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SOL Book Unit - I-V
SOL Book Unit - I-V
) Semester-IV
Core Course
Paper-IX : Business Mathematics
Unit : I-V
Department of Commerce
Editor : K.B. Gupta
Graduate Course
BUSINESS MATHEMATICS
CONTENTS
Editor:
K.B. Gupta
UNIT-I
Matrix algebra is an important tool of decision making in the problems of business and economics
under the assumptions of linearity.
Matrix is a set of elements arranged in the form of a rectangular array, such as
a11 a 12 a 13
A = a 21 a 22 a 23
a 31 a 32 a 33
Each matrix is denoted by a single capital letter and by brackets like [ ] or ( ) as written above. Each
number of the matrix is called an element. Elements written horizontally form a row and vertically written
elements form a column. Each element has two subscripts, first one indicates its row and the second one
indicates the column of the matrix. In the above example element a11 means element of the Ist row and
first column; similarly a23 indicates the element of the second row and the third column. Rows are always
read first and columns afterwards. The number of rows and the number of columns specify the dimension
of a matrix. The above matrix is of 3 rows and 3 columns. Therefore, its dimension is 3×3 (read 3 by 3).
The dimension of a matrix is written as a subscript to the matrix, such as
1 4 3
A = 2 1 8
0 9 5 33
p l q
B =
c t r 23
a11 a12 a13 ..........a1n
a a 22 a 2n ..........a 2n
C = 21
... ... ... ........... ..
a in1 a m2 a m3 ..........a mn m×n
Total number of elements in a matrix are equal to the product of its rows and columns. For example,
matrix A above is of 3×3 order, there, the total number of elements in the above matrix will be 9 (ie, 3×3).
Similarly total number of elements in matrix C will be mn.
The following are some important facts about matrices:
(a) If a matrix has only one row it is called a row matrix or row vector.
x = [3 2 7]
(b) If a martix has only one column it is called as a column matrix or column vector.
5
y = 1
3
(c) Two matrices are equal, if and only if, their corresponding elements are equal and their
dimensions are the same. For example.
2
a11 a12
A =
a 21 a 22 22
a11 = b11
a21 = b21
b b12
B = 11
b 21 b 22 22
A = A if
a12 = b12
a22 = b22
(d) If all the elements of a matrix are zero it is called a Null matrix (or Zero matrix). For example,
0 0 0
O =
0 0 0 23
Types of Matrices
(1) Square Matrix
If the number of rows a matrix are equal to the number of its columns ie., if m = n, it is called a
square matrix. For example.
3 7
A =
4 2 22
1 3 4
B = 5 7 6
4 0 2 33
Matrix A is a square matrix as there are only 2 rows and 2 columns. It is called a square matrix of
2×2. Similarly B is a square matrix of 3×3.
(2) Diagonat Marix
A squarc martix is called a diagonal matrix when all its elements except the principal diagonal
elements are zero. For example:
a11 0 0
A = 0 a 22 0
0 0 a 33 33
A is a diagonal matrix
(3) Identify Matrix of Unit Matrix
A square matrix whose principal diagonal are 1 and all elements above and below the principal
diagonal are zero is known as an Identity matrix. For example:
3
1 0 0
I = 0 1 0 .
0 0 1 33
It is an Identity matrix of 3×3.
(4) Scalar Matrix:
If the diagonal elements of a matrix are equal it is called a Scalar matrix. For example
3 0 0
A = 0 3 0
0 0 3
x 0 0 0
0 x 0 0
X =
0 0 x 0
0 0 0 x
Matrix A and X are Scalar matrices.
Algebra of Matrices
(1) Addition of Matrices:
Two matrices Amxn = aij and Bmxn = bij can be added if their dimensions are same. If the addition
matrix is called matrix C, then
Cmxn = Amxn + Bmxn
Dimensions of matrix C will be similar to the dimensions of matrices A and B. Matrix C can be
obtained by adding corresponding elements of matrix A with the elements of matrix A with the elements
of matrix A with the elements of matrix B. For example :
5 4 0
A = 7 1 2
1 3 6 33
1 3 2
B = 2 4 6
5 1 0 33
5 1 4 3 0 2
Then C = 7 2 1 4 2 6
1 5 3 1 6 0
6 7 2
or C = 9 5 8
6 4 6 33
Cij = aij + bij
If the dimensions of two matrices are different, they cannot the added. For example
4
0 2
A =
7 6 22
5 1 2
B =
7 3 6 23
A2×2 and B2×3 cannot be added.
(a) Mtrix addition is commutative, i.e.,
A + B = B + A [Provided their dimensions are same]
(b) If A. B. C are three matrices of the same dimensions, then
A+(B+C) = (A+B) + C
In indicates that matrix addition is associative.
(c) If Null matrix Omxn is added with a matrix Amxn we get only matrix Amxn. For example :
0 0
0 =
0 0 22
5 7
A =
2 3 22
O2x2 + A2x2 = A2x2 = A2x2 + O2x2
(2) Subtraction of Matrices
Subtraction of two matrices is possible if their dimensions are same. For example :
(aij) – (bij) = (dij) where dij = aij – bij
7 0 1
A =
2 7 5 23
2 8 4
B =
1 3 6 23
D = A–B
7 2 0 8 1 4
or D =
2 1 7 3 5 6
5 8 3
=
1 4 1 23
Dimension of matrix D will be same as that of A and B.
(3) Multiplication of a matrix by a Scalar
When a real number is multiplied with all the elements of a matrix, it is called a scalar multiplication
and the number is known as a scalar (S). For example
1 3 9
S = Scalar = 2 A = 0 7 5
6 2 8
5
2 1 2 3 2 9
SA = 2 0 2 7 2 5
2 6 2 2 2 8
2 6 18
or SA = 0 14 10
12 4 16
In general SA = (Saij)mxn
(4) Multiplication of two matrices
If the colunins of the first matrix are equal to the rows of the second matrix (known as condition of
conformity), the two matrices can be multiplied.
If Amxa = (aij) and Bmxo = (bjk) then (AB)mxo = C = (Cik)
For example :
3 2 7
A =
4 6 8 23
4 1 7
B = 2 2 1
1 3 2 33
A and B can be multiplied because the columns of matrix A are 3 and rows of matrix B are 3. The
dimensions of their product AB will be 2×3. Let the product matrix be known as matrix C. It will be
arrived at by summing the products of the elements of the ith row of matrix A and the corresponding
elements of the kth column of matrix B. For example, for product matrix C for the above two matrices A
and B the following procedure will be applied.
Each element of the Ist row of matrix A will be multiplied by each element of the Ist column of
matrix B., then its sum will give us the first element of the product matrix C. Then each element of the Ist
row of A will be multiplied by the all the elements of the second column of B. Their sum will give us the
second element of Ist row of C. Similarly each element of Ist row of A will be multiplied by all the
elements of 3rd column of matrix B. Their sum will denote the 3rd element of Ist row of C. this process
will be repeated for all the subsequent rows of A. On the basis of this procedure C can be arrived from the
mentioned matrices A and B.
(3 4) (3 5) (3 1) (2 1) (2 2) (2 3) (7 7) (7 1) (7 2)
C=
(4 4) (4 5) (4 1) (6 1) (6 2) (6 3) (8 7) (8 1) (8 2)
(3 4) (2 5) (7 1) (3 1) (2 2) (7 3) (3 7) (2 1) (7 2)
(4 4) (6 5) (8 1) (4 1) (6 2) (8 3) (4 7) (6 1) (8 2)
(12 10 7) (3 4 21) (21 2 14)
or C =
(16+30+8) (4 12 24) (28+6+16)
29 28 37
or C =
54 40 50 23
6
Illustration 1.
5 1
A =
3 2
3 1
B =
4 2
find AB and BA.
Solution :
(5x 3) (1 4) (5 1) (1 2)
AB =
(3x 3) (2 4) (3 1) (2x 2)
( 15 4) (5 2) 19 7
= =
(9 8) (3 4) 1 1
(3 5) (1 3) (3x 1) (1 2)
BA =
(4 5) (2 3) (4x 1) (2 2)
( 15 3) (3 2) 12 5
= =
(20 6) (4 4) 14 8
Illustration 2.
y
x 5y 0 2
A = B=
2 x 0 x y
5 10
find AB and BA.
Solution:
x y y
( x 0) (5 y 5 ) (xy 2 ) (5 y 10 )
AB =
(2 x 0) (0 x ) (2 x x y ) (0 y )
5 2 10
5 xy xy 5 y 2
(0 ) ( ) xy y 2
= 5 2 10 = xy
2
2 xy xy
(0 0) (
2
0) 0
y y
(0 x) 2 2 x (0 × 5 y ) 0
2
BA =
x y y y
x 2x 5 y 0
5 10 2 10
2 xy
0 2 (0 + 0) xy 0
= 2
= 2 x xy
x 2 xy 5 xy xy
0 5
5 10 5
7
(3 1) (3 0) (3 0) (1 0) (1 1) (1 0) (1 0) (1 0) (1 1)
AI = (2 1) (2 0) (2 0) (7 0) (7 1) (7 0) (1 0) ( 1 0) ( 1 1)
(1 1) (1 0) (1 0) (5 0) (5 1) (5 0) (4 0) (4 0) (4 1)
3 1 1
= 2 7 1
1 5 4
AI = A
Similarly IA will be equal to A.
(e) Multiplication of a matrix by itself.
If A is a square matrix by itself.
Simliarly AA2 = A.A.A = A2A [By Associative Law]
Transpose of a Matrix
The transpose of a matrix is obtained by interchanging its rows into columns and columns into rows.
It is denoted by A’ or At. Let A = (aij) then A’ = (aji)nxm
8
For example
4 2 6
1 1 3
A =
1 2 0
5 4 1 43
4 1 1 5
A’ = 2 1 2 4
6 3 0 1 34
3 5
Its determinant |A| =
2 7
|A| = (3×7) – (5×2)
= 21 – 10
= 1
Determinant of a matrix of 3×3 is arrived at in the following way :
a11 a12 a13
A = a 21 a 22 a 23
a 31 a 32 a 33
a 22 a 23 a 21 a 23 a 21 a 22
|A| = –a12 +a13
a 32 a 33 a 31 a 33 a 31 a 32
= 11{a22 × a33 – a23 × a32} – a12{a21×a33 – a23 × a31} + a13 {a21 × a32 – a22 × a31}
2 1 4
For examply A = 1 0 3
4 2 5
0 3 1 3 1 0
|A| = 2 –1 +4
2 5 4 5 4 2
= 2 (0×5–3×2)–1 (1×5–3×4) + (1×2–0×4)
= 2(–6)–1(–7)+4(2)
= –12+7+8
= 3
(Note – if the matrix is of 1×1 its determinant will be the number itself and if the number is negative
then the positive of that number will be its determinant).
Propetries of Determinants :
(a) If the rows of a determinant are changed into columns or vice versa, the value of the determinant
remains unchanged, For example.
a11 a12 a11 a 21
=
a 21 a 22 a12 a 22
(Note–Determinant of matrix A is equal to the determinant of A’)
(b) In a determinant if two rows (or columns) are interchanged, its absolute value remains the same
but the sign changes. For example,
10
2a c a -2a b c
= (a+b+c)
a b ac
R2 R2 + R1
2b c a + a b -2a b c + a c
= (a+b+c)
ab a c
bc ba
= (a+b+c)
ab ac
= (a+b+c) {(b–c) (a–c)–(b–a) (a–b)}
= (a+b+c) (a2+b2+c2–ab–bc–ac)
= a3+b3+c3–3abc
Trace of a Matrix
Every square matrix has its trace which is equal to the sum of its diagonal elements. For example :
1 5 4
A = 9 2 3
6 7 1
Trance (tr) of A = 1–2+1 = 0
Rank a matrix
The rank of matrix A is equal to the highest order of non-singular matrices formed in a matrix. For
example.
1 2
A =
2 4
|A| = 0
The rank of matrix A is 1 beceause A2x2 is a singular matrix and the next order non-singular matrix
is 1 (which is non-zero.)
2 4 8
A = 3 6 12 Determinant |A| = 0
1 2 4
Here for any 2×2 matrix the determinant is zero. But for 1×1 matrix the determinant is not Zero.
Therefore, the rank of the above matrix is 1.
a a 23
for a11 the minor is 22 for a
a 32 a 33
a a 23
its minor is 21 and similarly for
a 31 a 33
a a 22
a13 the minor is 21
a 31 a 32
In a matrix total number of minors are equal to total number of elements.
When a minor is multiplied by (–a)i+j of the respective element, it is known as a cofactor.
13
Adjoint of a Matrix
Transpose of a co-factor matrix is known as the adjoint matrix. For example, if the following is a co-
factor matrix of matrix A.
c11 c21 c13
c12 c22 c 23
c13 c32 c33
Its abjoint will be
c11 c21 c32
Adj = c12 c22 c32
c13 c 23 c33
Illustration : 5
Find the adjoint of the following matrix
2 1 1
A = 10 4 5
5 2 2
Solution :
2 5 1
Co-factor matrix of A = 0 1 1
1 0 2
2 0 1
Adj A = 5 1 0
1 1 2
Inverse of a Matrix
Every non-singular square matrix possesses an inverse which is denoted as A-1 (if the matrix is a).
A-1 is arrived at by the following formula.
1
A-1 = (Adj A)
|A|
14
(There are other methods also for ascertaining the inverse of a matrix. They will be discussed later.
The above method of finding inverse of a matrix is known as adjoint method of finding inverse.)
Note–
1. AA-1 = I = A–1 A.
2. The inverse of a matrix is unique i.e., there cannot be more than one inverse of a matrix.
3. I = I-1
Illustration 6.
Find the inverse of the following matrix
2 4
A =
3 4
Solution :
1
We know A–1 = (Adj A)
|A|
2 4
|A| =
3 4
= 8–12
= –4
4 3
Co-factor Matrix of A =
4 2
4 4
Adj A =
3 2
1
A–1 = (Adj A)
|A|
1 1
1 4 4 3 1
= 3 2
4
4 2
Illustration 7
Find the inverse of the following matrix
1 2 1
A = 2 3 1
5 1 1
Solution :
1
A–1 = (Adj A)
|A|
|A| = 1(3–1)–2(2–5)–1(2–15)
= 2 + 6 + 13 = 21
15
2 3 5
Adj A = 3 6 3
13 9 1
2 3 5
1
A–1 = 3 6 3
21
13 9 1
2 1 5
21 7 21
1 2 1
=
7 7 7
13 3 1
21 7 21
1 3 0 1
4 2 1 0
[R1 R2 – 4 R1]
1 3 0 0
0 10 1 4
1
R 2 R 2 + 10
16
0 1
1 3 1 2
0 10
10 5
[R1 R1 – 3 R2]
3 1
1 0
10 5
0 1
1 2
10 5
3 1
10 5
A–1 =
1 2
10 5
Illustration 8
Find the inverse of the following matrix by Row operation method.
1 2 7
A = 0 1 3
3 2 4
Solution :
1 2 7 1 0 0
0 1 3 0 1 0
2 2 4 0 0 1
R1 R3 – 3 R1
1 2 7 1 0 0
0 1 3 0 1 0
0 4 17 3 0 1
R1 R3 – 2 R2 and R3 R3 – 4 R2
1 0 1 2 0
1
0 1 3 0
1 0
0 0 5 3 4 1
R3 R3 + – 5 R2 R2–3R3 and R1 – R1– R3
17
2 6 1
1 0 0
5 5 5
9 17 3
0 1 0
5 5 5
3 4 1
0 0 1 5 5 5
2 6 1
5 5 5
9 17 3
A–1 =
5 5 5
3 4 1
5 5 5
where aij and bi are real numbers and m and n may, in general be different.
The above system of equations may be written as a single matrix equation i.e.,
AX = B
–1
and if A exists, we can write as
X = A–1 B
If A–a does not exist, the system of equations is inconsistent.
Example :
Solve the following equations using matrices.
