c) r
I
, 1
I
.
The sequence of intervals (1
I
)
IN
thus obtained has the properties:
a) all the elements are closed intervals included in [0. 1] and the sequence is decreasing (in the sense
that 1
I
1
I1
)
b) The length of the interval 1
I
is
1
3
k
.
c) r
)
, 1
I
\, = 1. /
Observe from these properties that the extremes of the intervals form two numerical sequences (c
I
)
IN
increasing and (/
I
)
IN
decreasing, with all the elements from (c
I
)
IN
smaller than all the elements from
the sequence (/
I
)
IN
. The two numerical sequences are monotonic and bounded so they converge to some
limits denoted by c and / for which c _ /.
Then the intersection

IN
1
I
= [c. /] (so also nonvoid as it contains at least one element) and any
element of the intersection can not be a member of the initial numerical sequence (r
a
)
aN
(because of the
construction of the sequence of intervals (1
I
)
IN
). So at least one element from [0. 1] was found, which is
not an element of the numerical sequence (r
a
)
aN
, which is a contradiction with the initial assumption. It
follows that the set R is not countable.
A.2.6. Theorem. The set of all innite (countable) sequences of 0s and1s is not countable.
Proof. Suppose by contradiction that the set can be organized as a sequence :
1
= (:
a
1
)
aN
, :
2
=
(:
a
2
)
aN
, of sequences of 0s and 1s. Construct the sequence : = (:
a
)
aN
in the following way:
:
a
=
_
0, if :
a
a
= 1
1, if :
a
a
= 0
. The sequence : is a new sequence of 0s and 1s which does not belong to the
sequence (:
a
)
aN
, contradiction.
A.3. Minorants, majorants
A subset of R is majorated (minorated) if there is an element c R such that r _ c (r _ c), \r ;
the element c is called "a majorant of " ("a minorant of "). An element c is maximal (minimal) if it
is a majorant (minorant) and c .
An element c is the upper bound of the set if:
1. c is a majorant for .
2. c is the smallest of the majorants (if c
t
R also satises r _ c
t
, \r , then c _ c
t
)
A.4. Relations
A.4.1. Denition. Given two sets A, 1 and a set G
1
_ A 1 , the triple 1 = (A. 1. G
1
) is called
binary relation (correspondence) between A and 1 .
A is the domain of 1,
1 is the codomain (the target space) of 1 and
G
1
is the graph of 1.
The set
1
1
= r A; 1. (r. ) G
1
_ A
is the eective domain of 1 (the preimage of 1 under 1).
The set
Im
1
= 1 ; r A. (r. ) G
1
_ 1
is the range (the image) (the set of images) of 1.
The relation 1
1
= (1. A. G
1
1) where
G
1
1 = (. r) ; (r. ) G
1
_ 1 A
is the relation inverse to 1.
The relation 1
A
= (A. A. G
1
X
) where G
1
X
= (r. r) ; r A _ AA is the identity relation over A.
A.4.2. Remark. Two relations are equal when the two triples are equal.
A.4.3. Denition. Given three sets A, 1 , 2 and two relations 1
1
= (A. 1. G
1
1
), 1
2
= (1. 2. G
1
2
),
the relation 1 = (A. 2. G
1
) where:
G
1
= (r. .) ; r A. . 2 AND 1 such that (r. ) G
1
1
AND (. .) G
1
2
is the composed relation (denoted 1