5x1 + 2x2 = 2
4x1 – 3x2 = 10
Solution :
In the matrix form the above equations can be written as follows
AX = B
18
5 2 x1 2
where A = X= x B=
4 3 2 10
|A| = (5× – 3) – (2 × 4)
= –15 – 8
= –23
Adj
A–1 =
|A|
3 2
Adj A =
4 5
3 2
23
A–1 = 23
4 5
23 23
Since A–1 exists, we can write the equations in the following form also :
X = A–1 B
3 2
x1 23 23 2
=
x2 4 5 10
23 23
6 20 26
23 23
= 23
8 50 42
23 23 23
26 42
x1 = and x2 =
23 23
Example :
Solve the following system of linear equations by inverse method :
x + 2y + 3z = 14
3x + y + 2z = 11
2x + 3y + z = 11
Solution:
1 2 3 x 14
A = 3 1 2 x = y
B = 11
2 3 1 z 11
|A| = 18
Adj A
A–1 =
|A|
19
5 5 1
Adj A = 1 5 7
7 1 5
5 7 1
18 18 18
Adj A 14 5 7
A–1 = d=
|A| 18 18 18
7 1 5
18 18 18
X = A b –1
5 7 1
18 18 18
x
y 14 5 7
=
18 18 18
z
7 1 5
18 18 18
5 7 1
18 14 18 11 18 11
14
11 10 5 7
= 14 11 11
18 18 18
11
7 14 1 11 5 11
18 18 18
X = 1
ie. y = 2
z = 3
Linear equations can also be solved by two more method. They are :
(i) Row elimination method
(ii) Cramer’s Rule
Under Row elimination method, equation are written in the form of augmented matrix (i.e. append B
matrix to coefficient matrix A in the form A/B) and row operations, as earlier discuser in this chapter, are
applied. In the place of coefficient matrix we obtain an Identity matrix and in the place of B matrix we
obtain the values of unknown variables ie. X1, X2...Xn. This method can be easily understood by the
following example :
If x + y + z = 45
–x + 0y + z = 8
x – 2y + z = 0
In the augmented matrix form the above matrix can be written as follows :
1 1 1 45
1 0 1 8
1 2 1 0
R2 R2 + R1 and R3 R3 – R1
20
1 1 1 45
0 1 2 53
0 3 0 45
R1 R1 + R2 and R3 R3 – 3R2
1 0 1 8
0 1 2 53
0 0 6 114
R3 R3 + 6. R2 R2 and R1 R1 + R3
1 0 0 11
0 1 0 15
0 0 14 19
The value of x = 11;y =15 and z = 19
1 2 1 1 6 1 1 2 6
12 3 4 2 12 4 2 3 12
7 1 2 3 7 2 3 1 7
x = _______ y = _______ z = _______
1 2 2 1 2 1 1 2 1
2 3 4 2 3 4 2 3 4
3 1 2 3 1 2 3 1 2
11 22 11
x = ; y= ; z=
11 11 11
X = 1, y = 2 and z = 1
The output of industry I is 40 units as shown in the Ist row. Out of these, 16 units are consumed by
industry I, 20 units by industry II and final consumers take 4 units. The second row can be interpreted in
the similar way. It is forecasted that the final demand will increase to 18 units and 44 units for I & II
respectively in future.
22
The above information can be shown in an input-output matrix. In terms of ratios, the requirement
16 8
of industry I for producing one unit will be = A and = 2 from industry I and Ii respectively,
40 40
20 40
Similarly for industry II, the ratios will be .25 and = 5. Thus the input-output matrix will be:
80 80
I II
A = I .4 .25
II .2 .5
[Note:-Matrix A is also known as technology matrix]
We observe that columns represent the amount of material required for producing one unit of output.
I
If matrix X = indicates the total output needed to obtain the required demand, then AX indicated the
II
ratios of inter-industry input. Thus,
AX + D = X
or (1–A) = D
or X = (1–A)–1 D
where (i) D is the final demand matrix
(ii) (1–A)–1 is also known as transaction matrix
1
I 1 0 .40 .25 18
II = 0 1 .20 .30 14
.60 .25
(1–A) = ; |1–A| = .25
.20 .50
Adj 1-A .2 1
(1–A)–1 =
|1-A | .8 .24
we know X = (1 – A)–1 D
I .2 1 18
II = .8 .24 44
I 2 18 1 44 80
II = .8 18 2.4 44 = 120
I = 80 and II = 120
Howkins- Simon Conditions
(i) |1–A| 0
(ii) All the diagonal elements of the transaction matrix must be positive. Sometimes, when these
conditions are not fulfilled, the solution may be inconsistent.
Illustration :
The input-output technology matrix for three industries is
23
2 .3 .1
A = 0 .5 .2
0 0 .5
If the final demand for three industries is
100
D = 200
300
x1
find the gross output X = x2
x3
Solution :
We know x = [1–A]–1 D
.8 .3 .1
1–A = 0 .5 .2 ; |1–A| = .2
0 0 .5
25 15 11
20 20 20
Adj 1-A 16
–1
[1–A ] = = 0 2
|1-A | 20
0 0 2
25 15 11
20 20 20
100
16 200
X = 0 2
20
300
0 0 2
440
= 640
600
EXERCISES
3 1 7 3
(1) If A = , B= , find [A + B]
2 9 6 0
Solution :
24
3 7 1 3
[A+B] =
2 6 9 0
10 4
=
8 9
5 6 1 2 3 2
(2) If A = and B =
4 3 4 3 4 1
5 2 6 3 1 2
Solution : (A–B) =
4 3 3 4 4 1
3 9 1
=
1 1 3
3 2 a b
(3) If A = and B = find a and b
4 1 3 5
such that AB = BA. Compute 3A+5B.
Solution :
3 2 a b 3a+6 3b+10
AB = =
4 1 3 5 4a 3 4b 5
a b 3 2 3a+4b 2b+b
BA = =
3 5 4 1 9 20 6 5
AB = BA
3a+6 3b+10 3a+4b 2b+b
or =
4a 3 4b 5 29 11
3a + 6 = 3a + 4b 3b + 10 = 2a + b
b = 1.5 b–1 =5
4a + 3 = 29 4b + 5 = 11
a = 6.4 b = 1.5
a = 6.5 b = 1.5
3 2 9 6
3A = 3 =
4 1 12 3
a b 5a 5b
5B = 5 =
3 5 15 25
9 6 5a 5b
3A+5B = +
12 3 15 25
5a+9 5b+6
=
27 28
25
1 0 1 2 1
(4) If A = 1 1 1 , B = 1 1 C = [1 0 2]
0 2 2 2 2
find AB, A’B, AC, and CB
Solution :
1 0 2 2 1
AB = 1 1 3 1 1
0 2 1 2 2
1 2 0 1 2 2 1 1 0 1 2 2
= 1 2 1 1 3 2 1 1 1 1 3 2
0 2 2 1 1 2 0 1 2 1 1 2
6 5
= 9 6
0 4
1 1 0 2 1
A’B = 0 1 2 1 1
2 3 1 2 2
1 2 11 0 2 1 1 1 1 0 2
= 0 2 11 2 2 0 1 1 1 2 2
2 2 3 1 1 2 2 1 3 1 1 2
3 0
= 5 3
5 3
1 1 0 1
AC’ = 0 1 2 0
2 3 1 2
1 1 0 0 2 2 5
= 1 1 1 0 3 2 = 7
0 1 2 0 1 2 2
1 0 2 2 1
CB =
1 1
2 2
= [1×2+0×1+2×2 1×1+0×-1+2×2]
= [6 5]
(5) In a certain city there are 50 colleges and 400 schools. Each school and college has 18 peons, 5
clerks and one cashier. Each college in addition has one section officer and one librarian. The monthly
salary of each of them is as follows :
26
2 1 1
= (x + y + z) z x z x
x y y z
C1 C1 – C2+ C3 and C2 C2+ C3
27
0 0 1
= (x + y + z) 0 z x x
x z y z z
0 z x
= (x + y + z)
x z y z
= (x + y + z) (x - z)2
1 4 2
(7) Given the matrix X = 1 2 1
1 3 2
1 2
3 0
3
X–1 = 1 0 1
5 1
2
3 3
1 2
0
1 4 2 3 3
X X–1 = 1 2 1 1
0 1
1 3 2 5 1
2
3 3
28
1 5 2 1
1 3 4 1 2 3 1
3
4 0 2
3
1 0 4 1 2 2
1 5 2 1
= 1 2 1 1 1 2 0 1 1 0 2 1 1 2
3 3 3 3
1 3 1 2 5
1 2 1
1 3 0 2 1 0 3 1 2 2
3 3 3 3
1 0 0
X X–1 = 0 1 0 = 13
0 0 1
(8) Given the following equations for two related markets A and B, find the equilibrium conditions
for each market and the price for each market :
Xa (A) = 82 – 3PA+ PB Xx (A) = –5 + 15PA
Xd (B) = 92 – 2PA–4 PB Xs (B) = –6 + 32P8
Solution :
For equilibrium conditions
Xd A = Xs(A) and Xd (B) = Xs(B)
82 – 3PA+ PB = 5+15PA 92 + 2PA– 4PB = 6 + 32PB
18PA = 87 –2PA + 36PB = 98
Matrix form
18 1 PA 87
2 36 P = 98
B
AP = B
P = A–1 B
36 1
Adj A 1 36 1 346 646
A–1 = =
|A| 646 2 18 2 18
646 646
36 1 36 87 98
87 6464 646
P = 346 646
=
2 18 98 2 87 18 98
646 646 646 646
3230
646 5
=
1938 3
646
PA = 5 and Pa = 3
(9) A company produces three products every day. There total production on a certain day is 45
tons. It is found that the production of third product exceeds the productions of first product by 8 tons
29
while the total production of first and third product is twice the production of second product. Determine
the production level of each product using Cramer’s rule.
Solution :
X + y + Z = 45
z = 8+x
X + Z = 2y
or
x + y + z = 45
–x + 0y + z = 8
x – 2x + z = 0
AX = B
|A| = 6
45 1 1
8 0 1
0 2 1 66
X = = = 11
6 6
1 45 1
1 8 1
1 0 1 90
y = = = 15
6 6
1 1 45
1 0 8
1 2 0 114
z = = = 19
6 6
x = 11; y = 15 and z = 19.
(10) Suppose the inter-industry flow of the products of two industries are given as under :
Consumption
x y Domestic demand gross output
Products x 30 40 50 120
Y 20 10 30 60
Determine the technology matrix and test Simon-Hawkins conditions for the viability of the tested.
80
Compute the equilibrium level of output of the products when the domestic demand vector is
40
30
Solution
30 40
60
Technology Matrix = A = 120
20 10
120 60
1 2
3
= 4
4 1
6 6
We know Ax + D = x
(1 – A) x = D
x = (1–A)–1 D
3/ 4 2 / 3
(1–A) =
1/ 6 5 / 6
5 2
3
|1–A| = Adj (1–A) = 6
1 3
6 4
5 72 2 72
Adj 1-A 3 37
3 37
|1–A|–1 = =
|1 A | 1 72 3 72
3 37 4 37
X = (1–A)–1 D
60 48 60 80 48 40
80 37 37
= 37 37
12 54 40 12 80 50 40
37 37 37 37
181.62
=
84.32
Simon–Hawkins conditions :
(1) |1–A| 0
(2) Diagonal elements of (1–A) should be positive.
Both the conditions are satisfied in the above problem.
Example. The standard weight of a special purpose brick is 5 kg and it contains two basic
ingredients B1 and B2. B1 costs `8 per kg. Strength considerations dictate that the brick contains
not more that 4 kg of B1 and minimum of 2 kg of B2. Since the demand for the product is likely
to be related to the price of the brick, find the minimum cost of brick satisfying the above
conditions.
31
Solution. Let
x1 < 4
x2 > 2
x1, x2 > 0
We now use graphic method to find the solution of the above problem. The feasible region is the
dark line segment AB as show in Figure 1. To find the coordinates of A, we solve the equations
x1 + x2 = 5 and x2 = 2 simultaneously, which gives x1 = 3, x2 = 2. The coordinates of B are (0, 5).
Evaluating Z at these points, we obtain
Thus the minimum value of Z occurs at A (3, 2). Hence the optimum product mix is : 3 kg of
ingredient B1 and 2 kg of ingredient B2 so as to achieve the minimum cost of `31.
Example. Given below is the simplex tableau for a maximization type of LP problem:
Cj Basic 3 4 0 0 bi
Variable x1 x2 s1 s2
32
4 x2 1 1 1 0 6
0 s2 1 0 –1 1 2
Cj Basic Quantity 3 4 0 0
Variable x1 x2 s1 s2
4 x2 6 1 1 1 0
0 s2 2 1 0 –1 1
Zj 24 4 4 4 0
Cj –Zj –1 0 –4 0
(i) Yes, it is an optimal solution because all the entries in Cj – Zj row are negative or
zero.
(ii) No, it does not have more than one optimal solution because none of the non-basic
variable has a zero Cj – Zj entry in the final simplex table.
(iii) No, because none of the basic variables has solution value equal to zero.
(iv) Yes, it is feasible because optimal solution is always feasible.
(v) Machine A is being used to the full capacity because value of slack variable s1 is zero
in the optimal simplex table.
33
(vi) The entry in the final Cj – Zj row under x1 is –1. This means the profit will be reduced
by `1 if one unit of x1 is added to the solution. Hence in order to ensure no reduction
of profit price of x1 should be increased by `1.
(vii) x1 = 0, x2 = 6 and total profit is 24.
(viii) Since marginal profitability of machine A is `4 per hour, a reduction of 2 hours
capacity in a week would cause a reduction of 2 × 4 = `8 in profit.
(ix) Machine A : `4 per hour; Machine B : nil.
(x) Shadow prices are: Machine A - `4 per hour; Machine B – nil
Example. Write the dual to the following LPP:
x1 + x2 + x3 = 27
Solution. Since the primal is a maximization problem, we must convert each constraint into
the type ‘<’. Thus multiplying both sides of the third constraint by –1, we can restate the
primal as
x1 + x2 + x3 = 27
Let y1, y2 and y3 be the dual variables corresponding to three primal constraints in given
order. Since the second constraint of the primal is an equation, the second variable y2 will be
unrestricted in sign. Similarly, the fourth variable x4 of the primal problem is unrestricted in
sign, therefore the fourth constraint of the dual will be an equation.
4y1 + y2 > 20
–3y1 + y2 + y3 > 15
4y1 – 7y3 = 10
Example. A manufacturing company makes three products, each of which requires three
operations as part of the manufacturing process. The company can sell all of the products it
can manufacture but its production capability is limited by the capacity of its operations
centres. Additional data concerning the company are as follows:
A 1 3 2 11 15
B 3 4 1 12 20
C 2 2 2 10 16
What should the product-mix be? Write the dual of the given problem. Give is economic
interpretation and use it for checking the optimal solution of the given problem.
Solution. Let the company produce x1 units of A, x2 units of B and x3 units of C. Then the
appropriate mathematical formulation of the problem is:
Introducing slack variables s1, s2 and s3 so as to convert the constraint inequalities into equations,
the given problem can be restated as follows:
35
2x1 + x2 + 2x3 + s3 = 80
x1 = 0, x2 = 0, x3 = 0, s1 = 160, s2 = 120, s3 = 80
at which Z = 0. Starting with this solution, we obtain a sequence of simplex tableaux that leads to
the final solution.
Since all Cj – Zj entries of the last table are zero or negative, optimum solution has been
obtained, and the maximum value of Z is 920/3 which occurs when x1 = 0, x2 = 40/3 and
x3 = 100/3.
36
The dual variables represent the worth of the resources of the organisation. The variables y1, y2
and y3 represent the marginal profitability of the capacity of centres 1, 2 and 3 respectively. If the
company were to rent out its capacity, the minimal rental for each centre would be equal to its
marginal profitability. Since the centre I has unused capacity, its marginal profitability is nil,
while for centres 2 and 3, these are, respectively, `5/3 and `4/3 per hour. Thus y1 = 0, y2 = 5/3
and y3 = 4/3
LESSON 1 UNIT-II
LIMIT OF A FUNCTION
The term function denotes functional relationship between two or more quantities. Functional relationship
means if one quantity is given, other can be determined. In a demand function stating relationship
between price and quantity demanded, if price is given, quantity demanded can be calculated. Similarly in
the total cost function stating relationship between total cost and units produced, if units produced are
given, the total cost can be determined. The generatlised forms of functions are y = f (x), y = (x), y =
g(x).
A function consists two things—constants and variables as in a demand function x = 100 – P2.
Constants are those quantities whose value is fixed during certin mathematical process. Constants
are classified as absolute and arbitrary. Absolute constants are those quantities whose value is fixed in all
processes whereas arbitrary constants are those whose value may differ in different processes. Arbitrary
constants are denoted by first alphabets as a, b, c etc. On the other hand, variables are those quantities
whose value vary within a mathematical process as P and x in the demand function. These variables are
usually denoted by latter alphabets as x, y, z etc. These are also classified as dependent and independent
variables. Independent variables are those variables which can take any arbitrary value. Its value is not
determined by any other factore. The limit within which its value vary is known as domain of the
function. Dependent variables are those whose value is determined by the value of independent variable.
The limit within which dependent variable can take values is known as range of function. Almost all the
functions used for stating economic and business application have positive domain as well as range.
All the functions used in mathematics are classified on different basis. One of the most important
classifications in the algebraic and non-algebraic functions. Algebric functions are those functions in
which dependent variable is related with independent variable by using mathematical operatiosn only as
addition, multiplication, substraction, division, power and root. For example x = 40 – 2P, TC(x) = 1000 +
5x, x = 250 P2 are algebraic functions.
Such functions are most widely used in business and economics. All other functions are known as
non-algebraic or transcendental functions. These are classifiedas trignometrical, inverse trignometrical,
logarithmic and exponential functions.
Trignometrical functions are those where independent variable appears with some trignometrical
ratio as y = sin x. Inverse trignometrical functions involve inverse of trignometrical ratios as y = tan–1x. It
is equal to x = tan y which is a trignometrical ratio. These functions are used in science.
Exponential functions are defined as those functions where independent variable appears as power
of some constant base as y = ex where e is a constant equal to 2.7183 (it is the base of natural log also
known as napierian log). This function is based upon certain practical assumptions.
Logarithmic functions are those where independent variable appears with log ratio as y = log x or y
= log10x. These functions are related with exponential functions. They are taken as inverse of the
exponential function.
In addition to this, there are a number of other classifications of functions as continuous and
discontinuous functions, explicit and implicit functions. Univariate, bivariate and multivariate functions
etc.
38
Meaning of Limit
Function denotes the relationship between dependent and independent variable as y = f(x), y is a
dependent variable and x is an independent variable. An independent variable may be assigned value in
two ways viz. a fixed value as x = a or tending towards certain constant as x a. Value of the function
when independent variable is assigned a fixed value is known as defined value of the function, but it is
known as limit of the function if independent variable is tending towards certain constant. The implication
is the x is not equal to a.