2
1
1
) (1
2
1
1
= 1).
A.4.4. Remark. The composition operation is associative but not commutative.
A.4.5. Denition. 1 = (A. A. G
1
) is a preorder relation if:
(1) Reexivity: G
X
_ G
1
(\r A, (r. r) G
1
);
(2) Transitivity: (r. ), (. .) G
1
= (r. .) G
1
.
1
) is an equivalence relation if it is a preorder with the extra property
G
1
1 _ G
1
((r. ) G
1
=(. r) G
1
) (symmetry). The set ^ r = A; (r. ) G
1
is the equivalence
class of r with respect to 1. The set of equivalence classes is denoted A,1 (also called the factor set).
A.4.7. Remark. Properties of equivalence classes:
(1) r ^ r, \r A;
(2) (r. ) 1 = ^ r = ^ ;
(3) (r. ) , 1 = ^ r ^ = O.
1
) is an order relation if it is a preorder with the antisymmetry
property: G
1
G
1
1 = G
1
X
((r. ) G
1
and (. r) G
1
= r = ).
An order relation is called total (or complete) when \r. A, (r. ) G
1
OR (. r) G
1
(G
1
'
G
1
1 = A A) and partial otherwise.
The pair (A. 1) is called ordered set (by the order relation 1).
An ordered set is called inductively ordered if any totally ordered subset is majorated.
A.4.9. Denition. In Economics a preorder is called preference if it is also total (complete) (in the
sense that \r. A, (r. ) G
1
OR (. r) G
1
(G
1
' G
1
1 = A A)) and r1 means "r is at least
as good as ". The relations derived from 1 are "indierence" [meaning (r. ) G
1
and (. r) G
1
] and
"strict preference" [meaning (r. ) G
1
and (. r) , G
1
].
A.4.10. Remark. (Zorns Lemma) Any inductively ordered set has a maximal element.
A.4.11. Remark. If 1 is an order relation on A, then 1
1
is also an order relation on A (the dual
order relation).
Proof. Reexivity: r A = (r. r) G
1
= (r. r) G
1
1;
Transitivity: Fie (r. ) G
1
1 and (. .) G
1
1 = (. r) G
1
and (.. ) G
1
= (.. r) G
1
=
(r. .) G
1
1;
Antisymmetry: (r. ) G
1
1 and (. r) G
1
1 = (r. ) G
1
and (. r) G
1
= r =
A.5. Functions
A.5.1. Denition. A function is a relation , = (A. 1. G
)
) (also called functiontype relation) with the
following properties:
(1) \r A, 1 , (r. ) G
)
;
(2) (r.
1
) G
)
and (r.
2
) G
)
=
1
=
2
.
The usual notation is , () : A 1 and the connection between , () and G
)
is given by:
G
)
= (r. , (r)) ; r A .
A.5.2. Remark. Two functions are equal only when the two triples are equal (that is, when the
domains, codomains and the graphs are all equal).
A.5.3. Remark. The relation 1
A
(the identity relation over A) is a functiontype relation (1
A
() :
A A, 1
A
(r) = r for all r A).
A.5.4. Remark (Typical vocabulary, also see sections 13.1, 13.5 [3]). Consider a function , () : A 1 .
is called the domain of , (). The set 1 is called the codomain (the target space) of , (). The set
, (A) = , (r) ; r A (_ 1 ) is called the image of A under , () (the range of , ()) (the set of images
of elements from A under , ()). For a set _ A, the set , () = , (r) ; r (_ 1 ) is the (direct)
image of the set under the function , (). For a set 1 _ 1 the set ,
1
(1) = r A; , (r) 1 (_ A)
is the preimage of the set 1 under the function , ().
A.5.5. Remark (See also Thm. 13.6, [3]). For a function , () : A 1 the following statements are
true (when T (A) C denotes the set A and when 1 T (1 ), C1 denotes 1 1):
(1)
\
1
.
2
T (A) .
1
_
2
= , (
1
) _ , (
2
)
(2)
\1
1
. 1
2
T (1 ) . 1
1
_ 1
2
= ,
1
(1
1
) _ ,
1
(1
2
)
(3)
\ T (A) . \1 T (1 ) . , () _ 1 = _ ,
1
(1)
(4)
\ T (A) . ,
_
,
1
()
_
_ _ ,
1
(, ())
(5)
\ T (A) . \1 T (1 ) . ,
_
,
1
(1)
_
= , () 1
(6)
\(1
i
)
i1
_ T (1 ) . ,
1
(
_
i1
1
i
) =
_
i1
,
1
(1
i
)
(7)
\(1
i
)
i1
_ T (1 ) . ,
1
(
i1
1
i
) =
i1
,
1
(1
i
)
(8)
\1 T (1 ) . ,
1
(C1) = C,
1
(1)
(9)
\(
i
)
i1
_ T (A) . ,(
_
i1
i
) =
_
i1
, (
i
)
(10)
\(
i
)
i1
_ T (A) . ,(
i1
i
) _
i1
, (
i
)
Proof. Exercise
Readers interested in an applicable introduction should also consult [7] (especially for applications in
databases)
A.5.6. Denition (Composition). If the functions , () : A 1 and q () : 2 1 are such that
, (A) _ 2 then a new function named "the composition of , () with q ()" may be considered, dened in
the following way: (q ,) () : A 1, (q ,) (r) = q (, (r)).
Composition is not dened for each possible pair of functions. When it is dened, it is associative but
not commutative (even if both operations are possible).
A.5.7. Denition. A function , () : A 1 is called surjective (onto) if:
\ 1. r
j
A. , (r
j
) = .
or equivalently, if , (A) = 1 .
A.5.8. Denition. A function , () : A 1 is called injective (onetoone) if
r
1
,= r
2
= , (r
1
) ,= , (r
2
) .
A.5.9. Denition. A function , () : A 1 is called invertible if there is another function q () : 1
A such that (, q) () = 1
Y
() and (q ,) () = 1
A
().
A.5.10. Remark (Surjectivity in terms of equations, also see p. 297, [3]). A function , () : A 1
is surjective if and only if the equation , (r) = (considered as an equation in the unknown r and with
parameter ) has at least a solution in A for each possible value of the parameter from 1 .
A.5.11. Remark (Surjectivity in terms of graph). A function , () : A 1 is surjective if and only if
for each
0
1 the intersection G
)
(r.
0
) ; r A is nonvoid (intuitively: the graph of the function
has at least a common point with any horizontal line corresponding to the codomain).
A.5.12. Remark (Injectivity in terms of equations, also see p. 297, [3]). A function , () : A 1
is injective if and only if the equation , (r) = (considered as an equation in the unknown r and with
parameter ) has at most one solution in A for each possible value of the parameter from 1 .
A.5.13. Remark (Injectivity in terms of graph). A function , () : A 1 is injective if and only if
for each
0
1 the intersection G
)
(r.
0
) ; r A has at most one element (intuitively: the graph of
the function has at most one common point with any horizontal line corresponding to the codomain).
A.5.14. Remark. When a function is invertible, there is an unique function q () as in the denition
of invertibility. This function is called the inverse function and is denoted by ,
1
().
A.5.15. Remark. A function is invertible if and only if it is injective and surjective.
Functions in Economics
A.6. Binary Logic
A.6.1. Binary logic for propositions. A proposition is a statement that is either true or false;
statements which are ambiguous or contradictory are not acceptable in the present setting.
Binary logic deals with declarative statements (also called logical propositions), operations
with them (also called logical connectives) and evaluation of their truth values. It considers only
two possible values (TRUE, coded 1 and FALSE, coded 0); a statement is supposed to take exactly one
of these two values. Although each acceptable statement has exactly one truth value, the statement and
its truth value should not be mixed up.
Examples of statements which are not part of binary logic (because they fail to have exactly one truth
value):
It will rain tomorrow.
Ambiguous
(will not know until tomorrow)
Question:
Is a zebra white and blackstriped or
black and whitestriped?
Answer: Yes
Ambiguous answer :)
"I am lying"
"This statement is false"
selfreferential sentences
(The assumption that the sentence is true
leads to the conclusion that it is false)
A.6.1. Remark. [Logical Operations] Logical operations are functions (also called logical con-
nectives or logical operators) applicable on acceptable or valid logical propositions. The following
notations/signs will be used:
Symbol Meaning Common Usage
|, ~ Negation NOT
. Disjunction OR
., & Conjunction AND
Implication If...then
, = Equivalence If and only if
Existence quantier There exists/There is
! Existence of an unique There is an unique
, negated There is not
\ Universal quantier For all
Their behavior will be described by means of truth tables in which the rst line describes the logical
objects involved and the rst column (or the rst two columns) from left describe the possible truth values.
A.6.2. Denition. Logical negation (NOT) (NON):
j |j
0 1
1 0
A.6.3. Denition. Logical conjunction (AND):
j j .
0 0 0
0 1 0
1 0 0
1 1 1
A.6.4. Denition. Logical disjunction (OR):
j j .
0 0 0
0 1 1
1 0 1
1 1 1
This operand is also called inclusive disjunction (to distinguish from exclusive disjunction XOR
which is true only when exactly one component is true)
A.6.5. Denition. Logical implication (IfThen):
(1) Truth implies only truth.
(2) False implies any value.
A.6.6. Theorem. [Implication] Logical implication is given by the truth table:
j j
0 0 1
0 1 1
1 0 0
1 1 1
Proof. Using rules 1. and 2. from the above denition gives the truth table for implication (this
means that the following truth table is a proved result and not a denition:
j j
0 0 1 (apply rule 2)
A.6.7. Theorem. [Properties of operations with logical statements]