Mathematically limit of a function f(x) when x a is denoted by lim f x .
x a
It can be defined as limit of a function f(x) for a given value of the argument x is that constant l to
which the function continuously approaches as x approaches the given value such that the difference
between constant and the function may be made as small as we would lke by making the argument x
approaching sufficiently near to the assigned value a. Symbolically, f(x) l as x a but |(x – a)| > 0. In
other words, the function f(x) is said to tend to the limit l as x tends to a if > 0 is chosen arbitrarily
small and it is possible to find > 0 such that whenever |x – a| < , | f(x)–l | < , i.e., f(x) can be made as
close to l as we would like by taking x sufficiently close to a. It is denoted as f(x) l as x l which
means f(x) is l as x tends to a.
Although it is one of the most difficult concept in mathematics, it is generally used in practice. It is
used to describe all those situations where target is such that it is possible to reach near the target, but it is
not possible to achieve the target. In other words it is possible to reach near the point, but it is not possible
to touch that point. For example, achieving optimum leave of installed capacity or achieving optimum
level of production are instances of limit.
The entire mathematical system of differential and integral calculus is based on the concept of limit
of a function and related conditions of continuty of a function. Both ideas are fundamental and occupy an
important position in a formal course on Calculus.
1 h
2
1
lim f x = lim
x 1 h 0 1 h 1
1 h 2 2h 1
= lim
h0 h
= lim h 2
h0
= 2 Ans.
xn an
Example. Evaluate lim f x =
xa xa
39
a h
n
an
lim f x = lim
xa h 0 aha
n n 1 n n 1 n 2 2
a na h a h ...... hn an
2
= lim
h 0 h
[Applying binomial expansion]
n n 1 n 2 2
na n 1h a h ...... h n
= lim 2
h0 h
= na n–1 [as all the successive terms involve h
which is tending towards zero]
But this method can not be applied in all conditions. In those conditions, other methods based on
this are preferred.
Properties of Limit
This limit has various properties. These are used for evaluating limit. All these are examplified below:
1. Limit of a constant is always equal to constant, i.e., lim k = k. For example, lim 5 = 5. It is
xa x3
where f (x) and g(x) are two different functions. It can be extended to sum or difference of any
n
lim fi x = lim fi x .
n
number of functions as
xa
i 1 i 1
xa
For example lim [(2x + 3) + 3x2] = lim (2x + 3) + lim 3x2 = 13 + 75 = 88.
x5 x5 x5
3. Limit of the product of two or more functions is equal to the product of their limit
i.e., lim [f (x) . g(x)] = lim f (x) . lim g(x)
xa xa xa
4. Limit of the quotient of two functions is equal to quotient of their limits provided the limit of
divisor is not equal to zero.
f x lim f x
x a
i.e., lim = where lim g(x) 0.
xa
g x lim g ( x)
x a
xa
40
x2 2 lim x 2 2 6
x2
For example lim = 6
x 2
x 1 lim x 1 1
x2
5. Limit of the nth power of a function is equal to nth power of the limit,
n
i.e., lim [f(x)n] = lim f x
xa x a
2
For example, lim (2x + 3)2 = lim 2 x 3 = 49.
x2 x 2
6. Limit of the nth root of a function is equal to nth root of the limit of a function
i.e., lim n f x = n lim f x
x a xa
= 2.
lim f (x) = 4 x 2 3x 1
4 2
Example. Evaluate
x1 x 7
Solution. Since f (x) is defined for x = 1, so putting x = 1,
4 1 3 1 1
lim f (x) =
x1 1 7
6 3
=
8 4
Note: Although this method is easy, but it can not be used if limit comes in indeterminant form. It is
0 b
taken as in indeterminant form if it comes in any of these form, viz., , or where b is a constant.
0 0
Limit is not determinable. If the defined value of a function takes any of these forms, it also amount to
defined value as indeterminable. These results are not defined in mathematics.
(ii) By factorisation method : This method is used when given function is a rational function. It
involves factorising numerator and denominator to the extent possible, cancelling the common factor and
putting x = a in the simplified form.
2x2 7 x 6
Example. Evaluate f (x) = when x 2.
5 x 2 11x 2
41
lim f (x) =
2 x 3 x 3
[Factorisation]
x2 5 x 1 x 2
2x 3
=
5x 1
Putting x = 2
1
lim f (x) = Ans.
x2 9
lim f (x) = x 3 5 x 2 2 x 2
3 2
Example. Evaluate
x1 x 2x 6x 3
Solution. When x = 1, f (x) is not defined, so factorising the rational function.
x 1 x2 4x 2
f (x) =
x 1 x2 3x 3
x2 4 x 2
=
x 2 3x 3
Putting x = 1
1 4 1 2
lim f (x) = = –5
x1 1 31 3
xn an
Example. Evaluate f ( x) =
xa xa
Solution. Using factorisation method
x a xn1 xn2a xn3a2 ..... an1
f (x) =
xa
= xn–1 = xn–2a + xn–3 a2 ..... + an–1
Putting x = a
lim f (x) = an–1 + an–1 + an–1 + ..... n times
xa
= nan–1.
(iii) By rationalisation method: This method is used when the given function is in the irrational
form. The method involves rationalisation of the numerator or denominator as the case may be
simplifying the function after rationalisation putting x = a in the simplified form. The purpose of
rationalisation is to simplify by rationalisin the numerator or denominator as the case may be.
Example. Evaluate x2 4
f ( x) =
x2 x 2 3x 2
Solution. When x = 2, f (x) is not defined, so rationalising the denominator.
x2 4 x 2 3x 2
f (x) =
x 2 3x 2 x 2 3x 2
x 2
4 x 2 3 x 2
=
x 2 3x 2
[(a – b) (a + b) = a2 – b2]
42
x 2 x 2 x 2 3x 2
=
2 x 2
x 2 x 2 3 x 2
=
2
Putting x = 2
4 2 2
lim f (x) =
x2 2
= – 8.
x2 4
Example. Evaluate lim f (x) =
x2 x 2 x2
Solution. Since f (x) is not defined for x = 2, Rationalising the denominator
x2 4 x 2 x 2
f (x) =
x 2 x2 x 2 x 2
=
x2 4 x 2 x 2
x 2 x 2 2 2. x 2
x 2 x 2 x 2 x 2
=
2 2. x 2
x 2 x 2 x 2
=
2 2
Putting x = 2
2 2 2
lim f (x) =
x2
2 2
= 2.
(b) When x tends towards zero: In case x 0, same methods can be applied for evaluating limit
depending upon nature of function.
lim f (x) = x 2 ax a2
2
Example. Evaluate 3
x0 a
0 2a 0 a 2
=
a3
1
= .
a
x
Example. Evaluate lim f (x) =
x0
1 x 1 x
Solution. Rationalising the denominator,
43
x 1 x 1 x
f (x) =
1 x 1 x 1 x 1 x
x 1 x 1 x
=
1 x 1 x
1 x 1 x
=
2
2
Putting x = 0 = = 1.
2
(c) When x tends towards : In this case, limit can be evaluated by dividing all the terms of
numerator and denominator by the term having maximum power among all the terms of numerator and
denominator taken together. It is in the case of rational functions. After this put x = , now all the terms
having x in the denominator will be zero.
lim f (x) = x 33 x 6 x 5
3 2
Example. Evaluate
x x 2x 6
Solution. Term having maximum power is x3;so dividing numerator as well as denominator by x3
x3 3x 2 6 x 5
f (x) = x3
x 2x 6
3
x3
3 6 5
1 2 3
= x x x
2 6
1 2 3
x x
Putting x =
3 6 5
1
lim f (x) =
x 2 6
1
= 1. [Any number divided by infinity is equal to zero]
1 2 3 4 .....n
Example. Evaluate the limit of the following sequence where n .
n2
Solution. The numerator is forming an arithmetical progression involving first n numbers, so their
sum is given by
n n n 1
Sn = 2a n 1 a or
2 2
in this case
n n 1 n2 n
lim f (n) = 2
n 2n 2n 2
Dividing both sides by n2
1
1
f (n) = n
2
44
Putting n =
1 1
lim f (n) = [ = 0 as n = ]
n 2 n
Example. Evaluate the limit of the following sequence a + ar + ar2 ........ n
where n if r > 1, r = 1, r < 1.
Solution. The sequence is forming a geometrical progression with a as the first term and r as the
common ratio
r n 1
Sn = if r > 1
r 1
= na if r = 1
1 r n
= a if r < 1
1 r
a r n 1
lim Sn = = [as rn is if n ]
n
r 1
a 1 r n
But lim Sn = lim
n n
1 r
a ar n
= lim lim
n 1 r
n 1 r
a
= [because rn is approximated as zero when n
1 r
as r < 1]
a
So limit exists only when r < 1 and is equal to .
1 r
Interpretation of e in limit form
e is a constant taking approximate value of 2.7183. It is the base of natural log system also known as
n
1
Napierian log. This e is defined in terms of limit as lim 1 = e.
n
n
Example. Evaluate lim 1 x 1/ x
x0
Solution. Let x = 1 , then if x 0, y must tend towards , only then they are equal so substituting
y
x = 1 in the function.
y
y
1
lim 1 x = lim 1
1/ x
x0 y
y
= e (by definition)
45
x 5
1
Example. Evaluate lim 1
x
x
x 5 x 5
1 1 1
Solution. lim 1 = lim 1 . lim 1
x
x x
x x
x
(Applying law of indices)
5
= e . 1 lim 1 1
1
x
x
= e.
3x
1
Example. Evaluate lim 1
x
x
3x x x x
1 1 1 1
Solution. lim 1 = lim 1 . lim 1 . lim 1
x
x x
x x
x x
x
= e.e.e
= e3.
x
2
Example. Evaluate lim 1
x
x
Solution. Let 2 1 or x = 2y if x , y
x y
x 2y
2 1
lim 1 = lim 1
x
x y
y
y y
1 1
= lim 1 . lim 1
y
y y
y
= e.e.e
= e2.
m rt
r
= lim 1
r
m
m m r .rt mt
rt
m
r r
= P lim 1
m m
m
= P. en
as lim 1 r r
e
m m
So if interest is compounded continuously A = Pen where e is a constant. The value of en are
provided by readymade tables known as exponential table giving values of en corresponding to rt.
Example. Determine the amount at the end of 4 years of an investment of Rs. 1000 if the annual
interest rate is 6 per cent being compounded
(i) annually
(ii) half-yearly
(iii) continuously.
Solution. (i) Amount = P (1 + r)t
= 1000 (1 + 0.6)4
47
–.24
= 500e
= 500 (.786628) (From exp. table)
= Rs. 393.32 app.
2
1
Solution. Total investment = 1000 + 1000 1 + 1000 ..........t
10 10
where t
1
i
= lim 1000
t
t
i 1 10
2
= 1000 1 1 1 1 ...........
10 10 10
1
It is forming a geometrical progression with a = 1 and r =
10
= 1000 1
1
1
10
10000
= Rs. .
9
Example. A firm has purchased a machinery for Rs. c being depreciated at r per cent per annum on
diminishing balance method. Using limit, show that sum of depreciation of all the years is equa to initial
cost. (r may be used as in relation to 1.)
50
CONTINUITY OF FUNCTIONS
Functions can also be classified as continuous and discontinuous functions. In simple word a
function is taken as continuous if its graphical presentation gives a smooth curve. The interval for which it
gives a smooth curve. Otherwise, function is known as discontinuous.
The continuity of a function can be tested with the help of limit concept. There are two possible
cases in this situation, viz., continuity at a point and continuity in an interval. Both the situations are
explained below.
Continuity at a point
It involves testing the continuity of a function at a particular value of x. It is taken as continuous at a
point of the following conditions are fulfilled:
(a) Defined value exists at that point, i.e., f(a) exists.
(b) Limit at that point exists i.e., lim f(x) exists.
xa
(c) Both defined value and limit are equal, i.e., f(a) = lim f(x)
xa
If any of these conditions are not fulfilled, the function is taken as discontinuous. There are different
types of discontinuities based on the condition not fulfilled. It is taken as missing point discontinuity if
defined value does not exist. If limit does not exist at that point, the discontinuity is taken as finite
discontinuity. But if both does not exist, the discontinuity is known as infinite discontinuity.
x3 1
if x 1
Example. Given f(x) = x 1
3x if x 1
Determine whether function is continuous at x = 1.
Solution. For continuity of the function,
(1) Definied value, f (1) = 3(1) = 3.[as f(x) = 3x when x = 1]
x 1 x2 x 1
(2) Left hand limit of f (x), lim f(x) =
x1 x 1
= 1+1+1=3
Right hand limit of f(x), lim f(x) = 3 (1) = 3
x1
So both left hand and right hand limit are existing and equal, lim f(x) = 3.
x1
(3) Both defined value and limit are existing and equal, therefore, function is continuous at x = 1.
51
x 2 3 x 10
Example. Given f(x) – for x 2.
x2
What value should be assigend to f(2) to make f(x) continuous at x = 2.
lim f(x) =
x 2 x 5
Solution. [By Factorising]
x2 x2
= (2 + 5) = 7
So f(2) must be equal to 7 for making f(x) continuous at x = 2. Only then both defined value and
limit will be existing and equal.
2. Continuity in an interval
The limit concept can also be used for testing the continuity of a function in an interval. This
interval may be open or close. Hence continuity in an interval may be
(a) continuity in an open interval
(b) continuity in a close interval.
(a) Continuity in an open interval : An open interval is defined as that interval in which end points
are not included. All the values in between end points are included. It is denoted by (a, b). So continuity
in the open interval of (a, b) amounts to testing continuity at all points in between a and b excluding a and
b. If the function is continuous at all the points in between a and b, it is taken as continuous in the given
interval, otherwise not.
Testing of continuity in the open interval is same as testing at a point because at each point, function
should fulfill all the three conditions for continuity. It may be applied in the form of taking some points in
the given interval and testing the continuity at each point separately.
(b) Continuity in a close interval : A close interval is that interval in which end points are also
included. It is denoted by [a, b] read as close interval of a and b. The continuity of the function in this
close interval requires three conditions:
(i) Right hand continuity at the point a
(ii) Continuity in the open interval of (a, b)
(iii) Left hand continuity at the point b.
(i) A function is taken as having rith hand continuity at the point a if the following three conditions
are fulfilled.
(a) Defined value of f(x), i.e., f(a) is existing.
(b) right hand limit of f(x) i.e., lim f(x) is existing.
x a
It implies that if a function is continuous in the close interval, it is always continuous in the same
open interval. (as it is one of the conditions for continuity in the close interval). But if a function is
continuous in the open interval, it may not necessarily be continuous in the close interval. It may be that
function which have only one side continuity either left hand side or right hand continuity.
Continuous Functions
There are some functions which are always in its domain. If a function appears in any of these
forms, it can be directly stated that function is continuous without applying tests. These are as follows:
(a) Polynomial function : A function appearing in the form f(x) =a0xn + a1xn–1 + a1xn–2 + ..... + anx0
where n is a non-negative integer, is known as polynomial function of nth degree. Such functions are
always continuous for all the interval because defined value and limit at all points exist and are equal. So
if the given function is a polynomial function, it can be taken as continuous in the given interval.
(b) Rational function : A rational function appearing in the form of division of two functions is
taken as continuous for all the interval if it does not include any point where denominator is equal to zero.
If it includes any point where denominator is equal to zero, neither defined value nor limit will exist, so
function will be discontinuous.
It can be applied in the form as to put the denominator of rational function equal to zero and solve
for x. If the given interval consists of that value of x function is taken as discontinuous, otherwise
continuous.
x3 1
Example. Given f(x) = , determine all values of x for which f(x) is continuous.
x2 9
Solution. The given f(x) is a rational function, so putting denomination x2 – 9 = 0, x = ± 3 so f(x) is
continuous for all intervals excluding –3 and 3.
Example. Given f(x) = d X R.
Determine its continuity in the interval (–, –3), (–, –3), (3, +), (3, +), (–3, 3).
Solution. The given function f(x) is defined for all values except for less than 3 and greater than –3
excluding both. For all values in between –3 and +3, it becomes root of negative which is not defined in
real number system. So limit will also not exist and function is discontinuous for value between –3 and 3.
According to the given intervals.
(i) (–, –3), function is continuous
(ii) (–, –3), function is continuous
(iii) (3, +), function is continuous
(iv) (3, +), function is continuous
(v) (–3, 3), function is discontinuous.
1
Example. Let G(x) = , 2, x R
x2
Tell for what interval the function G(x) is continuous.
Solution. If x is a real number denominator it is defined only wnen x > 2.
G(x) is Continuous for the interval (2, )
necessary that a function must be continuous for differentiation which it turn has number of applications.
Some are explained below.
Example. An electric company changes from its customers the following amount for services; Rs.
3.00 for the first 20 kilowatts hours or less, Rs. 0.10 per kilowatt hour for the next 80 kilowatt hours; and
0.08 per kilowatt hour for any hours above 100 kilowatt hours. Determine the total cost function of x
kilowatt hours, TC(x) and test its continuity at x = 20 kilowatt hour and x = 100 kilowatt hours.
Solution. Accordingly,
3 if 0 x 20
TX(x) = 3 .10 x 20 if 20 x 100
11 .05 x 100 if x 100
At x = 20
Defined value, TC (20) = 3
lim TC(x) = 3 (comparing left hand and right hand limit)
x 20
LESSON 2
SIMPLE DIFFERENTIATION
Introduction
The term ‘calculus’ means method of calculation. This meaning does not have much relevance in
the practical use of the term in relation to differentiation. Calculus is classified as differential and integral.
Differential calculus is related with average rate of change.
It is one of the important branch of mathematics. It is becoming more and more important since its
evolution. Although an idea was evolved about it far back as Greek antiquity. But the credit for the
development of the subject goes to the mathematician and philosopher Gothfried W. Leibniz (1646-1716)
and to mathematician and physicist Isac Newton (1642-1727). They made the most significant
contributions to the development of the mathematical system of calculus simultaneously and
independently.
Initially it was applied to various problems of physical sciences only but now it has been commonly
applied in the study of commerce and economics. Various aspect of economics as price elasticity of
demand and supply, marginal function, firm’s equalibrium under different market conditions, laws of
returns etc. involve applications of differential calculus. Similarly it has applications at the macro level as
multiplier and accelerator.
It also has various applications in commerce. But the applications in economics as such can not be
separated rigidly because of close linkage between two disciplines. Although some specific applications
include inventory control, measurement of rate of growth, optimum operating level etc.
Meaning of Differntiation
As mentioned above, differential calculus is related with average rate of change. The method
involved is known as differentiation and the result obtained is known as derivative or differential
coefficient.
Practically derivative can be defined as the ratio of change in the value of function to change in the
value of independent variable where the change in the latter is tending towards zero. Technically, if y =
y
f(x), then lim is the derivative of y with respect to x where
x 0 x
y denotes change in y
x denotes change in x
dy
This derivative is often denoted by or f(x) or y1.
dx
Therefore, derivation is the rate of change in the value of function when limit of change in the value
of independent variable is tending towards zero.
On the basis of above interpretation, the steps involved in differentiation are described below:
(i) introduces certain change x (delta x) in the independent variable x and find the corresponding
change in the value of function. Technically, if y = f(x), then introducing x change in x and y
change in y.
y + y = f (x + x)
y = (x + x) – y
55
= f (x + x) – f(x)
(ii) divide both side of x giving the ratio of change in value of function to change in the value of
independent variable. The same is also known as average rate of change.
y f x x f x
Therefore =
x x
(iii) Lastly take its limit when x 0. This limit must exist for the derivative.
y f x x f x
Therefore lim = lim
x 0 x x 0 x
dy f x x f x
or = lim
dx x 0 x
The same is the derivative of y with respect to x. The derivative obtained by following steps is
known as derivative by first principle.
Example. If y = xn, find its derivative by first principle.
Solution. Given y = xn.
then y + y = (x + x)n (introducing change)
y = (x + x)n – xy
= (x + x)n – xn
n n 1 n 2 2
= x n nx n 1x x x .... x n x n
2
(Apply binomial distribution)
n n 1
= nx n 1 x x n 2 x 2 .... x n (simplifying)
2
Dividing both sides by x
n n 1 n 2 2
nx n 1x x x .... x n
y 2
=
x x
n n 1
= nx n 1 x n 2 x 2 .... x n
2
Taking its limit when x 0.
y n n 1 n 2
lim = lim nx n 1 x x.... x n
x 0 x x 0 2
dy
or = nxn–1.
dx
Instantaneous rate of change denotes the rate of change in the value of function at a particular value
of independent variable. Derivative gives the same as it is the rate of change in y when limit of rate of
change in x is tending towards zero which amounts to a particular value of x. Therefore derivative gives
the rate of change in the value of function at a given value of independent variable. This rate may be
constant or vary with the value of independent variable. It will be constant if derivative does not involve
independent variable, otherwise it will vary.
P
Example. The demand function of a commodity is x = 20 – . Find the rate of change in quantity
2
demanded.
P
Solution. Given x = 20 –
2
P P
then x + x = 20 –
2
P
x =
2
Dividing both sides by P and taking its limit when P 0
x 1
lim =
P0 P 2
d f x d g x
g x f x
dy dx dx
6. If y = f(u) and u = g(x) = (Chain rule)
dx g 2 x
7. Implicit Functions: Functions are also classified as explicit and implicit function. Explicit
functions are characterised as those where one variable can be expressed as a function of another variable
only as y = f(x). Otherwise it is taken as implicit function as f(x, y) = 0. For example, y = x2 + 2x + 4 is an
explicit function whereas x2 + 2xy + y2 = 0 is an implicit function. The derivative of implicit function is
obtained using chain rule. For example derivative of y2 with respect to x can be obtained assuming u = y2,
then
du
= du . dy
dx dy dx
On this basis, the rule is that all terms involving y will be first differentiated with respect to y and
dy dy
multiply it by . After this solve it for . The same is the derivative of implicit function.
dx dx
8. Parametric Functions: Two functions are taken as parametric functions if they have common
independent variable as y = f(t) and x = (t). This common independent variable is known as parametric.
Then
dy
dy
= dt
dx dx
dt
9. Inverse Functions: Two functions are taken as inverse if the independent variable of one function
becomes the dependent variable of the other and vice-versa. For example, if y = f(x), then x = f (y). Then
dy dx = 1
.
dx dy
58
dy 1
or =
dx dx
dy
x 1 x 1
Solution. Given y =
x 1 x 1
x 1 x 1 x 1 x 1
=
x 1 x 1 x 1 x 1
(Rationalising the denominator)
x 1 x 1 2. x2 1
=
x 1 x 1
2x 2. x2 1
=
2
y = x+ x2 1
dy 1
= 1 x 2 1 . 2 x
1/ 2
dx 2
= 1+ x
x 12
x a a2 x2
= . (Rationalisation)
a a2 x2 a a 2 x 2
x a a 2 x
= 2
a a2 x2
a a2 x2
y =
x
dy
=
x . a a a 2 x2 a a2 x 2 dxdx
dx x3
(Quotient form)
1
x . a2 x2
2
1/ 2
2 x a a2 x2
=
x2
x2
a a2 x2
= a2 x2
x2
x2 a . a2 x2 a2 x2
=
x2 . a2 x2
a a a 2 x 2
=
x . a x
2 2 2
t 2 1 t 2 1
Example. Given x = a . , y = at
t2 1 t2 1
dy t 4 2t 2 1
Shoow that =
dx 2t
t 2 1
Solution. Given x = a
t2 1
dx
2
= a 1 t2 1
1/ 2
t 2
1 2 t t 2 1 2 t
dt 2 t 1 t 2 1
2
1/ 2
2
= a t 2 1 .
2t
t 1
2
t 2
1
2at
=
t 1 . t 2 1
2 1/ 2 3/ 2
60
Similalry
dy
2
= a . t. 1 t 2 1
1/ 2
.
t 2
1 2t t 2 1 2t
t2 1
dt 2 t 1 t 1 t2 1
2 2
2at 2 t 2 1
= a.
t 1 t 1 t2 1
2 1/ 2 2 3/ 2
2at 2 a t 2 1 t 2 1
=
t 1 t 1
2 1/ 2 2 3/ 2
2 at 2 at 4 a
=
t 1 t 1
2 1/ 2 2 3/ 2
dy dy dx
= /
dx dt dt
2 at 2 at 4 a
t 1 t 1
2 1/ 2 2 3/2
=
2 at
t 1 t 1
2 1/ 2 2 3/2
at 4 2 at 2 a
=
2at
t 4 2t 2 1
=
2t
dy
Example. Given x2y + xy2 = 10, find .
dx
Solution. Differentiating implicitly both sides,
dy dy
x2 . + y . 2x + x . 2y . + y2 = 0
dx dx
dy
Simplifying for
dx
dy 2
x 2 xy = – 2xy y 2
dx
dy 2 xy y 2
=
dx x2 2 xy
= ex [x + 1]
2
x
(ii) y = e
x
2
de x 2 dx
ex .
dy dx dx
= x. 2
dx x
2 2
= x . e . 22x e
x x
x
2
x
= e 2 2 x 2 1
x
x2
(iii) y = e + e–x
dy d 2x d x
= e 2x
. e x .
dx dx dx
1 1
2 x 2 .2 e x
2x
= e .
2
2
x
= e 2 2 x 2 1
x
(iv) y = 10 xe–x/50
dy de x / 50 dx
= 10 x. e x / 50 .
dx dx dx
= 10 xe x / 50 1 e x / 50
50
62
= 10e–x/50 x 1
50
1
(v) y = (x + 2) e x 2
1
dy de x 2
1
d x 2
= (x + 2) e x2 .
dx dx dx
1 1
1
= (x + 2) e x 2 . e x2
x 2
2
1
1
x 2 1
x2
= e
1
x2
x 1
= e x 2
dy
= 2
1 d x 1
.
2
dx x 1 dx
2x
=
x2 1
(ii) y = ln 1 x 2
63
dy 1 d 1 x2
= .
dx 1 x2 dx
1 1
1 x 2 . 2 x
1/ 2
= .
1 x 2 2
x
=
1 x 2
(iii) y = ln2 (x + 1)
or y = [ln (x + 1)]2
dy 2 ln x 1
= 2 ln (x + 1) .
dx dx
2 ln x 1
=
x 1
(iv) y = x . lnx
dy 1
= x. + lnx
dx x
= 1 + lnx.
x 1
(v) y = ln .
x 1
x 1
dy x 1 x 1
= .d
dx x 1 dx
=
x 1 1 x 1
1/ 2
x 1 x 1
. .
x 1 2 x 1 x 1
1/ 2
x 1 x 1 1
= .
x 1 x 1 x 1
2
1
=
x 1 x 1
1
=
x 12
In addition to this, logarithmic differentiation can be used in different ways. It is based on the
derivative of logarithmic function. It basically involves three steps (i) taking natural log of both the sides,
dy
(ii) Differentiating implicitly both sides with respect to x, and (iii) solving for . Some forms based on
dx
these are as follows:
(a) Derivative of natural exponential function:
as y = ex . Taking natural log of both sides
lny = x . lne [lne = 1]
lny = x
Differentiating both sides with respect to e
64
1 dy = 1
.
y dx
dy
= y
dx
= ex.
(b) Derivative of other exponential functions as y = ax. Taking natural log of both sides
lny = x . lna [lna is a constant]
Differentiating both sides with respect to x.
1 dy = lna
.
y dx
dy
or = lna . y
dx
= lna . ax
(c) Derivative of a function raised to the power another function as y = [f (x)]g(x). It can be
differentiated only with the help of logarithmic differentiation. Taking natural log of both sides
lny = g(x) . ln f (x).
Differentiating both sides with respect to x
1 dy = g(x) . 1
. . f (x) + ln f (x) . g(x)
y dx f x
dy g( x )
= . f ( x ) ln f ( x ).g ( x ) . y
dx f(x)
g( x )
. f ( x ) ln f ( x ).g ( x ) . f ( x )
g( x )
=
f(x)
Logarithmic differentiation can also be applied for differentiating algebraic and exponential
functions if these appears in combined forms.
Example. Differentiate the following with respect to x :
(i) y = 5x + 2 (ii) y = ax . xa (iii) y = x e
x
dy x
= a .
d x x .d a
n
a
x
dx dx dx
65
= ax . axa – 1 + xa . ax . lna
da x
= ax . xa–1 [a + x . lna] a x .ln a
dx
(iii) y = s x e . Taking natural log of both sides and differentiating.
x
lny = ex . lnx
1 dy 1
. = e x . ln x . e x
y dx x
dy
= e x 1 ln x .y
dx x
= e x 1 ln x x e
x
x
(iv) y = x . lny. Differentiating implicity both sides with respect to x.
dy
= x . 1 . dy + lny
dx y dx
dy x
or 1 = lny
dx y
dy ln y
=
dx yx
(v) y = xlnx. Taking natural log of both sides and differentiating with respect to x.
lny = lny . lnx
= (lnx)2
1 dy = d . ln x
.
y dx y
dy
= 2 . ln x . x ln x
dx y
= 2 . lnx . xlnx – 1.
x
Example. If x y e x y
= a, then prove that
dy
y. + x = 2y
dx
x
Solution. given x y e x y
= a, taking natural log of both sides:
ln (x – y) + x . lne = lna
x y
x y x 1
dy
1 dy
dx
1 = 0.
x y dx x y
2
dy 1 x 1 y
=
dx x y x y
2
x y x y 2
dy y x 2 y
=
dx x y
2
x y
2
dy x 2 y
2
. x y
2
y. =
dx x y
dy
y = = –x + 2y
dx
y dy
or + y = 2y.
dx
dy y2
Example. If y = x x x .......
, prove that x .
dx 1 yln x
x .......
Solution. Given y = xx
as y x x
x .......
= xy
Taking natural log of both sides and differentiating:
lny = y . lnx
1 dy = y . 1 ln x . dy
.
y dx x dx
dy 1 y
lnx =
dx y x
dy 1
x = y
dx 1 y .ln x
y3
=
1 y .ln x
dy ln x
Example. If xy = ex – y, prove that
dx 1 ln x 2
Solution. Given xy = ex – y, taking natural log of both sides.
y . lnx = (x – y) . lne
y . lnx = (x – y) (as lne = 1)
or y [lnx + 1] = x
67
or y = x
1 ln x
1
dy
1 ln x x .
=
x
1 ln x
3
dx
ln x
=
1 ln x
2
or P = 200 x2
TR (x) = P . x = 200 x2 x
68
APPLICATIONS
The applications based on simple differentiation (derivative concept) are explained below:
x dx
= dx . p as lim
dp x p0 p dp
If a demand function is given and price elasticity of demand is required at a price, it is given by
Ep = dx . p
dp x
69
where dx is the derivative of demand function with respect to p, p is the price at which elasticity is
dp
required, and x is quantity demanded at that price.
Example. The demand function of a commodity is x = 100 p 2 . Determine the price elasticity of
demand (i) when price decreases from Rs. 8 to Rs. 6, (ii) at price Rs. 8.
Ep =
x p d
.
100 p . p 2
p x dp x
p p
.
100 p
=
2 x
p2 100 p2 x given
=
x3
64 16
=
36 9
Example. The linear demand function of a commodity shows that quantity demanded is nil when
price is Rs. 50 per unit and it is just 1000 units hen price is zero. Determine the price and quantity where
price elasticity and demand is unit.
Solution. Linear demand function can be obtained using intercept form as intercept of x-axis is 1000
units and on y-axis is Rs. 50 [given].
x P
= 1
1000 50
or x + 20 P = 1000
or x = 1000 – 20 P ... (i)
70
Corresponding Ep = dx P 20 P
dp x x
20P
= –1 [unit mean –1 for Ep]
x
or x = 20 P ... (ii)
Solving (i) and (ii) simultaneously for P
1000 – 20 P = 20 P
or 40 P = 1000
P = Rs. 25
Corresponding x = 20 (25) = 500 unit.
So it has unit elasticity when P = Rs. 25 and x = 500 units.
a
Example. The demand function of a commodity is P = where a and b are positive constants.
xb
1
Show that it has constant price elasticity of at all prices.
b
a
Solution. Given P = = ax–b
xb
dp
= –abx–b–1
dx
dx = 1
or
dp abx b 1
Now Ep = dx . P
dp x
1 P P ax b
= . [Putting p = ax–b]
abx b 1 x abx b abx b
1
=
b
71
1
It is constant at all prices. So whatever may be the price, price elasticity of demand remains .
b
where dx is the derivative of supply function with respect to p. it always takes positive value
dp
because of positive relationship between price and quantity supplied stated by law of supply.
Example. The weekly supply of butter (x kg) depends on the price (Rs. p per kg) according to
At this equilibrium price, price elasticity of demand is obtained by using demand function and price
elasticity of supply is obtained by using supply function. The only difference in this application and the
previous two is that in this elasticities are calculated at equilibrium price only whereas in earlier two at
any arbitrary price (given).
Example. A firm has the following demand and supply functions
P = 100 X 2 (Demand)
X = –10 + 2P (Supply)
Determine the price elasticity of demand and supply at equilibrium price.
dX P d 100 P2 P
Ep = . .
dP X dP X
1 P
100 P . 2 P .
2 1/ 2
=
2 X
P2 P2
=
100 P2 X X
64 16
=
36 9
dX P d 10 2 P P
Ep = . = .
dP X dP X
2 P 2(8)
=
X 6
8
= .
3
Example. A firm finds that both quantity demanded and supplied are 30 units when market price is
Rs. 8 per unit. It is known that demand is nil if price is increased to Rs. 12 per unit and firm is not willing
to supply if price is reduced to Rs. 5 per unit. Determine the firm’s price elasticity of demand and supply
at equilibrium price assuming linear relationship between price and quantity in both cases.
73
Solution. The demand equation being straight line, so its equation can be obtained as:
P 12 X 0
=
12 8 0 30
or –30 (P – 12) = 4X
15
or x = 90 – P (Demand)
2
Similarly supply function will be
P 5 X 0
=
58 0 30
or –30 (P – 5) = –3X
or X = 10P + 50 (Supply)
Using these price elasticity of demand and supply at equilibrium price, P = Rs. 8 will be:
dx P 15 P 15(8)
EP = . = . = –2
dP X 2 X 2(30)
dx P 10 P 10(8) 8
ES = . =
dP x x 30 0
4. Derivation of marginal revenue function [MR(x)] from total revenue function TR(x)
Total revenue function, TR(x), gives the total revenue of x units sold. It can be obtained from the
demand function as TR(x) = P . x where is the price when x units are demanded. On the other hand,
marginal revenue function, MR(x) gives the additional revenue of xth unit. In economics, marginal
revenue is defined as change in total revenue caused by change in number of units sold as additional
revenue of xth unit = TR(x) – TR (x – 1). It has an important relationship with total revenue as total
revenue will increase till marginal is positive, it will be zero if marginal is zero and decrease if marginal is
negative.