(1) | (|j) = j (double negation)
(2) j . = . j (commutativity of disjunction)
(3) j . ( . :) = (j . ) . : (associativity of disjunction)
(4) j . 1 = 1 (last element property for disjunction)
(5) j . 0 = j (neutral element property for disjunction)
(6) j . = . j (commutativity of conjunction)
(7) j . j = j (idempotency of conjunction)
(8) j . j = j (idempotency of disjunction)
(9) j . ( . :) = (j . ) . : (associativity of conjunction)
(10) j . 0 = 0 (rst element property for conjunction)
(11) j . 1 = j (neutral element property for conjunction)
(12) | (j . ) =|j.| (De Morgan laws)
(13) | (j . ) =|j.| (De Morgan laws)
(14) j . ( . :) = (j . ) . (j . :) (distribution of conjunction with respect to disjunction)
(15) j . ( . :) = (j . ) . (j . :) (distribution of disjunction with respect to conjunction)
Proof. All the properties can be proved by means of truth tables. The proofs are left to the reader.
A.6.8. Theorem. [Expression of implication by means of the other operators]
|j . = j
Proof. By truth table.
A.6.9. Theorem. [Negation of implication]
| (j ) = j.|
Proof. | (j ) =| (|j . ) =| (|j) .| = j.|
A.6.10. Theorem. ["Proof by Contradiction" Principle] [Contrapositive formof j ][Proofs
in contrapositive form]
j = (|) (|j)
Proof. j =|j . = .|j =| (|) .|j = (|) (|j)
A.6.2. Binary logic for predicates.
A.6.11. Denition. A logical predicate is a function j () : 1 1 (1 is the set of propositions
acceptable in Binary Logic)
A.6.12. Denition (Reformulation). A logical predicate is a function with range the set of propositions
acceptable in Binary Logic and with any domain (which stands for the set of predicates parameters)
Logical quantiers together with predicates form new types of propositions. Their rules for negation
are:
| (\r. j (r)) = r. |j (r)
| (r. j (r)) = \r. |j (r)
When two or more quantiers are attached to a predicate to form a proposition, the quantiers generally
dont commute:
\r
a
j (r.
a
) ,=
0
\rj (r.
0
)
A.6.3. A brief list of ploys and fallacies. [from: "Tracy Bowell and Gary Kemp Critical Thinking
- A Concise Guide 2005, second edition, Routledge"]
Ploys ["dirty tricks", characterized by the lack of any reasoning]:
Appeal to novelty
Appeal to popularity
Appeal to compassion, pity, guilt, fear
Appeal to cuteness, sexiness, coolness
Appeal to wealth, status, power
Hard sell and buzzwords
Scare quotes
Ambiguity or vagueness
Misleading implication
Subject changing
Fallacies "incorrect or misleading notion or opinion based on inaccurate facts or invalid reasoning"
Formal:
+ Arming the consequent [j " = " j]
+ Denying the antecedent [(j ) & j " = " ]
+ A prescriptive conclusion is deduced solely from some description
+ Application of Bayes rule based only on comparing the probabilistic information within
each class and disregarding the information about the richness of the classes
Substantive
+ Majority belief
+ Common practice
+ Ad hominem, and subspecies
Circumstantial Ad hominem
Tu quoque
+ Appeal to authority
+ Rejection based on incompleteness
+ Conation between morality and legality
+ Weak analogy
Causal
+ Post hoc ergo propter hoc (temporal priority is considered sucient for a causal rela-
tion)
+ Mistaking correlation for cause
+ Inversion of cause and eect
Epistemic
+ Appeal to ignorance
+ Exceptions to Lebnitzs Law (if one thing is identical with another one, then what is
true of one must be true of the other)
Further
+ Equivocation
+ Red herring
+ Sliperry slope (oodgates)
+ Straw man (ignore the opponents real position and set up a weaker version of the
position, by missrepresenting it, exaggerating it distorting it or simplifying it)
+ Begging the question (the validity of the conclusion is assumed by at least one of its
premises)
+ False dilemma (pretending less options than there are in fact)
A.7. Database applications for Logic, Sets, Relations and functions
It is more convenient to apply all of these topics (namely Logic, Sets, Relations and Functions) without
distinguishing which part is applied in a certain topic, because this approach gives an overall view for
databases. The software applications to have in mind are two: Oracle and CRANR an open source
software product for Statistics that uses builtin database operations.
A.7.1. Denition. A table is a set of functions with the same domain. The empty set is a table over
any set (as domain). The common domain of the functions is "the heading of the table". In common
language, the heading stands for "column names" and the functions stands for rows.
With two or more "compatible" tables (they have the same heading) set operations can be performed,
like: union, intersection, dierence.
A.7.2. Denition. Projection is the operation of restricting the common domain of a table (the head-
ing) to a subset (a subheading).
A.7.3. Denition. Table restriction is the operation of selecting a subset of functions from the initial
functions which belong to the table.
A.7.4. Denition. Join is the operation of "prolongation"/"gluing" the functions which composes two
tables, as long as they are "compatible" in the sense that on the intersection of the two common domains
(the common part of the headings) the functions coincide. A particular join operation is the extension
operation, which extends the heading of the table and the corresponding functions of the table.
A.7.5. Denition. Database or table queries are predicates built over the queried objects. They are
used with several purposes, like gathering specic information from the object or verify certain integrity
issues for the queried object.
A.7.6. Remark. The type of logic used in databases is more than binary. Readers interested in an ap-
plicable introduction should also consult [7] (especially for applications in databases) for more information
about ternary logic and application in Oracle.
Ternary logic in CRANR statistical software:
AND table TRUE FALSE NA
TRUE TRUE FALSE NA
FALSE FALSE FALSE FALSE
NA NA FALSE NA
OR table TRUE FALSE NA
TRUE TRUE TRUE TRUE
FALSE TRUE FALSE NA
NA TRUE NA NA
A.8. Sequences
A.8.1. Denition. A sequence of elements from the set A ,= O is a function c () : N A. Usual
notation: c (:) = c
a
(alternative names for :: the index/rank/position of the term in the sequence)
A.8.2. Denition. The set c
a
; : N is the range of the sequence.
A.8.3. Denition. The sequence (/
I
)
IN
is a subsequence of (c
a
)
aN
if for all / N,
_
/
I
= c
a
k
. `1
0 _ :
1
< :
2
< < :
I
< .
Consider a topological structure T on the set A.
A.8.4. Denition. (Denition with neighborhoods) The sequence (c
a
)
aN
_ A is convergent towards
c A if:
\\ 1 (c) . :
\
N. c
a
\. \: _ :
\
.
A.8.5. Remark. One notation is c
a
c; alternative notations are c
a