MR(x) can be obtained with the help of simple differentiation if TR(x) is given. MR(x) gives the rate
of change in total revenue which in turn is also given by derivative of total revenue function. Therefore,
MR(x) is equal to simple derivation of TR(x):
74
d TR x
MR(x) =
dx
It gives the rate of change in total revenue at x giving additional revenue of (x + 1) the unit.
TR(x) p . x = 100 x x 2
Now MR(x) =
d TR x
=
d 100 x 2 x
dx dx
1
100 x . 2 x
2 1/ 2
= 100 x 2 x .
2
x2
= 100 x2
100 x2
100 2x2
MR(x) =
100 x2
100 2 6
2
28 7
MR(6) = = Rs. 3.50.
100 6 8 2
2
Example. The demand function of a commodity is p = 15 . 300 2 x where Rs. p is the price per
unit when x units are demanded. Determine the level of output where marginal revenue is equal to zero
and price corresponding to the level.
Solution. Given p = 15 . 300 2 x
TR(x) = p . x = 15 . 300 2 x x
= 15x . 300 2x
d TR x d 15 x . 300 2 x
corresponding, MR(x) = =
dx dx
x
= 15 300 2x
300 2x
300 3x
MR(x) = 15
300 2x
Putting this equal to zero and solving for x
75
300 3x
15 = 0
300 2x
or 300 – 3x = 0
x = 100 units
At x = 100 units, p = 15 300 2 100
= Rs. 150.
So marginal revenue is zero when x = 100 units and corresponding price is p = Rs. 150.
Example. A firm can sell 100 units if it charges Rs. 5 per unit. It knows that for each Rs. 0.10
reduction in price, it can sell 20 more units. Determine the firm’s marginal revenue function. Use it to
determine marginal revenue when x = 100 units.
Solution. Given when P = Rs. 5
quantity demanded, x = 100 units
when P = Rs. 4
quantity demanded, x = 300 units.
(as for each Rs. 0.10 reduction, quantity demanded increases by 20 units, so if price declines 10
times to Rs. 4, quantity demanded also increases 10 times to 300 units).
Using two point form:
P 5 X 100
=
54 100 300
or –200 (P – 5) = X – 100
or x = –200P + 1100
11 X
or P =
2 200
So corresponding, TR(x) = P . X = 11 X X
2 200
11 X2
= X
2 200
11 X2
d X
d TR X 2 200
MR(X) = =
dx dx
11 X
=
2 100
when X = 100 units
11 100 9
MR (100) = = Rs. 4.50.
2 100 2
According to point method, price elasticity of demand at a point on the demand curve is equal to
lower half of the tangent at that point divided by upper half of his tangent as in figure, price elasticity of
BC
demand of B is equal to .
AB
The same result, if further analysed using relationship between average revenue and marginal
revenue gives elasticity of demand:
AR
Ep =
AR MR
1
or MR = AR 1
E p
[For proof, see any text book on Economics].
The same result can be provided using simple differentiation. It is as follow:
TR(X) = P . X
d TR X dX dP
= P. X. [Using product form)
dX dX dX
dp
or MR(x) = P + X
dX
p
= P+X.
X . Ep
dX p X . E p dX dP p
Ep . or
dp X P dP dX X . E p
1
MR = P 1
Ep
77
1
= AR 1 [P = AR]
E p
1
MR = AR 1 [ Ep is always negative]
E p
AR
or Ep =
AR MR
dp
Alternatively, MR = P + X .
dP
X dP
= P+P. .
P dP
[dividing and multiply second form by p]
1
= P P .
E p
1 X dP 1
MR = AR 1 as .
E p P dX E p
Example. AR and MR denotes the average and marginal revenue of any output, show that
AR
EP =
AR MR
at this output. Also find the price elasticity of demand function P = a b X and verify the above for the
price-elasticity.
Solution. First part already proved
Given P = a bX
dP 1 b b
= a bX . b =
1/ 2
So
dX 2 a bX 2p
dX 2P
=
dP b
So price elasticity of demand:
dX p 2 P p
Ep = . = .
dP x b X
2 P 2
=
bX
AR
Using Ep = ,
AR MR
requires MR at this level which will be:
P = a bX
TR(X) = P . X = a bX X
d TR X
Corresponding MR(X) = = a bX + X
dX
78
b
(Using product form)
2 . a bx
bX
= P–
2P
2 P 2 bX
=
2p
p
Now Ep =
2 P 2 bX
P
2P
P 2 p
=
2 P 2 P 2 bX
2
2P 2
= ... (iii)
bX
So both (i) and (ii) are equal except negative sign. It is because
AR
Ep =
AR MR
is based on the assumption that Ep is negative. It has already been incorporated in the formula.
Example. The demand equation of a commodity is x = 60 – P2. Determine the price elasticity of
demand when marginal revenue is Rs. 4.00.
Solution. Given X = 60 – P2
and MR = Rs. 4.00
So price elasticity of demand requires average revenue when marginal revenue is Rs. 4. It can be
obtained only if x is known at which MR = Rs. 4.00.
P = 60 X
TR(x) = P . X = 60 X x
d TR x
MR(x) =
dx
x 1
= 60 x
2 60 x
2 60 X X
=
2 . 60 X
2P2 X
MR(x) = =4 (Given)
2P
or 8P = 2P2 – X
or x = 2P2 – 8P ... (ii)
Using (i) and (ii) equations
60 – P2 = 2P2 – 8P
79
or 3P2 – 8P –60 = 0
3P2 – 18P + 10P – 60 = 0
3P [P – 6] + 10 [P – 6] = 0
(3P + 10) (P – 6) = 0
10
So either P = (not possible, so it is ignored)
3
or P = Rs. 6
or AR = Rs. 6 when MR = Rs. 4
AR 6
Ep = = 3.
AR MR 6 4
SUCCESSIVE DIFFERENTIATION
So far we have discussed the first order differentiation. But it is also possible to obtain the derivative
of the first derivative itself and this process may go on till it is possible. The process is known as
successive differentiation. It involves the derivative of the derivatives. These are also known as higher
order derivatives. The method and standard forms are same as in the case of first-order derivatives. For
example, if y = 12x2, its first-order derivative is 24x, its derivative 24 is known as second-order successive
dy d 2 y d 3 y
derivative, and likewise. These are denoted as , , and so on or y1, y2, y3 and so on or
dx dx 2 dx 3
f x , f x , f x and so on.
80
y = ln x 1 x ,
2
Solution. Given
dy 1 1
1 2 1 x
21/ 2
y1 = = . 2x
dx x 1 x2
1 x
= 1
x 1 x 2
1 x2
1 1 x2 x
=
x 1 x 2 1 x2
y1 = 1
1 x2
Cross-multiplying, squaring both sides
(1 + x2) (y1)2 = 1
Differentiating both sides with respect to x.
(1 + x2) 2y1y2 + (y1)2 . 2x = 0
Taking 2y1 common from both sides:
(1 + x2) + xy1 = 0.
1 1
d2y dy
Example. If 2x = y m y m , prove that (x2 – 1) 2
x. = m2y.
dx dx
1 1
Solution. Given 2x = y m y m
Differentiating both sides w.r.t. I
1 m 1 dy 1 m 1 dy
1 1
2 = y . y .
m dx m dx
1 m dy
1 1
= y y m
my dx
Cross multiplying:
1 m dy
1 1
2my = y y
m
my dx
dy
= 2 . x2 1 .
dx
a b a b 4ab
2
= 2
m1
1 1
y y 4y . y
m m
81
= 4x2 4
= 2. x2 1
dy
or my = x2 1 .
dx
Squaring both sides and differentiating implicitly w.r.t. x
2
dy
(my)2 = (x2 – 1)
dx
2
dy d 2 y dy
m2 . 2y
dy
dx
= x2 1 2 . . 2x
dx dx2 dx
dy
Taking 2 as common from both sides
dx
d2y dy
m2y = (x2 – 1) 2
x
dx dx
d2y dy
or (x2 – 1) 2
x = m2y.
dx dx
Example. If y = x 1 x 1 , prove that
1
(x2 – 1) y2 + xy1 = y.
4
Solution. Given y = x 1 x 1
1 1
y1 =
x . x 1 2. x 1
x 1 x 1
y1 =
2 . x2 1
y
=
2 x2 1
or 2. x2 1 . y1 = –y
Squaring both sides and differentiating w.r.t. x
4(x2 – 1) (y1)2 = y2
4[(x2 – 1) 2y1y2 + (y1)2 . 2x] = 2yy1
Taking 2y1 as common
4[(x2 – 1)y2 + xy] = y
1
or (y2 – 1)y2 + xy1 = y.
4
Example. If y = (a + bx) e–nx, show that
82
y2 + 2ny1 + n2y = 0
Solution. Given y = (a + bx) e–nx
y1 = (a + bx)e–nx – n + e–nx . b
= – ny + e–nx . b [product form]
[Putting y = (a + bx)e–nx]
and y2 = –ny1 + e–nx . –bn
= –n [–ny + c–nx b] + e–nx . –bn
= n2y – nbe–nx – nbe–nx
= n2y – 2nbe–nx
Talking L.H.S. and putting values of y1 and y2
y2 + 2ny1 + n2y
or n2y – 2nbe–nx + 2n [–ny + be–nx] + n2y
or n2y – 2nbe–nx – 2n2y + 2nbe–nx + n2y
= 0 R.H.L.
Example. A firm selling its product under imperfect competition is given by x = 100 p 2 . Show
that the corresponding total revenue function increases at decreasing rate till it is increasing.
83
or p = 100 p 2
=
100 x 4 x 100 2 x
2 2
100 x 2
=
100 x 4 x 100 2x
2 2
100 x 2 3/ 2
300 x 2 x 2
=
100 x 2 3/ 2
which is negative so total revenue is increasing till x = 10 units, but at decreasing rate.
Example. Show that the total cost function, TC(x) = ax2 + bx + c where a > 0, b > 0; c > 0 is an
increasing function at increasing rate.
Solution. Given TC(x) = ax2 + bx + c
d TC x
So rate of change in TC(x) = = 2ax + b
dx
which is positive as both a and b are positive. So is it increasing function.
d 2 TC x
Further = 2a > 0, so it is increasing at increasing rate.
dx 2
For inputs, a function is taken as convex from below if its second derivative id positive irrespective
of the value of first derivative. But it must be positive in case of supply function as shown in figure (i), it
must be negative in case of demand function as shown in figure (ii), it may be first negative, then zero and
positive in case of average cost function as shown in figure (iii). In addition to this, tangent position
changes in anti-clockwise direction in this case.
Otherwise function is taken as concave from below. In this case, tangent is above the curve (or curve
is below tangent). There can be three possibilities in the case also as shown below.
85
At x = x1
d TR x d TR x
2
In (i) case, > 0 but <0
dx dx 2
d AP x d 2 AP x
(ii) case = 0 but <0
dx dx 2
d f x d 2 f x
(iii) case < 0 but <0
dx dx 2
So in each case, first derivative may take any value, but second derivative is always negative. In
addition to this, tangent changes its position in clockwise direction.
a
Example. Show that the demand curve P = – C is downward sloping and convex from below
xb
(p is price x is quantity and a, b and c are positive constants).
a
Solution. Given p = –c
xb
dp
= <0
dx
d2 p 2a
So demand curve is sloping downwards > 0 which implies demand curve is convex
dx 2
x b
from below.
a
or x = –h
yk
dx = a
3/ 2 < 0
dy 2 y k
So indifference curves are sloping downward
2
d x 3a
2 = 3/ 2 < 0,
dy 4 y b
So in difference curves are convex from below.
d2 p
Example. It is given that a demand curve is convex from below 2 0 at all points where p is
dx
price per unit and x is quantity demanded. Show that the marginal revenue curve is also convex from
d2 p d2 p 3 d2 p
below if either is positive or is negative and numerically less than . . Does a similar
dx2 dx2 x dx2
property held for demand curve that are concave from below.
Solution. Let the demand function is p = f(x), then corresponding total revenue function:
TR(x) = p . x
d TR x dx dp
= MR(x) = p . x. [Product form]
dx dx dx
dp
or MR(x) = p + x .
dx
d MR x dp d 2 p dp dx
= x. 2 .
dx dx dx dx dx
dp d 2 p dp
= x. 2
dx dx dx
2 dp d2p
= x. 2
dx dx
For its convexity from below:
d 2 MR x d2 p d 3 p d 2 p dx
= 2. x . .
dx dx 2 dx 3 dx 2 dx
3d 2 p d3p
= x .
dx 2 dx 3
must be positive.
3d 2 p d3p
x . = 0
dx 2 dx 3
3 d2 p d3 p
or . = 0 (Dividing both sides by x)
x dx2 dx 3
d3 p 3 d2 p d3 p d2 p
if 3
is positive, then . 2 3 will be positive as is already positive (Given). So
dx x dx dx dx2
corresponding MR(x) is convex from below:
87
d2 p 3 d2 p d 2 p
If 2
< 0, then . 2 2 (Given)
dx x dx dx
d2 p 3 d2 p
So MR(x) is convex also if < 0 but less than . .
dx2 x dx2
d2 p
In case demand curve is concave from below will be negative, then
dx2
d 2 MR x 3 d2 p d3 p
(i) = .
dx x dx2 dx 3
2
d p 3 d2 p d3 p
will be positive if > 0 and . which is not fulfilled. So MR(x) will not be convex
dx2 x dx2 dx 3
from below if demand curve is concave from below in this case.
d3 p 3 d2 p d3 p
(ii) if < 0 then . < 0,
dx3 x dx2 dx 3
So MR(xx) is again concave from below.
2. Determining the relatively extreme values of functions
Another important application based on successive differentiation is determination of relatively
extreme values of a function (also known as maxima and minima). This in turn, has a number of
important applications in business and economics.
It involves the following steps:
(a) Determining the point where it takes relatively extreme value : if y = f (x) is the function, then
put dy/dx = 0 and solve for x, gives the value of x where f (x) takes relatively extreme value.
(b) Determining whether function is taking relatively maximum, relatively minimum or point of
inflection (neither increasing, nor decreasing) at the point given by step (a), as
d2 y
if > 0, relatively minimum.
dx2
d2 y
if = 0, point of inflection.
dx2
d2 y
if < 0, relatively maximum.
dx2
It is also possible to determine the relative maxima and minima using first derivative in place of
second derivative in the second step. First step is same in this situation also.
dy
(i) It is relatively maximum at the point where = 0, if derivative is positive for this any value of x
dx
before this and negative for any after this.
dy
(ii) It is relatively minimum at the point where = 0, if first derivative is negative for any values
dx
of x before this and positive for any value after this.
(iii) It is a point of inflection of first derivative is zero for some value before and after this.
x 2 27
Example. Find relatively extreme values of a function y = and also determine maxima and
x6
minima.
88
x 2 27
Solution. Given y =
x6
For relatively extreme values its first derivative will be equal to zero.
dy
=
x 6 2 x x 2 27
dx x 6
2
x 2 12 x 27
=
x 6
2
x2 – 12x + 27 = 0
(x – 3) (x – 9) = 0
So either x = 3 or x=9
x 6 2 x 12 x 2 12 x 27 . 2 x 6
2
d2 y
When x = 3, =
dx2 x 6
4
9 2 x 12 53 2
=
x 6
4
81 3
d2 y 54 2
and when x = 9, =
dx2 81 3
Therefore at x = 3, it takes relatively maximum value, i.e., 18 and at x = 9, it takes relatively
minimum value, i.e., 6.
Example. Find the value of a, b and c of a function
f (x) = ax2 + bx + c
if it has relatively maximum value of 7 at x = 1 and the function passes through the point (2, –2).
Solution. Given f (x) = ax2 + bx + c
If it has relatively maximum value of 7 at x = 1
d f x
= 2ax + b = 0
dx
Putting x = 1, 2a + b = 0 ... (i)
Also when x = 1, f (x) = 7
and when x = 2, f (x) = –2
a+b+c = 7 ... (ii)
4a + 2b + c = –2 ... (iii)
Subtracting (ii) and (iii),
3a + b = –9 ... (iv)
Solving (i) and (iv) simultaneously for a and b
a = –9, b = 18
89
d 2TR x d 2TC x
2
dx dx 3
At this level, P = 1000 – 2 (35) = Rs. 930.
f (x) has relatively maximum values at B and D and relatively minimum of point A and C. But it has
absolutely maximum at B and absolutely minimum at C.
Calculus gives only relatively extreme values. For example if a profit function is given, similarly if
average cost function is given, objective is to determine the level of output where cost per unit is
minimum.
Absolutely extreme values can be obtained from relatively extreme values by simple comparison. If
a function has two relatively maximum values, then absolutely maximum can be obtained by comparing
both relatively maximum values of a function. But if the function has only one relatively extreme value it
becomes absolutely extreme also.
The relatively extreme values can be obtained using calculus in the same way as explained in the
determination of relatively extreme values under Successive Differentiation. The step required are
summarised below:
dy
(i) If y = f (x), then put = 0 and solve for x.
dx
d2 y
(ii) At this values of x, if > 0, y takes relatively minimum value,
dx2
91
d2 y
if = 0, point of inflection, and
dx2
d2 y
if < 0, y takes relatively maximum values.
dx2
Example. If f (x) = ax2 + bx + c, a 0, prove that the point
b 4ac b 2
,
2a 4a
is a relatively maximum if a < 0 and is a relatively minimum if a > 0.
Solution. Given f (x) = ax2 + b + c
d f x
= 2ax + b.
dx
Putting it equal to zero and solving for x for relatively extreme value.
2ax + b = 0
x = –b/2a
b
At x =
2a
d 2 f x
= 2a
dx 2
It will be positive if a > 0, so taking relatively minimum value of
2
b = a b b b c 4ac b
2
f 2a 2a 2a
2b
It will be negative if a < 0, so taking relatively minimum value of
4 ac b 2
2a
Example. The demand function of a commodity is p = 15e–x/3 for 0 d x d 8 where Rs. p is the price
per unit when x units are demanded. Determine the price and quantity for which total revenue is
maximum.
Solution. Given p = 15e–x/3
TR(x) = p . x = 15e x / 3
x
= 15xe–x/3
dTR x
and = 15 x . e x / 3 . 1 e x / 3 1
dx 3
= 15 e x / 3 x 1
3
For maximisation, put it equal to zero and solve for x
x
15e x / 3 1 = 0
3
So either 15 e x / 3 = 0 or x 1 = 0
3
x
1 = 0. [15e–x/3 = 0 not possible as it is equal to p]
3
x = 3 units.
d 2TR x
x /3 1 x 1
At x = 3, = 15 e . 1 e x / 3 .
dx 2
3 3 3
= 5 e x / 3 1 x 1
3
= –5e–1 < 0.
So TR(x) is maximum when x = 3 units
At this level, p = 15e–1.
Example. A watermelon grower wishes to send his produce to the city market as early as possible in
the season to catch the prices. He can send now 6 tons at a price of Rs. 60 per ton. By waiting, he
estimates that he can add 3 tons per week to what he can send now, but then the price will be reduced by
Rs. 5 per ton per week. How long should he wait for maximum revenue (use the method of Calculus).
Also determine price at that level and maximized total revenue.
Solution. Let watermelon waits for x weeks for maximum revenue.
Then quantity after x weeks = (6 + 3x) tons and price after x weeks = Rs. (60 – 5x) per ton.
Total revenue after x weeks:
TR(x) = (60 – 5x) (6 – 3x)
For maximisation, take its first derivative w.r.t. x
dTR x
= (60 – 5x) (6 + 3x) – 5
dx
Putting it equal to zero and solving for x
150 – 30x = 0
93
or x = 5 weeks
d 2TR x
At x = 5 weeks, = – 30 < 0.
dx 2
Sp TR (x) is maximum at x = 5 weeks.
When p = (60 – 5x) = (60 – 25) = Rs. 35 per ton.
and TR(5) = 35(21) = Rs. 735.
Example. A shoe manufacturer produces both high grade and low grade shoes in units of x hundreds
of pairs and y hundreds of pais per day respectively. Assume that the equipment in plant is capable of
producing the shoes is this relationship:
42 5 x
y = (x < 10)
10 x
if the high grade shoes are sold at a price twice the low grade shoes. Determine the pairs of both be
produced to mximize total revenue.
Solution. Let the price of low grade shoes be Rs. p per pair, then price of high grade shoes will be
Rs. 2 p per pair. Accordingly total revenue will be:
TR = 2px + py
or TR(x) = 2px + p 42 5 x 42 5 x
Putting y 10 x
10 x
For maximizing TR(x), take its first derivative w.r.t. x, put it equal to zero and solve for x
dTR x
10 x . 5 42 5x . 1
= 2p + p
10 x
2
dx
8
= 2p + p
10 x
2
8
= 2 [Cancelling p from both sides]
10 x
2
or (10 – x)2 = 4
10 – x = +2 or 10 – x = –2
or x = 8 or 12
x = 8 [x < 10, to x = 12 not possible]
d TR x
2
16
At x = 8 which is negative, so
10 x
2 2
dx
42 5 8
RT(x) is maximum when x = 8, putting this in transformation function y = = 1.
10 8
94
Therefore, total revenue is maximum when manufacturer produces 800 pairs of high grade and 100
pairs of low grade.
2. Minimisationof Average cost function
Maxima and minima can also be used for determining the level of output where per unit cost is
minimum corresponding to given total or average cost function. It is often used in economic analysis. It
gives the optimum level of output.
dA x d 2 AC x
(i) Put = 0 and solve for x (ii) the value of x for which > 0, per unit cost is
dx dx 2
minimum corresponding average cost can be obtained by putting this x in AC(x).
Example. A train which is found to consume fuel at the rate of (0.0002x2 + 0.02x + 0.32) gallons
per hour when travelling at x miles per hour. Determine (i) the speed at which the fuel consumption per
mile is at minimum. (ii) if fuel cost Rs. 0.50 per gallon and other costs are Rs. 0.09 per hour, what speed
will minimize the total cost per mile.
Solution. Given fuel consumption for x miles is (0.0002x2 + 0.02x + 0.32) gallons when speed is x
miles per hour.
TC(x) = 0.0002x2 + 0.02x + 0.32
Corresponding AC(x) giving per miles fuel consumption will be:
AC x 0.32
AC(x) = 0.00002 x 0.02
x x
For minimising it, take its first derivative w.r.t. x
dAC x 0.32
= 0.0002
dx x2
Putting it equal to zero solving for x
0.32
0.0002 – = 0
x2
or x2 = 1600
x = 40 miles per hour.
d 2 AC x 0.64
At x = 40 miles per hours, = >0
dx 2
x3
The fuel consumption is minimum at x = 40 miles per hour.
(ii) If fuel colst Rs. 0.50 per gallon and other costs are Rs. 0.09 per hour, then total cost of x miles
travelled in one hour will be
TC(x) = 0.50 [0.0002x2 + 0.02x + 0.32] + 0.09
So corresponding average cost per mile will be
TC x
AC(x) = = 0.50 0.0002 x 0.02 0.32 0.09
x x x
For minimising AC(x), take its derivative w.r.t. x
dAC x
= 0.50 0.0002 0.32
2
0.09 0.25
2 0.0001 2
dx x x x
Putting it equal to zero and solving x
95
0.25
0.0001 – = 0
x2
or x2 = 2500
or x = 50 miles per hour.
d 2 AC x 0.25
At x = 50 miles per hour, = > 0.
dx 2
x2
The cost is minimum when speed is 50 miles per hour.
Example. A machine initially costs Rs. 6,400 with no scrap value. The cost of operating is Rs. 500
in the first year and increases to Rs. 800 in each successive year. Determine (i) the number of years it
should be operated for minimising total operating cost per year, and (ii) corresponding cost per year.
Solution. Capital cost = Rs. 6400
Operation cost = Rs. 500 + Rs. 1300 + Rs. 2100.... upto x years.
x
= [2(500) + (x – 1)800]
2
[Second x term of an A.P.]
x
= [800 + 200]
2
= 400x2 + 100x
TC(x) = operating cost + capital cost
= 400x2 + 100x + 6,400.
Corresponding per year cost function will be:
TC x 6400
AC(x) = = 400x + 100 + .
x x
For minimising it, take its derivative w.r.t. x
dAC x 6400
= 400 –
dx x2
Putting it equal to cost and solving for x.
6400
400 – = 0
x2
or x = 4 years
d 2 AC x 12800
At x = 4 years, = > 0. So cost per year is minimum if machine is
dx 2
x3
6400
operated for 4 years. Corresponding AC(x) = 400 (4) + 100 + = Rs. 3300.
4
3. Maximisation of profit function
If a firm’s demand function with total cost function is given, it is possible to determine the firm’s
equilibrium by maximizing the corresponding profit function in other situations also the same can be
applied, if profit function can be obtained. It is taken as profit, function (x) = TR(x) – TC(x).
d x d 2 x
For maximizing if (i) = 0 and solve for x, (ii) the value of x for which < 0, profit is
dx dx 2
maximum corresponding profit can be obtained by putting in (x).
96
8000 x
=
500 x
(x) = Gross profit – x (advertisement cost)
8000 x
= – x.
500 x
(ii) For maximizing it, take its first derivative w.r.t. x,
d x 500 x 8000 8000 x
= –1
500 x
2
dx
8000 500
= –1
500 x
2
3200 – 160x = 0
x = 20 months.
d 2 x
At x = 20 months, = –160 < 0
dx 2
So (x) is maximum when x = 20 months.
(iii) Corresponding price, P = Rs. [3 + 0.10 (20)]
= Rs. 5.00 per kg.
(iv) Maximised profit, (2) = 2,40,000 + 3200(20) – 80(20)2
= Rs. 2,72,000.
4. Minimisation of Total Cost
Usually, total cost function gives the functional relationship between total cost and the number of
units produced. It means it is an increasing function, so minimisation of this is not possible. But
sometimes, the total cost is defined in such a way that, it decreases upto certain level and then increases.
Only in such cases, this application is relevant. The step involves for minimisation are as follow:
dTC x
(i) Put = 0 and solve for x
dx
d 2TC x
(ii) The value of x for which > 0,
dx 2
TC(x) is minimum.
Example. An open tank with a square base and vertical sides is to be constructed of the metal sheet
so as to hold a given quantity of water. Show that this cost of material will be least when depth is half of
the width.
Solution. Let capacity tank = y cubic units and its base = x units, with height = h units.
Corresponding volume of open tank will be:
length . breadth . height = y
or x.x.h = y
y
or h = units.
x2
If cost of material is Rs. C per sq. unit, then total cost,
TC(x) = cost of bottom material + cost town sides material.
= C [Area of bottom] + C [Area of front and back]
= + C [Area of two sides]
TC(x) = cx2 + 2c x . y2 2 c x . y2
x x
2cy 2cy
= cx 2
x x
4cy
TC(x) = cx2
x
For minimising it, take its derivative w.r.t. x
dTC x 2cy
= 2cx –
dx x2
99
192
24r = 0
r2
192
r2 = =8
24
r = 2 ft.
At r = 2ft.
d 2TC r 384
= 24r
dr 2
24r 3
So at r = 2 ft, TC (x) is minimum
20
Corresponding h = = 5 ft.
2
2
Fig 1
Fig 2
The profit maximizing output is given by setting MR(x) = MC(x) + t and solving for x. At this profit
must be minimum. It is same as xt. Corresponding total tax Revenue: TR(t) = t . x which can be
maximized in the same way as explained above.
Example. An industry operating under competition has the demand function P = 10 – x with the
x
supply function P = 4 + . Determine (i) the equilibrium quantity before tax; (ii) the equilibrium
2
quantity after tax if tax at the rate of Rs. t per unit is imposed; (iii) the value of t which maximizes tax
revenue; (iv) maximized tax revenue.
Solution. (i) Given P = 10 – x (Demand function)
x
and P = 4+ (Supply function before tax)
2
Equilibrium quantity will be
x
10 – x = 4 +
2
or x = 4 units
Corresponding equilibrium price will be, P = 10 – 4 = Rs. 6.
103
x
(ii) After tax supply function becomes P = 4 + + t. So new equilibrium after tax will be
2
x
10 – x = 4 + +t
2
2
or xt = 4 – t.
3
2
(iii) if xt = 4 – t, total tax revenue will be
3
Tax Revenue (t) = t 4 2 t
3
For maximizing it, take its first derivative w.r.t. t.
d tax Revenue t 4
= 4– t
dt 3
Putting it equal to zero and solving for t.
4
4– t = 0
3
or t = Rs. 3 per unit.
At t = Rs. 3 per unit,
d 2 Tax Revenue t 4
= – <0
dt 2 3
So tax revenue is maximum when t = Rs. 5 per unit.
(iv) Maximized tax revenue = t . xt
= 3 4 4 t
3
= Rs. 6.
Example. The demand and total cots function of a monopolist are P = 12 – 4x and TC(x) = 8x + x2
respectively. It the tax of Rs. t per unit is imposed. Find (i) the quantity and price corresponding to the
maximum profit, (ii) maximized profit, and (iii) the tax that maximizes the tax revenue.
Solution. (i) Given P = 12 – 4x, so total revenue, TR(x) = 12x – 4x2
Total cost after tax, TC(x) = 8x + x2 + tx
(x) = TR(x) – TC(x)
= 12x – 4x2 – 8x – x2 – tx
= x (4 – t) – 5x2.
For maximizing (x), take its first derivative w.r.t. x,
d x
= (4 – t) – 10x
dx
Putting it equal to zero and solving for x
(4 – t) – 10x = 0
4 t
or x = units
10
104
4 t d 2 x
At x= , = –10 < 0.
10 dx 2
4 t
So profit is maximum when x = ,
10
Corresponding P = 12 – 4
4 t = 52 25
10 10
2
=
20
4 t
(iii) When x = ,
10
Tax revenue (t) = t . x = t 4 t .
10
For maximizing it, take its derivative w.r.t. t
d tax revenue t 4 2t
=
dt 10
Putting it equal to new and solving for t
4 2t
= 0 or t = Rs. 2.
10
At t = Rs. 2,
d 2 tax revenue t
1
2
=
t < 0.
dt 5
So tax revenue is maximum when t = Rs. 2 per unit.
6. Determination of Economic-order Quantities
Economic-order quantity (EOQ) is defined as that order size where overall cost of maintaining
inventory is minimized. It is the basic concept of inventory control models.
A simple EOQ model assuming deterministic demand and supply conditions, constant cost, linear
demand, instantaneous supply, no shortage involves the following costs.
(i) Inventory Cost: It means cost of purchasing inventory. In this simple case where demand is
known with certainty with constant per unit cost. Inventory cost = No. of units demanded x cost per unit.
Since it is constant in this situation, it does not effect EOQ. So whether it is considered for calculating
EOQ or not does not effect EOQ.
(ii) Ordering Cost: It includes all those cost which are incurred from the placement of order till
supply inventory reaches the premises. If order size with ordering cost is given; then total ordering cost is
equal to number of order multiplied by cost per order. Number of orders is given by demand per time unit
divided by order size.
So total ordering cost = No. of order x per order cost.
D
= (s)
x
105
where D is demand per time unit betting given; x is the order size and s is the cost per order. It has
opposite relationship with order size.
(iii) Holding Cost: It is also known as storage cost, it includes all those costs which are incurred for
maintaining inventory in stock such as godown rent, insurance charges, godown keeper salary etc. It is
equal to average inventory in stock multiplied by per unit holding cost. Average inventory in stock is
given by average of opening and closing stock.
x x 0 x
So Holding cost = .H Average inventory 2 2
2
It has direct relationship with order size.
Therefore total inventory cost, if x is order size will be give by
TC(x) = Cost of inventory + Ordering cost + Holding cost
D x
= DC + .s+ .H
x 2
where D, C, s and H are constants.
The purpose is to determine the value of x which minimizes TC(x). The method is same as explained
earlier. Same value of x is known as EOQ.
Example. A company required 1,200 units of inventory in a year. The cost of inventory is Rs. 10
per unit. Cost of ordering is Rs. 300 irrespective of the size of order and holding cost is 20 per cent of the
average value of inventory in the business. Find the total cost function TC(x) when order are placed in x
units and determine the value of x which minimizes the overall cost.
Solution. Let x is the order size which minimizes the total cost; then cost of inventory = DC =
(1,200) (Rs. 10) = Rs. 12,000.
1200
Cost of ordering = No. of orders × per order cost = (300)
x
Cost of holding = Average inventory × per unit holding cost
= x 10 20 = Rs. x
2 100
1200
So TC(x) = 12000 + (300) + x
x
For minimizing TC(x), take its first derivative w.r.t. x
dTC x 3,60,000
= –+1
dx x2
3,60,000
Putting it equal to zero and solving for x – + 1 = 0, x = 600 units.
x2
d 2TC x 7,20,000
At x = 600 units, = > 0.
dx 2 x3
TC(x) is minimum when order size is 600 units.
7. Relationship between average product and marginal product
There exists an important economic relationship between average product and marginal product.
The relationship states if average product increases, marginal product increases at a higher rate and lies
above average product; if average product decreases, marginal product decreases at a higher rate and lies
below average product but marginal product equal average product is maximum. The same is shown in
the figure.
106
The relationship can be produced using maxima and minima. The important is to show that both are
equal when AP is maximum. If total product is given as univariate function (involving an input) then
TP x dTP x
corresponding AP(x) = and MP(x) = . Now maximizing AP(x) requires taking
x dx
derivative of AP(x) w.r.t. x, putting it equal to zero and solving x. At this level both average product and
marginal product must be equal.
Example. The total production function of a commodity is given by TP(x) = ax + bx2 + cx2 where
TP(x) is total output and x is input. Verify that when average product is maximum, it is equal to marginal
product. Are there any restrictions for the value of a, b and c.
Solution. Given TP(x) = ax + bx2 + cx2
TP x
AP(x) = = a + bx + cx2
x
dTP x
MP(x) = = a + 2bx + 3cx2
dx
For maximizing AP(x), take the first derivative w.r.t. x
dAP x
= b + 3cs
x
Putting is equal to zero and solving for x
b + 2cx = 0
b
x =
2c
Putting it equal to zero and solving for x
b + 2cx = 0
b d AP x
2
At x = , must be negative for maximum
2c dx 2
107
d 2 AP x
= 2c if less than zero
dx 2
So c must be negative.
b
If c must be negative, then b must be positive for x = being positive.