ao
c, c
a
A
ao
c, c
a
A
c depend-
ing on what level of detail is needed to be underlined. For example
_
1 +
1
:
_
a
R
c but
_
1 +
1
:
_
a
Q
, c
(the sequence
_
1 +
1
:
_
a
may be considered both a sequence of real numbers and a sequence of rational
numbers; despite that the sequence remains the same, considering it in dierent contexts is leading to
dierent properties (the Euler number is real but not rational so the sequence converges as a real sequence
but diverges as a rational sequence).
Other denitions for convergence, which are equivalent in similar contexts:
A.8.6. Denition. Denition of convergence:
\ 0 :
.
N \: _ :
.
[c
a
c[ < .
Any neighborhood of the limit contains all the terms of the sequence beginning with a certain
index.
Any neighborhood of the limit escapes (does not contain) only a nite number of terms of the
sequence.
A.8.7. Denition. Limit point of the sequence (c
a
)
aN
is an element / A such that there is a
subsequence (/
I
)
IN
convergent towards / (any neighborhood of the limit point contains an innite number
of sequence terms).
A.8.8. Proposition. If A (as a topological space) satises the "separability condition":
\r. A. r ,= . \
0
1 (r) . l
0
1 () . \
0
l
0
= O.
then the limit of a sequence when exists is also unique.
Proof. Proof by contradiction: suppose there are two elements ,
1
. ,
2
A, ,
1
,= ,
2
such that for
i = 1. 2 we have: \\ 1 (,
i
) . :
i
\
N, ,
a
\ , \: _ :
i
\
. Choose two disjoint neighborhoods for ,
1
and ,
2
: \
i
1 (,
i
), \
1
\
2
= O. Then \: _ max
_
:
1
\
1
. :
2
\
2
_
, ,
a
\
1
\
2
= O contradiction (from the
assumption that there are two distinct limits). So ,
1
= ,
2
.
A.8.9. Remark. It may seem very abstract to imagine a situation where the above "separability
condition" is not satised; yet, there is at least one situation when it appears in a very practical way. Image
a theoretical model T which simulates a real situation R [take, for example, a psychological description
of some persons based on 20 questions graded from 1 to 10]. A common fallacy is to falsely identify the
reality with the theoretical model [to consider that R = T]. What happens is that while T is separable,
R with the structure inherited from T is not separable anymore [John and Jim may have identical results
while being distinct real persons].
A.8.10. Proposition. When a sequence converges, any subsequence also converges towards the same
limit.
Proof. Ex.
A.8.11. Proposition. If the sequence (,
a
)
aN
from R is increasing and bounded from above then it is
convergent.
Proof. Consider a real increasing and bounded from above sequence (,
a
)
a0
. From Cantor property,
` = sup
a
c
a
R (` is the upper bound of the set ,
a
; : N). Then \ 0 the number ` is
not a majorant for the set ,
a
; : N so :
.
N such that ,
a
"
` ; from the monotonicity of the
sequence it follows \: _ :
.
,
a
` so that \: _ :
.
it happens that ` < ,
a
"
_ ,
a
_ ` < ` +,
which means [,
a
`[ _ \: _ :
.
and so ,
a
`.
a
)
aN
from R is decreasing and bounded from below then it is
convergent.
Proof. Exercitiu
A.8.13. Proposition (BolzanoWeierstrass Theorem). (Lema E. Cesaro 1859-1906) If the sequence
(,
a
)
aN
from R is bounded then it has at least one convergent subsequence (it has at least one limit
point).
Proof. For the bounded sequence (,
a
)
a0
the set ,
a
; : N is bounded, that is, with : = inf
aN
,
a