2c
b2 b2c b2
At x = b , AP b = a – 2 a
2c 2c 2c 4c 4c
b2 b2
and MP b = a + 2b b + 3c 2 = a –
2c 2c 4c 4c
b
So both AP(x) and MP(x) are equal when x = (where AP(x) maximum).
2c
8. Other Applications
In addition to these specific applications based on maxima and minima, there are a number of
situations where these can be applied. Some of these are exemplified below.
Example. A wire of 50 cms in length is to be cut in two parts and then bent into two circles. Find
the length of each part so that the sum of the areas of two circles is least.
Solution. Let one part = x cms, then other part = 50 – x cms.
So circumference for first circle = 2r = x
x
or r =
2
x 2 x 2
Corresponding area of this circle = r2 =
4 2 4
Similarly circumference of second circle = 2r = (50 – x) cms.
50 x
or r =
2
2
50 x
Corresponding Area of circle = r2 =
2
50 x
2
=
4
Total area of two circles given by adding (i) and (ii) will be
x2 50 x
2
A(x) =
4 4
For minimizing, take its first derivative, w.r.t. x
dA x x 50 x
So =
dx 2 2
2 x 50 x 25
=
2
108
x 25
Putting it equal to zero and solving for x, =0
2
or x = 250 cms
d 2 A x
At x = 25 cm, = > 0,
dx 2
So area of two circle is least if each part is of 25 cms.
Example. The production manager of a publishing company plans to include 180 sq. cms. of actual
printed matter in each page of a book under production. Each page should have 2.5 cms margin along the
top and bottom and 2 cms wide margin along the sides. What are the most economical dimensions of each
printed pages.
Solution. Let length of the printed page = x cms
180
then breadth of printed page = cms. (as Area = length × breadth)
x
Corresponding length of pate = [x + 2(2.5)] cms = (x + 5) cms
(as margin both sides is 2.5 cms)
Then Area of bottom + Area of front and box + Area of two sides + surface area
or 3 2 3
x 2 h 2 h = 1800
2 2
3 2
or x 5 xh = 1800
2
3
1800 x 2
h = 2 ft.
5x
Corresponding volume of the open box, V(x) = length . breadth . height
3 2
3 1800 2 x
= x . x .
2 5x
9 3
= 540x – x
20
For maximizing V(x), take its first derivative w.r.t. x
dV ( x ) 27
= 540 x2
dx 20
Putting it equal to zero and solving for x
27 2
540 x = 0
20
or x = 20 ft.
d 2 N ( x) 27
At x = 20 ft. 2
= x < 0,
dx 10
So volume is maximum when breadth = 20 ft.
3
20
2
1800
Corresponding length = 30 ft, height = 2 = 12 ft.
5 20
Maximized volume, V(20) = (30)(20)(12) = 7200 cubic ft.
110
LESSON 1 UNIT-III
PARTIAL DIFFERENTIATION
Functions used in business and economics can also be classified as univariate, bivariate and
multivariate functions. Univariate functions are those functions which involves only one independent
variable as y = f(x) whereas bivariate functions involve two independent variables as x = f(x, y),
Multivariate functions involve more than two independent variables as u = f(x, y, z). Bivariate and
multivariate functions are considered more practical. Most of the functions used in business and
economics : as demand functions, production function, utility function, total cost function often appears
as bivariate or multivariate functions involving more than one independent variable. For example,
production is a function of different inputs, quantity demanded is a function of not only the price of the
commodity itself, but also of the prices of related commodities, and consumer's income.
In the case of univariate functions, the rate of change in the value of function is given by simple
differentiation as in the demand function x = f(P), the rate of change in demand in relation to price P is
given by
x dx
lim ( simplederivative).
x 0 p dp
But in case of bivariate and mukivanat; functions, the rate of change in the value of function in
relation to one independent variable keeping others as constant is given by partial differentiation. So if
demand function appears as X = F(P, Q) where P is the price of the commodity itcr1f oosad Q is the price
of related commodity, then rate of change in X in relation to P is given by
x
lim
x 0 p
x
and is denoted by (partial of X with respect to p) assuming Q as constant.
p
Definition : It implies that partial differentiation is related only with bivaiiate and multivariate
functions. It gives the rate of change in the value of function in relation to one independent variable at a
time keeping the effect of others as constant. For example if
Z = f(x, y),
then partial of z with respect to x will be
x z f ( x x, y ) f ( x, y )
= lim lim
x x 0 x x 0 x
z z
Example. If z = 2x2 + 3xy – 6y2, find and .
x y
z
Solution : = 4x + 3y (–6y2 is a constant, so its derivative is
x
zero)
z
= 3x – 12y.
y
z z
Example. If z = xy + inx, find and .
x y
z 1
Solution : = y+
x x
z
= x.
y
x2 y 2 z z
Example. If z = , show that x and y = x.
xy x y
x2 y 2
Solution : Given z =
xy
= x2 y–1 —x–1 y2
z
So = 2xy–1 + x–2 y2
x
z
= —x2 y–2 —2x–1 y.
y
Taking L.H.S.
x[2xy–1 +x–2 y2] + y [—x2y–2—2x–1 y]
= 2x2 y–1 + x–1 y2 —x2y–1 —2x–1 y2
= x2y–1—x–1 y2 = z = R.H.S.
x2 y 2 z z
Example. If z = In 2 2
find and .
x y x y
x2 y 2 x y 2 x x y 2x
2 2 2 2
z
Solution : = 2
x x y2
x 2
y 2
2 x 2 2 xy 2 2 x3 2 xy 2
=
x2 y 2 x2 y 2
4 xy 2
=
x4 y 4
112
x 2 y 2 x y 2 y x y 2 y
2 2 2 2
z 4 xy 2
= 2
y x y2 x2 y2 x4 y 4
2
x2 y 2 z z
Example. If u = , show that x +y =3u
x y x y
Solution :
z
=
s y 2 xy 2 x 2 y2
x x y
2
2 x 2 2 xy 3 x 2 y 2
=
x y
2
xy xy 2 y 2
=
x y
2
u x y 2x2 y x2 y 2
=
y x y
2
xy 2 x 2 xy
=
x y
2
z z
Putting and on the L.H.S.
x y
x 2 y xy 2 y 2 xy 2 2 x 2 xy
x y x y
2 2
x2 y 2 2 x2 y 2 2x2 y 2 x2 y 2
=
x y
2
3x 2 y 2 x y
=
x y
2
x2 y 2
= 3 = 3u = R.H.S.
x y
Example. A television manufacture’s profit function is
(x, y) = 500x+400y–2x2 – y3– 2xy
where x denotes the number of retail outset and y denotes the advertisement outlay (in thousands of
Rs.); and (x, y) is profit (also in thousands of Rs.). Show that rate of change in profit is equal at x = 50
and y = Rs. 1,00,000.
Solution : Rate of change in relation to x is given by
x x, y
= 500 – 4x – 2y
x
At x = 50 and y = 100 (in thousands)
113
x, y
= 500 – 4 (50) – 2(100)
x
= 100
Rate of change in relation to y is given by
x, y
= 400 – 2y – 2x.
y
At x = 50 and y = 100, rate of change is :
x, y
= 400 –2(50) –2 (100)
y
= 100
So rate of change is equal at x = 50 and y = Rs. 1,00,000.
y P
= lim . [at a price P]
Q 0 p Y
y P
= .
p Y
Example. The joint demand functions of two related commodities A and B are as follows :
x = p–0.4 Q0.5 (A commodity)
y = 0.4
p– Q 1.5 (B commodity)
where x and y denote their units and PQ prices per unit. Determine their cross elasticity of demand.
Solution : Cross elasticity of demand of A commodity is relation to price of B commodity will be
x Q
EXQ = .
Q x
0.5 p 0.4Q 0.5Q
=
x
= 0.5 (Putting x = P–0.4 Q0.5)
Similarly cross elasticity of B in relation to price of A will be :
y P
Eyp = .
p Y
0.4 p 0.4Q1.5 P
=
y
= 0.4 (Putting y = P0.4 Q–1.5)
Complimentary versus Substitutes : The same cross elasticities can also be used for dividing the
relationship between two commodities in economics, there are three different possibilities, viz.,
competitive products (which serves the same purpose as two brands of paste), complimentary products
(supplementing each other as bread and butler) and no relationship exist. If the commodities are
competitive or substitutes, one can be used in place of the other commodity resulting in quantity
demanded of one commodity changes in the same direction in which the price of other commodity
changes. For example, if the price of one brand of paste increases, some of the consumers of this brand
may switch over to related brand resulting in increase of the demand of related brand. So it implies that
there exist positive relationship between change in quantity demanded of one commodity and change in
price of related commodity in this case. Therefore, if both the cross elasticities are positive, the
commodities may be taken as substitutes or competitive as in the previous example.
But two commodities are complimentary if they are consumed simultaneously as bread and butter
and if the price of one increases, quantity demanded of other decreases and vice versa. It amounts that
there exists negative relationship between change in quantity demanded for one commodity in relation n
to price of related commodity, Hence if both the cross elasticities are negative, the commodities may be
taken as complimentary,
It may be possible that both the cross elasticities take opposite algebraic signs, in such cases nothing
can be concluded about the relationship between commodities.
Example. The joint demand functions of two related commodities A and B are as follows :
115
8
x = (A commodity)
PQ
8
y = (B commodity)
PQ
where x and y denote their units and P and Q their price per unit respectively.
Determine both the cross elasticity at P = Rs. 2 and Q = Re. 1. Also state whether commodities are
competitive or complimentary.
8
Solution : Given x =
PQ
x Q
Ex2 = .
Q x
8 Q
= .
PQ 2 x
8 8
= 1
PQ x 8
[Putting P = Rs. 2 Q = Re. 1 and x = 4 units]
Similarly
y P
Eyp = .
p y
12 P
= .
P 2Q y
12
= = –1
PQy
[Putting P = Q = and y = 12 units]
Since both the cross elasticities are negative, the commodities re complimentary.
Note 1. If two commodities joint demand functions are given as
x = f(P, Q) and y = g(P, Q),
then four different elasticities can be calculated. These are as follows :
x P
Exp = . [Same as direct price elasticity of derr
p x
which always takes negative sign
bect of law of demand]
x Q
EXQ = . [Cross elasticity of x in relation to Q]
Q x
y Q
EXQ = . [Cross elasticity of y in relation on P]
P x
y Q
EYQ = . [Direct elasticity of demand’
Q Y
116
2. If the joint demand function involves income of the consumer also, then income elasticity of
demand can also be calculated as exemplified below:
Example. The demand (x) of passenger automobile is given by
x = 0.90 I 1.1 p–0.7
where I is the income and P is the price per car. Find (i) income elasticity of demand (ii) price elasticity of
demand.
x 1
Solution : Income elasticity of demand = .
I x
991.1 P 0.7 1
=
x
= .99 [Simplification]
x P
Price elasticity of demand = .
I x
0.63I 1.1 P 0.7 .P
=
x
= -0.63 [Simplified]
3. Measurement of marginal productivity of input : The partial differentiation can also be used
for analysing the production function. It can be used for determining the rate of change in production in
relation to one input keeping others as constant (as is in case of short run production function). The same
rate of changes measures the marginal productivity of input. For example if p = f(x, y, x) where x, y and x
denotes three inputs.
P
Then marginal productivity of x inputs = = MPx
x
P
marginal productivity of y input = = MPy
y
P
marginal productivity of z input = = MPz
z
Example. The production function of a commodity is
P = 50x – x2 + 60y – 2y2
where x and y denotes the units of two unpit. Determine (i) the marginal productivity functions of x
and y, and (ii) their contribution at x = 10 units and y = 10 units.
Solution : Given P = 50x — x2 + 60y — 2y2
P
MPx = = 50 — 2x
x
P
MPy = = 60 — 4y.
y
At x = 10 Units, y = 10 units
MPx = 30
MPy = 20.
117
MR1 =
TR x1 x2
x1
(b) Secondly, find the total cost function of both the firms; i.e., for x1 units of firm 1 and for x2 units
firm 2. Both the firms operate under different conditions, so their cost function may vary, For
example total cost function of firm 1 is
TC(x) = 5x + 400,
119
Solution : Given price function P = 100 – 0.5 x when x units are demanded. Assuming two firms
share it as x1 and x2. So putting x = x1 + x2.
P = 100 – 0.5 (x1 + x2)
Total revenue function of firm 1,
TR1, (x1 + x2) = Px1
= 100x1 – 0.5x12 – 0.5x1x2
So corresponding marginal revenue function,
TR x1 , x2
MR1 = = 100 – x1– 5x2.
x1
Similarly total revenue function of firm 2,
TR2, (x1, x2) = Px2 = 100x2 – 0.5x1x2 – 0.5x22
So corresponding
TR2 x1 , x2
MR2 = = 100 – 05x1–x2
x2
Total cost function of firm 1 for x1 units will be
TC (x1) = 5x1
dTC ( x1 )
So MC1 (x1) = = 5.
dx1
and total cost function of firm 2 for x2 units will be
120
TC (x2) = 0.5x22
dTC ( x 2 )
So MC2 (x2) = = x2
dx 2
(i) Setting their marginal revenue functions equal to their marginal cost functions and solving for x1 and
x2.
100 – x1 – 0.5x2 = 5 ...(1)
100 – 0.5x1 – x2 = x2 ...(2)
Solving (1) and (2) for x1 and x2, x1 = 80 units and x2 = 30 units. At both these marginal cost is increasing.
So both the firm’s are in equilibrium when x1 = 80 units and x2 = 30 units.
Total Differentiation
In the previous section we have been using term derivative or differentiation. If differs from
differential. Differential denotes the change in the value of function y = f(x) denoted by dy in y
corresponding to certain change in x i.e., dx. It differs from derivative as derivative gives the change in y
with respect to change in x where change in x is tending towards zero. So derivative gives the rate of
change whereas differential gives the total change. Then
dy y
= lim
dx x 0 x
y
dy = lim dx
x 0 x
dy
= dx
dx
where dy = differential of y
dy
= rate of change in y
dx
dx = differential of x.
Actually it gives the approximate change in y for a certain change in x. So it is taken as
dy
dy dx
dx
121
Therefore differential gives the change in the value of function for a certain small change in the
value of independent variable.
Example. Total revenue function of a firm is TR(x) = 5x. Find change in TR(x), dTR(x) if chnge in x,
i.e., dx = .04 units with the help of derivative.
Solution : Given TR(x) = 5x and dx = 4 units
dTR ( x)
= 5
dx
dTR ( x )
dTR (x) = dx = 5dx
dx
= (5).04
= Rs. 0.20.
Example. A firm’s total cost of producing x units is given by TC(x) = x2 + 1000. Using differential,
find change in total cost if output increased from 5 units to 5.10 units. Compare it with actual change.
Solution : Given TC(x) = x2 +1000 and dx = 5 units
dTR ( x )
dTC (x) = dx
dx
= [2x] dx
= [2x] 0.10 = .2x
Putting x = 5 units
dTC (x) = [.2] 5 = 1
Actual differential in TC(x) = TC (5.10) – TC (5)
= 1026.1 – 1025
= 1.1 app.
The difference can not be avoided.
This will be in case of function involves only one independent variable. If function considers more
than one variable as z = f(x,y), then dz is known as total differential involving the differential of x and y
only. It is the total differential of x when y is constant and differential of y when x is constant.
z z
dx + dy
x x
Therefore
z z
where and are the partial derivatives of z with respect to x and y respectively. Both these
x y
denotes the rate of change when other variable is constant.
If change in any of the two variables is zero, the differential corresponding to the variable becomes
z z
zero. For example if dy is zero, dx become zero and dz = dy. These two are also known as partial
x x
differentials. But these are also valid for small changes in x and y.
Example. Given z = x4 + 8xy + 3y3. Find its total differential dz.
Solution : Given z = x4 + 8xy + 3y3
122
z z
= 4x3 + 8y and = 8x + 9y2
x y
z z
then dz = . dx + .dy
x y
= (4x3 + 8y) dx + (8x + 9y2) dy.
Example. Given the total production function
Q = ALak1–a
where Q is total production when L units of labour and k units of capital are used. Find total
differential of Q.
Solution : Given Q = ALak1–a
Q Aal a k 1 a Q
= AaLak1–a =
L L L
= Ala (1 – a)k–a
=
1 a ALa k 1a 1 a Q
k k
Q Q
then dQ = dL + dk
L k
=
aq
dl
1 a Q dk .
L k
Example. Given the production function.
Q = (bk–r + aL–r)–1/r, find dQ.
Solution : Given Q = (bk–r + aL–r)–1/r,
Q
= [bk–r + aL–r]–1/r–1 –rbk–r–1
k
= bk–r–1 [bk–r +aL–r]–1/r–1
Q
= [bk–r + aL–r]–1/r–1 –rbL–r–1
L
= aL–r–1 [bk–r +aL–r]–1/r–1
Q Q
then dq = dk + dL
k L
= bk–r–1 [bk–r + aL–r]–1/r–1. dk + aL–r–1
[bk–r + aL–r]–1/r–1. dL.
f x, y f x, y
. dx dy 0
x x
(ii) Divide both sides by dx resulting into
f x, y dx f x, y dy
. . 0
x dx x dx
dy
(iii) Simplify it for , so
dx
dy f x, y f x, y
=
dx x x
Therefore derivative of an implicit function is equal to minus of the ratio of partial derivatives of
f(x, y) with respect of x and y respectively.