and ` = sup
aN
,
a
< , it happens that ,
a
; : N _ [:. `]. Consider as the interval 1
1
the one
from [:.
n+A
2
] or [
n+A
2
. `] which contains an innity of the sequence terms; then |c:q/t(1
1
) =
An
2
and
there is an index /
1
N such that ,
I
1
1
1
. Consider as the interval 1
2
, chosen from the halves of 1
1
, the
one which contains an innity of the sequence terms; then |c:q/t (1
2
) =
| (1
1
)
2
=
` :
2
2
and there is an
index /
2
N with /
2
/
1
such that ,
I
2
1
2
. A sequence of intervals (1
j
)
jN
is obtained by induction and
this sequence has the properties:
1
j
= [c
j
. ,
j
] _ [:. `]
1
j+1
1
j
\j N
|c:q/t (1
j
) =
` :
2
j
,
\j N /
j
N astfel nct ,
I
p
1
j
si sirul de numere naturale (/
j
)
jN
este strict cresc ator. Se obtine
c a : = c
0
_ c
1
_ _ c
j
_ ,
a
_ _ ,
1
_ ,
0
= ` si ,
j
c
j
=
bo
2
p
, adic a sirurile (c
j
)
jN
si (,
j
)
jN
sunt monotone si m arginite, deci convergente c atre o limit a comun a care se noteaz a cu ,. Are
loc ,

jN
1
j
asa c a

,
I
p
,
<
` :
2
j
jo
0. Se obtine c a sirul
_
,
I
p
_
jN
(subsir al lui (,
a
)
aN
) este
comvergent
Sequences on R
a
Consider a sequence (,
a
)
aN
of R
a
elements.
a
)
aN
is convergent then it is bounded.
Proof. Consider , R
a
and (,
a
)
a0
_ R
a
such that ,
a
,. From the denition it follows that for
= 1 :
1
N such that \: _ :
1
,
a
1
.
(,), which means \: _ :
1
, |,
a
| _ |,
a
,| + |,| _ |,| + 1.
Then \: N |,
a
| _ ` := max |,| + 1. |,
0
| . . |,
a
1
1
|
A.8.15. Proposition. If | R
a
and (q
a
)
a0
0 from R with q
a
0 and / N such that
|,
a
|| _ q
a
\: _ / , then the sequence (,
a
)
aN
converges and lim
ao
,
a
= ,.
Proof. Consider an arbitrary 0. From q
a
0 it follows the existence of :
.
N such that q
a
<
\: _ :
.
; for `
.
= max(:
.
. /) are loc |,
a
,| _ q
a
<
A.8.16. Proposition. If (n
a
)
aN
, (
a
)
aN
are R
a
sequences which are convergent towards 0, then
\c. , R the sequence (cn
a
+,
a
)
aN
also converges towards 0.
Proof. Consider c ,= 0 and , ,= 0 (the other cases: (c = 0 and , ,= 0) or (c ,= 0 and , = 0) or
(c = 0 and , = 0) are left exercises). For an arbitrary 0 there are `
1,.
, `
2,.
such that |n
a
| <

2 [c[
\: _ `
1,.
and |
a
| <

2 [,[
\: _ `
2,.
. Consider `
.
= max(`
1,.
. `
2,.
); then \: _ `
.
it happens that
|cn
a
+,
a
| _ |cn
a
| +|,
a
| = [c[ |n
a
| +[,[ |
a
| <

2
+

2
= .
so that lim
ao
(cn
a
+,
a
) = 0.
A.8.17. Proposition. If the real sequences (c
a
)
a0
, (/
a
)
a0
are convergent, then the sequences (c
a
+
/
a
)
a0
, (c
a
/
a
)
a0
are also convergent and moreover,
lim
ao
(c
a
+ /
a
) = lim
ao
c
a
+ lim
ao
/
a
(the limit of the sum equals the sum of limits) (the limittaking
operation commutes with the sum operation),
lim
ao
(c
a
/
a
) = ( lim
ao
c
a
) ( lim
ao
/
a
) (the limit of the multiplication equals the multiplication of limits)
(the limittaking operation commutes with the multiplication operation),.
Proof. Denote by c respectively / the limits of the sequences.
c
a
c = \ 0 :
1
.
N, \: _ :
1
.
, [c
a
c[ <
/
a
/ = \ 0 :
2
.
N, \: _ :
2
.
, [/
a
/[ <
For a xed 0 and for : _ :
.
:= max
_
:
1
.2
. :
2
.2
_
, it follows:
[(c
a
+/
a
) (c +/)[ = [(c
a
c) + (/
a
/)[ _ [c
a
c[ +[/
a
/[ _

2
+

2
= .
Consider c ,= 0 (the case c = 0 is left as exercise). Since (/
a
)
a0
is convergent, it is also bounded so
there is ` 0 such that [/
a
[ _ ` \: N; for a xed 0 and for : _ :
.
:= max
_
:
1
.2A
. :
2
.2[o[
_
, it
follows:
[c
a
/
a
c/[ = [(c
a
c)/
a
+c(/
a
/)[ _ [c
a
c[ [/
a
[ +[c[ [/
a
/[ _
_

2`
` +[c[

2 [c[
=

2
+

2
=
A.8.18. Corollary. In the same conditions, lim
ao
(cc
a
+,/
a
) = c lim
ao
c
a
+, lim
ao
/
a
, \c. , R.
Proof. Exercise
A.8.19. Proposition. If the real sequence (/
a
)
a0
converges to / ,= 0, then eventually all the num-
bers /
a
are dierent from zero (there is an index :
0
such that \: _ :
0
/
a
,= 0) and the sequence
_
1
/
a
_
aa
0
converges to
1
/
, that is lim
ao
1
/
a
=
1
lim
ao
/
a
.
Proof. Consider / 0 (the case / < 0 is left as exercise) and \
0
= (/
0
. / +
0
) a neighbourhood
of / which does not contain 0 (/ ,= 0 so the points can be separated in the sense that there are disjoint
neighbourhoods). From /
a
/ = :
0
N such that \: _ :
0
/
a
\
0
so in particular /
a
,= 0 and,
moreover, /
a
/
0
. While /
a
/ it follows that \ 0 :
.
N such that \: _ :
.
[/
a
/[ < ; for
:
1
.
= max
_
:
.(b.
0
)b
. :
0
_
:
1
/
a

1
/
/ /
a
/
a
/
=
[/
a
/[
[/
a
[ [/[
_
1
(/
0
) /
[/
a
/[ _
(/
0
) /
(/
0
) /
=
A.8.20. Proposition. If the real sequences (c
a
)
a0
and (/
a
)
a0
are convergent and if eventually c
a
_ /
a
(:
0
N such that c
a
_ /
a
\: _ :
0
) then lim
ao
c
a
_ lim
ao
/
a
(if the inequality holds for the terms of the
sequences and the sequences are convergent, then the inequality also holds for the limits) (if the inequality
holds strictly, i.e. c
a
< /
a
it can not be concluded that the inequality for the limit also holds strictly).
Proof. Denote the limits by c, respectively /; proove that c _ / by contradiction: if it happens that
/ < c, then (from the separability of R) \
1
1 (c), \
2
1 (/) cu \
1
\
2
= O. `
1
N such that c
a
\
1
\: _ `
1
and `
2
N such that /
a
\
2
\: _ `
2
. Consider ` = max(:
0
. `
1
. `
2
); for \: _ ` it follows:
c
a
_ /
a
, c
a
\
1
, /
a
\
2
, and because / < c and \
1
\
2
= O, it follows c
a
_ /
a
(from hypothese) and
/
a
c
a
(from the relative position of the neighbourhoods), which is a contradiction. It follows c _ /.
A.8.21. Corollary (The Squeeze Theorem). If (c
a
)
a0
, (/
a
)
a0
, (c
a
)
a0
are real sequences for which
eventually holds c
a
_ /
a
_ c
a
(:
0
N such that c
a
_ /
a
_ c
a
\: _ :
0
) and if c
a
| and c
a
| (the
same limit), then the sequence (/
a
)
a0
is convergent and moreover the limit is also |.
Proof. For | R, 0 _ /
a
c
a
_ c
a
c
a
. The sequence (c
a
c
a
)
a0
converges to 0 so \ 0 :
.
N
such that [c
a
c
a
[ < \: _ :
.
. Then \: _ :
.
, [/
a
c
a
[ _ [c
a
c
a
[ < so (/
a
c
a
)
a0
is also convergent
to 0. From /
a
= (/
a
c
a
) +c
a
it follows /
a
|. The cases | = or | = are left as exercises.
A.8.22. Proposition (CesaroStolz Lemma). If (/
a
)
aN
is an unbounded and strictly increasing real
sequence and lim
ao
o
n+1
o
n
b
n+1
b
n
= |, then the limit lim
ao
o
n
b
n
also exist and moreover is equal also with |.
Proof. lim
ao
o
n+1
o
n
b
n+1
b
n
= | = \ 0, :
.
N, \: _ :
.
,

o
n+1
o
n
b
n+1
b
n
|
< . Because (/
a
)
aN
increases
strictly and it is unbounded, /
a+1
/
a
0, \: N. = <
o
n+1
o
n
b
n+1
b
n
| < = + | <
o
n+1
o
n
b
n+1
b
n
< + |
= ( +|) (/
a+1
/
a
) < c
a+1
c
a
< ( +|) (/
a+1
/
a
), \: _ :
.
By adding the corresponding relations
for : from :
.
to :1 :
.
obtain:
( +|)
_
\
/
a
"
+1
/
a
"
_
<
\
c
a
"
+1
c
a
"
< ( +|)
_
\
/
a
"
+1
/
a
"
_
( +|)
_
\
/
a
"
+2
\
/
a
"
+1
_
<
\
c
a
"
+2

\
c
a
"
+1
< ( +|)
_
\
/
a
"
+2
\
/
a
"
+1
_
...........
\
...........
\
........
\
.............
\
...............
\
...............
\
.........
( +|)
_
\
/
n1
\
/
n2
_
<
\
c
n1
\
c
n2
< ( +|)
_
\
/
n1
\
/
n2
_
( +|)
_
/
n
\
/
n1
_
< c
n
\
c
n1
< ( +|)
_
/
n
\
/
n1
_
By adding term by term from :
.
to :1 obtain:
( +|) (/
n
/
a
"
) < c
n
c
a
"
< ( +|) (/
n
/
a
"
), \: _ :
.
Divide all the relation by /
n
(which is eventually strictly positive):
( +|)
_
1
b
n
"
b
m
_
<
o
m
b
m

o
n
"
b
m
< ( +|)
_
1
b
n
"
b
m
_
, \: _ :
.
and obtain by rearranging the terms,
( +|)
b
n
"
b
m
+
o
n
"
b
m
<
o
m
b
m
| < ( +|)
b
n
"
b
m
+
o
n
"
b
m
, \: _ :
.
it follows:
o
m
b
m
|
< max
_
( +|)
b
n
"
b
m
+
o
n
"
b
m
( +|)
b
n
"
b
m
+
o
n
"
b
m
_
_
_ + max
_
( +|)
b
n
"
b
m
+
o
n
"
b
m
( +|)
b
n
"
b
m
+
o
n
"
b
m
_
.
As the sequence c
n
:= max
_
( +|)
b
n
"
b
m
+
o
n
"
b
m
( +|)
b
n
"
b
m
+
o
n
"
b
m
_
is convergent to 0, there is an
index :
.
such that [c
n
[ < , \: _ :
.
. Then

o
m
b
m
|
< 2, \: _ :
.
which means that lim
no
o
m
b
m
=
|
A.9. Symbols
Symbol Meaning Common Usage
N the set of natural numbers natural numbers
Z the set of integers integers
Q the set of rational numbers fractions
R the set of real numbers reals
C the set of complex numbers complex
R Q the set of irrational numbers irrational
appartenence ...is an element of...
, nonappartenence ...is not an element of...
_ nonstrict inclusion ...is a subset of ...
strict (proper) inclusion ...is a strict (proper) subset of ...
O the empty set void/empty
intersection common elements; AND
' reunion OR
dierence
cross/cartesian product ordered pair(s) / [tuple = a set of ordered pairs]
T () powerset of the set of all subsets
| Negation NOT
. Disjunction OR
. Conjunction AND
Implication If...then
Equivalence If and only if
Existence quantier There exists/There is
\ Universal quantier For all
APPENDIX B
Topology
The purpose of this section is to introduce the following notions: open set, closed set, neighbourhood,
border of a set, accumulation points [limit points], convergence, continuity.
Axiomatically there are several alternative ways to introduce these notions. Although it may seem
pedantic to present alternative ways, they may facilitate interpretations of the topological notions.
B.0.1. Denition. Consider an arbitrary nonvoid set A. The set (of sets) t _ T (A) is called topology
(topological structure) on A the following axioms are satised:
(1) O, A t.
(2) 1
1
, 1
2
t = 1
1
1
2
t (nite intersection property).
(3) 1
i
t, i 1 =

i1
1
i
t (arbitrary union property).
The pair (A. t) is called topological space. The elements of t are called open sets. A set 1 T (A) is
closed when A 1 (= C
A
1 = C1) t.
B.0.2. Remark. (1) On a given set may coexist several dierent topological structures.
(2) The natural topological structure on R (the set of real numbers) is:
t = 1 _ R; \r 1
a
0. (r
a
. r +
a
) _ 1 .
(3) The usual topological structure on R
a
is:
t = 1 _ R
a
; \r 1
a
0. 1
.
(r) _ 1 .
1
.
(r
0
) = r R
a
; |r r
0
| < _ R
a
.
B.0.3. Denition. Consider a topological space (A. t) and an arbitrary subset of A denoted by .
(1) The set \ _ A is a neighbourhood of r when:
1 t : r 1 _ \.
The set of all neighbourhoods of r is denoted by A (r) and the set \ r is called pointed
neighbourhood.
(2) The point r A is called adherent point for the set if:
\\ 1 (r) \ ,= O.
The set of all point from A which are adherent to is denoted by

and is called the closure of
the set .
(3) The point r A is called interior point of if:
1 (r) .
The set of all interior points of the set is denoted by

or i:t () and is called the interior of
the set .
119
(4) The point r A is called limit point (accumulation point) for the set if:
\\ 1 (r) \ r , = O.
The set of all limit points of the set is denoted by
t
.
(5) The point r A is called boundary point of if:
r

A
_
.ct
= J
_
.
(6) The point r A is called an isolated point for if:
r

t
.
(7) The point r A is called exterior point for if:
r i:t (A ) = \ 1 (r) \ = O.
Def: Fie (A. t) si A
0
_ A. Familia t
A
0
= 1 A
0
; 1 t se numeste topologia indusa pe A
0
.
Def: (A. t) se numeste separat (Hausdor) dac a \r. A l 1 (r) si \ 1 () astfel nct
l \ = O.
Prop:
1. t = \r . 1 (r).
Dem:
t = \r are loc: r _ = 1 (r)
Prop:
1. \
1
1 (r), \
1
_ \
2
= \
2
1 (r)
2. \
1
, \
2
1 (r) = \
1
\
2
1 (r)
3. \
1
, \
2
1 (r) = \
1
' \
2
1 (r)
4. \ 1 (r) = \ _ \ , \ 1 (r), astfel nct \ \, \ 1 ().
Dem:
1.
\
1
1 (r) = 1 t. r 1 _ \
1
\
1
_ \
2
_
=
= 1 t. r 1 _ \
2
= \
2
1 (r)
2.
\
1
1 (r) = 1
1
t. r 1
1
_ \
1
\
2
1 (r) = 1
2
t. r 1
2
_ \
2
1
1
. 1
2
t = 1 = 1
1
1
2
t
_
_
_
=
= 1(= 1
1
1
2
) t. r 1 _ \
1
\
2
=
= \
1
\
2
1 (r)
3.
\
1
1 (r) = 1
1
t. r 1
1
_ \
1
\
2
1 (r) = 1
2
t. r 1
2
_ \
2
1
1
. 1
2
t = 1 = 1
1
' 1
2
t
_
_
_
= 1(= 1
1
' 1
2
) t, r 1 _ \
1
'\
2
= \
1
'\
2
1 (r).
4. \ 1 (r) = 1 t, r 1 _ \ ; e \ := 1. Atunci:
* \ _ \ ,
* \ 1 (r) (pentru c a r 1 _ 1),
* \ \ are loc: \ _ \ = \ 1 ()
Prop:
1. _ 1 =

_

1.
Dem: Fie r

= \\ 1 (r) . \ ,= O. Dar _ 1 asa c a \\ 1 (r) . \ 1 _ \ ,= O, deci
\\ 1 (r), \ 1 ,= O = r

1
2. _ 1 =
t
_ 1
t
.
Dem: Fie r
t
= \\ 1 (r) . \ r , = O. Dar _ 1 asa c a \\ 1 (r) . \ 1 _ \ ,= O,
deci \\ 1 (r), \ 1r , = O = r 1
t

3. _

,
t
_

,

_ , J _

.
Prop:
1. C

=
..
C (complementara aderentei este egal a cu interiorul complementarei)
2. C
= C (complementara interiorului este egal a cu aderenta complementarei)

3. ' 1 =

'

1, 1 _

1
4. ,
5. ( ' 1)
t
=
t
' 1
t
, ( 1)
t
_
t
1
t
.
Dem:
1.
r C

= r ,

=
= :o:(\\ 1 (r) . \ ,= O) =
= \
0
1 (r) . \
0
= O =
= \
0
1 (r) . \
0
_ C
Prop: Fie t = C1; 1 t. Atunci t are propriet atile:
1. O, A t.
2. 1
1
, 1
2
t = 1
1
' 1
2
t.
3. 1
i
t, i 1 =

i1
1
i
t.
Dem: Ex.
Prop:
1. \ T (A),

t si

_
2.

este cea mai mare multime deschis a inclus a n (n sensul incluziunii: \G deschis a, G _ are
loc G _

).
3. t = =

.
4. _ 1 =

_

1.
5.

'

1 _
..
' 1
6.
..
1 =

1
7.

Dem:
6. r
..
1 = 1 1 (r) dar 1 _ = 1 (r) = r i:t (). Analog r i:t (1) = r

1
Prop:
3. 1 (r) este baz a de vecin at ati pentru r.
4. Familia 1 t; r 1 este baz a de vecin at ati pentru r.
5. Dac a E(r) este baz a de vecin at ati pentru r, atunci \l. \ E(r) \ E(r), \ _ l \ .
Dem: Ex.
APPENDIX C
Functions of one variable
Consider a onevariable function , ().
The derivative at point r
0
approximates the transmission to , () of a change in r
(in econometric parlance r is the dependent variable and is the dependent variable)
The derivative at r
0
approximates the change in the dependent variable triggered by the change in the
independent variable, at r
0
:
d, (r
0
) = ,
t
(r
0
) dr
0
, (r) , (r
0
) +,
t
(r
0
) (r r
0
)
123
Bibliography
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[2] Berck, Peter; Strm, Arne; Sydster, Knut: Economists Mathematical Manual 4th ed. Springer, 2005.
[3] Blume, Lawrence; Simon, Carl, P.: Mathematics for Economists, W.W. Norton & Company, 1994.
[4] Bonar D.D., Khoury M.J.: Real innite series Math. Assoc. Am., 2006.
[5] Bourbaki, N.: LMENTS DE MATHMATIQUE, THORIE DES ENSEMBLES, N. Bourbaki et SpringerVerlag,
2006.
[6] Castillo E.; Iglesias A.; Ruiz-Cobo R.: "Functional equations in applied sciences" Elsevier, 2004.
[7] de Haan, Lex; Koppelaars, Toon: Applied Mathematics for Database Professionals, Apress, 2007.
[8] Demidovich B. (ed.) Problems in mathematical analysis, Mir Publishing House, 1970.
[9] Devlin, K.: The Joy of Sets Fundamentals of Contemporary Set Theory, second edition, Springer, 1993.
[10] Dieudonne, J.: "Treatise On Analysis", Vol. IV, Academic Press, 1969, 1972, 1974, 1976, 1977.
[11] Doepke, Matthias; Lehnert, Andreas; Sellgren, Andrew W.: Macroeconomics, 1999.
[12] Ferrar W.L.:A textbook of convergence, Oxford University Press, 19381969, 1980.
[13] Green, Jerry, R.; Mas-Colell, Andreu; Whinston, Michael, D.: "Microeconomic_Theory", Oxford University Press,
1995.
[14] Hestenes M.R.: Optimization theory: the nite dimensional case, Wiley, 1975.
[15] Jehle, Georey, A.; Reny, Philip, J.: "Advanced_Microeconomic_Theory", Second Edition, Copyright owned by the
authors, 2001.
[16] Karris, Steven, T.: Mathematics for Business, Science and Technology with MATLAB and Excel computations, 3rd
edition, Orchard Publications, 2007.
[17] Lucas, R., E.; Stokey, N.; with Prescott, E., C.: Recursive Methods in Economics Dynamics, Harvard University Press,
1989.
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[19] Rudin, W.: Principles of Mathematical Analysis, McGrawHill, 1976.
[20] Varian, Hal: "Microeconomic Analysis", Third Edition, W. W. Norton & Company, Inc., 1992.
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Mathematics for Economists and Social Sciences

Cristian Necul aescu

is called "the sequence of partial sums of the series".

" comes from the capital greek letter "sigma".

series divergent sum equal to

sum does not exist

( is a matrix, r and are column vectors)

2.2. Limits of a function at a point

has limit at (0. 0) equal to 0 while the iterated limit lim

2.6.18. Corollary. Consider l = i:t (l) convex R

2.6.20. Corollary. Let 1 be open, convex in R

all of them closed and with

is the composed relation (denoted 1

A.6.7. Theorem. [Properties of operations with logical statements]

= C (complementara interiorului este egal a cu aderenta complementarei)

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