Example. Show that derivative of the following implicit function is equal to minus of the ratio of
partial derivatives :
(i) x2 + y2 + 2xy = 0 (ii) x3 + y3–3axy = 0
Solution : Let f(x, y) = x2 + y2 + 2xy = 0
Taking its total differential of both sides.
f x, y f x, y
dx dy = 0
x x
f x 2 , y 2 2 xy f x 2 , y 2 2 xy
or dx dy = 0
x x
or (2x + 2y) dx + (2y + 2x) dy = 0
dy
Divide both sides by dx and solve for
dx
dy
(2x + 2y) + (2y + 2x) = 0
dx
dy 2x 2 y
or = = –1
dx 2x 2 y
(ii) Given x3 + y3= –3axy = 0
f x 2 , y 2 2 xy f x 3 , y 2 2 xy
So dx dy = 0
x x
(3x2 – 3ay) dx + (3y2 – 3ax) dy = 0
Dividing both sides by dx
dy
(3x2 – 3ay) dx + (3y2 – 3 ) = 0
dx
dy 3 x 2 3ax ay x 2
=
dx 3 y 2 3ax y 2 ax
124
Eular’s theorem
Functions are classified in different categories on different basis. As on the basis of number of
independent variables, functions are classified as univariate, bivariate and multivariate functions.
Univariate functions have only one independent variable. Bivariate functions are known as those
functions which have two independent variables as z = f(x, y). Similarly multivariate functions are those
which have more than two independent variables as
u = f(x, y, x)
Bivariate and multivariate functions are further classified as homogeneous and non-homogeneous
functions. The basic property of homogeneous functions is that if z = f(x,y), then any constant ,
f(x, y)=x f(x, y). For example, if z = x2+ 2xy + y2, then a2z = a2x2 + 2a2xy + a2y. These are known as
homogeneous functions of nth degree and 2nd degree respectively. If n = 1, the homogeneous function is
known as linear homogeneous function. These functions are characterised as those where sum of the
power of independent variables of all the nomials (terms) is equal. The sum of such powers is known as
degree of homogeneous function. For example z = x2 + 2xy + y2 is a homogeneous function of second
degree.
A rational function appearing in the form of division of two functions is known a homogeneous
function if both numerator and denominator are homogeneous functions with the degree as difference
between the degree of numerator and denominator. If both the numerator and denominator. are
homogeneous functions of equal degree, the function is known as zero degree, homogeneous function.
Eular's Theorem is relating to homogeneous functions only. According to Eular's theorem if
z = f(x,y) of nth degree homogeneous function and first order partials exist, then
z z
(i) x. y. = nz
x y
It has a number of corollaries, one of the important one is that :
2
(ii) x. x y. y z = n(n–1) z
2 z 2 z 2 z
2
or x2 . 2 xy. y . = n (n – 1) z.
x 2 y y y 2
[Proof has been ignored]
Example. For the production function z = axa y, show that
z z
(i) x. y. = ( + ) z
x y
2 z 2 z 2 z
2
(ii) x2 . 2 xy. y . = ( +) (a+b–1) z
x 2 y y y 2
Solution : Given z = axa y3 is a homogeneous function of ( + ) degree, so according to Eular’s
theorem:
z z
(i) x. y. = ( + ) z
x y
Taking L.H.S.
125
ax a y ax a y
x. y.
x y
or x. xaa–1 y + yax y–1
or axa y + ax y
or axa y (+ )
or (+ ) z = R.H.S.
x. y.
x x
or x. [–(ax + by)–2 .a] + y [–(ax + by)–2. b]
or –(ax + by)–2 [ax + by]
or –(ax + by)–1 = R.H.S.
(ii) Applying a corollary of Eular’s Theorem :
126
2 z 2 z 2 z
2
x2 . 2 xy. y . = 2 (ax + by)–1
x 2 x y y 2
Taking L.H.S.
z z z
x2 2 xy y2.
dx x x y y y
or x2 (ax by ) 2 2 xy b(x by )2
x y
y2 b( ax by ) 2
z
or x2 [2a (ax + by)–3 a] +2xy [2b (ax + by)–2. a]
+ y2 [2b (ax + by)–3. b]
or (ax + by)–3 [2a2x3+ 4abxy + 2b1 y2]
or 2(ax + by)–3 [a2x2+ 2abxy + b2 y2]
or 2(ax + by)–3 [(ax + by)2)]
or 2(ax + by)–1 = R.H.S.
Example. Using matrix inversion method, solve the following system of equations for x, y and z.
x + y + z = 5; 2x + y – z = 2; 2x – y + z = 2
Solution. The given system can be expressed in the matrix form as
AX = B,
1 1 1 x 5
where A 2 1 –1 , X y and B 2
2 –1 1 z 2
0 –2 –2 5 –8 1
1 1
Thus, X = A B = – –4 –1 3 2 – –16 2
–1
8 8
–4 3 –1 2 –16 2
Hence x = 1, y = 2 and z = 2.
127
1 –4 –1
Solution. We have D = 2 –5 2 1(–5 – 4) 4(2 6) – 1(4 – 15) 34.
–3 2 1
11 –4 –1
where D1 = 39 –5 2 11(–5 – 4) 4(39 – 2) – 1(78 5) –34
1 2 1
1 11 –1
D2 = 2 39 2 1(39 – 2) – 11(2 6) – 1(2 117) –170
–3 1 1
1 –4 11
D3 = 2 –5 39 1(–5 – 78) 4(2 117) 11(4 – 15) 272
–3 2 1
Example. A manufacturer produces three products X, Y and Z which he sells in three markets I,
II and III. Monthly sales and sale prices are given as follows:
X Y Z X Y Z
If the costs per item for three products X, Y and Z are ` 1.80, ` 2.50 and ` 3.40 respectively, find
by matrix algebra his total profit.
2.30 – 1.80
[3000 3500 4000] 3.10 – 2.50
4.20 – 3.40
Example. A firm produces three products P1, P2 and P3 requiring the mix-up of three materials
M1, M2 and M3. The per unit requirement of each product for each material is as follows:
M1 M2 M3
P1 2 3 1
A=
P2 4 2 5
P3 2 4 2
(i) The total requirement of each material if the firm produces 100 units of each product.
(ii) The per unit cost of production of each product if the per unit costs of materials M1,
M2 and M3 are ` 5, ` 10 and ` 5 respectively, and
(iii) The total cost of production if the firm produces 200 units of each product.
Solution. (i) The total requirement of each material if the firm produces 100 units of each
product is given by the matrix product
129
P1 P2 P3
M1 2 4 2 100 P1 M1 800
M 2 3 2 4 100 P2 M 2 900
M3 1 5 2 100 P3 M 3 800
Thus the firm requires 800 units of material M1, 900 units of material M2 and 800 units of
material M3 to produce 100 units of each product.
(ii) The per unit cost of production of each product is given by the matrix product
M1 M2 M3
P1 2 3 1 5 M1 P1 45
P2 4 2 5 10 M 2 P2 65
P3 2 4 2 5 M 3 P3 60
Thus the per unit costs of three products P1, P2 and P3 are ` 45, ` 65 and ` 60 respectively.
(iii) The total cost of production if the firm produces 200 units of each product is given by
45
[200 200 200] 6 [34, 000]
60
Example. The following matrix gives the proportionate mix of constituents used for the three
fertilizers:
Constituent
A B C D
I 0.5 0 0.5 0
(i) If sales are 1000 tins (of one kilogram) per week, 20% being fertilizer I, 30% being
fertilizer It and 50% being fertilizer III, how much of each constituent is used?
(ii) If the cost of each constituent is 50 paise, 60 paise, 75 paise and 100 paise per 100
grams respectively, how much does one kilogram tin of each fertilizer cost?
(iii) What is the total cost per week?
130
Solution. The proportionate mix of constituents used for three fertilizers can be represented by
the 4 × 3 matrix:
I II III
A 0.5 0.2 0.2
B 0 0.3 0.2
P
C 0.5 0 0.1
D 0 0.5 05
0.2 I 200 I
S 1000 0.3 II 300 II
0.5 III 500 III
(i) The total quantity of each constituent used is given by the matrix product:
I II III
A 0.5 0.2 0.2 260 A
200 I
B 0 0.3 0.2 II 190 B
PS 300
C 0.5 0 0.1 150 C
500 III
D 0 0.5 0.5 400 D
(ii) The cost (in `) of each constituent (per kg) can be represented by 4 × 1 column matrix:
Cost
A 5
B 6
C 7.5
D 10
Thus the cost of 1 kg tin of each fertilizer is given by the matrix product:
A B C D
5 A
I 0.5 0 0.5 0 I 6.25
6 B
II 0.2 0.3 0 0.5 II 7.80
7.5 C
III 0.2 0.2 0.1 05 III 7.95
10 D
131
(iii) The total cost of fertilizers, when 1000 tins (of one kilogram) are sold per week, is given by
6.25
[200 300 500] 7.80 [7565]
7.95
Example 21. An amount of ` 5,000 is put into three investments at the rates of interest of 6%,
7% and 8% per annum respectively. The total annual income is ` 358. If the combined income
from the first two investments is ` 70 more than the income from the third, find the amount of
each investment by using matrix algebra.
Solution. Let x, y and z represent the investments (in `) at the rates of interest of 6%, 7% and 8%
per annum respectively. Then, according to the given information, we have
x + y + z = 5000 x + y + z = 5000
1 1 1 x 5000
6 7 8 y 35,800
6 7 –8 z 7000
A X B
Since |A| 0, A–1 exists and the solution is given by X = A–1 B. It can be easily verified that
–112 15 1
1
–1
A =–
96 –14 –2
16
0 –1 1
132
Example. Mr. X has invested a part of his investment in 10% bond A and a part in 15% bond B.
His interest income during first year is ` 4000. If he invests 20% more in 10% bond A and 10%
more in 15% bond B, his income during second year increases by ` 500. Find his initial
investments and the new investments in bonds A and B using matrix method.
Solution. Let his initial investment be ` x and ` y in bond A and bond B respectively. Then
according to the given information, we have
Since he invests 20% more in bond A and 10% more in bond B in the next year, his new
investments are 120x and 1.10y. Thus again according to the given information, we have
Now we’ll solve Eqs. (i) and (ii) using matrix method. Expressed in the matrix from, we obtain
Now |A| = 0.0165 – 0.0180 = –0.0015 0. Hence the solution is given by X = A–1 B. It can be
easily verified that
1 0.165 –0.15
A–1 = –
0.0015 –0.12 0.10
Thus x = 10,000, y = 20,000. That is, his initial investments are ` 10,000 and ` 20,000 in bond A
and bond B respectively. Substituting these values in 1.20x and 1.10y, we get his new
investments as ` 12,000 and ` 22,000.
Example. The total sales (S) in thousands of rupees of a firm selling two products X and Y is
given by the relationship : S = a + bX + cY. Data for the first three months is given as under:
1 12 2 3
2 13 6 2
3 15 5 3
Using determinant method, determine the sales in the next month when it sells 4 units of X and 5
units of Y.
a + 2b + 3c = 12
a + 6b + 2c = 13
a + 5b + 3c = 15
We solve the above system for a, b and c using determinant method. The determinant of the
coefficient matrix is:
1 2 3
D 1 6 2 30
1 5 3
D1 D2 , D3
a , b c ,
D D D
where
134
12 2 3
D1 13 6 2 12(18 – 10) – 13(6 – 15) 15(4 – 18) 3
15 5 3
1 12 3
D2 1 13 2 1(39 – 30) – 12(3 – 2) 3(15 – 13) 3
1 15 3
1 2 12
D3 1 6 13 1(90 – 65) – 2(15 – 13) 12(5 – 6) 9
1 5 15
2 3 9
a 1, b 1, c 3
3 3 3
Hence the total sales (S) is given by S = 1 + X + 3Y. In particular, when X = 4 and Y = 5, the
total sales is given by S = 1 + 4 + 3 (5) = 20.
Example. A firm produces three products P1, P2 and P3 processed on three machines M1, M2, M3
before completion. M1 can process 25 units of P1 or 50 units of P2 or 75 units of P3 per hour M2
can process 5 units of any one product per hour. M2 can process 50 or 25 or 100 units per hour of
products P1, P2 and P3 respectively. The processing hours available on machines M1, M2 and M3
are 12, 12 and 13 respectively. Using Matrix notations, find:
(i) How many units of three products can be produced per day.
(ii) The production cost per unit, if costs per hour of operating machines M1, M2 and M3
are ` 500, ` 1000 and ` 1500 respectively.
(iii) The total cost of production.
Solution. (i) Let the daily production of products P1, P2 and P3 be x units, y units and z units
respectively. Then
x y z
12 6x + 3y + 2z = 1800
25 50 75
x y z
12 x + y + z = 600
50 50 50
x y z
13 2x + 4y + z = 1300
50 25 100
The above system can be expressed in the matrix form as
135
6 3 2 x 1800
1 1 1 y 600
2 4 1 z 1300
A X B
–3 5 1
1
A –1
= 1 2 –4
11
2 –18 3
(ii) The production cost per unit of each of the three products is given by
M1 M 2 M3
1 1 1
50 500 M P 70
P1 25 50
1 1
1 1 1
P2 1000 M2 P2 90
50 50 25
P3 1500 M3 P3 41.67
1 1 1
75 50 100
70 P1
P1 P2 P3
90 P2 [37, 500]
[100 200 300]
41.67 P3
Example. Suppose the inter-industry flow of the products of two industries is given as under
Production X 30 40 50 120
Production Y 20 10 30 60
136
Determine the technology matrix and test Hawkins-Simon conditions for the viability of the
system. Compute the equilibrium level of output of the products when the domestic demand
80
vector is .
40
30 40 1 2
120 60 4 3
Solution. Let A be the technology matrix. Then A =
20 10 1 1
120 60 6 6
1 2 3 2
–
1 0 4 3 4 3 15 2 37
I–A= – | I – A | – 0.
0 1 1 1 1
–
5 24 18 72
6 6 6 6
1 1
Also, the diagonal elements, and , of the technology matrix are both less than 1. Hence
4 6
Hawkins-Simon conditions are satisfied and the system is viable.
x 80
Let X = denote the total output and D = 40 denote the demand vector. Then
y
5 2
1 72 6 3
Now, (I – A)–1 = adj(I – A)
|I–A| 37 1 3
6 4
5 2 280 6720
72 6 3 80 72 3 37
X=
37 1 3 40 37 130 3120
6 4 3 37
6720 3120
Thus the equilibrium level of output of the products is and units respectively.
37 37
137
Example. Find the demand vector which is consistent with the input-output matrix
d1
AX + D = X, where D = d2 is the demand vector.
d3
D = (I – A)X
|I – A| = 0.384 > 0
Also each entry on the main diagonal of the input-output matrix A is less than 1. Thus the
Hawkins-Simon conditions are satisfied and the system is viable.
Example. An economy produces only coal and steel. The two commodities serve as intermediate
inputs in each other’s production. 0.4 tonne of steel and 0.7 tonne of coal are needed to produce a
tonne of steel. Similarly, 0.1 tonne of steel and 0.6 tonne of coal are required to produce a tonne
of coal. No capital inputs are needed. Do you think that the system is viable?
2 and 5 labour days are required to produce a tonne of coal and steel respectively. If the economy
needs 100 tonne of coal and 50 tonne of steel, calculate the gross output of the two commodities
and total labour required. Also determine the equilibrium prices and the value added, if the wage
rate is `10 per man-day.
138
Solution. The input-output coefficients may be summarized in the tabular form as follows:
Input
Steel Coal
Output
0.4 0.1
Let A denote the input-output coefficient matrix. Then A = and the Leontief matrix
0.7 0.6
1 0 0.4 0.1 0.6 –0.1
is : I–A= –
0 1 0.7 0.6 –0.7 0.4
Since |I – A| is positive and all the elements on the main diagonal of A are less than 1, Hawkins-
Simon conditions are satisfied and the system is viable.
Let the gross output of steel be x1 units and the gross output of coal be x2 units to meet the final
50
demand vector D = . Then the balancing equations are
100
0.4x1 + 0.1x2 + 50 = x1
0.4 0.1 x1 50 x1 x
0.7 0.6 x 100 x i.e., AX + D = X, where X = 1 .
2 2 x2
Hence the gross outputs of steel and coal, for a given final demand, are 176.5 and 558.8 units
respectively.
x 176.5
Total labour days required = [l1 l2 ] 1 [5 2] [2000]
x2 558.8
139
p1 –1 1
lw 1 0.4 0.7 50 1 37 200
[(I – A) ]
p2 l2 w 0.17 0.1 0.6 20 0.17 17 100
Hence the equilibrium prices per tonne of steel and coal are `200 and `100 respectively. Also,
l w 50
Value added = [ x1 x2 ] 1 [176.5 558.8] [20, 001].
l2 w 20
Example. A country produces only two goods X and Y. The two commodities serve as
intermediate inputs in each other’s production. 0.1 units of X and 0.55 units of Y are needed to
produce a unit of X, whereas 0.4 units of X and 0.2 units of Y are needed to produce a unit of Y.
In addition to this 4 units and 3 units of primary input are needed to produce each unit of X and
Y respectively.
(i) If 240 and 140 units of X and Y respectively are needed for final consumption, find gross
output levels of the two goods.
(ii) If the price of primary input is `10 per unit, compute the prices of the goods.
(iii) Also compute total value added. [Delhi Univ. B.Com.(H) 2008]
X = AX + D or (I – A) X = D
0.9 –0.4
Now I–A= |I – A| = 0.72 – 0.22 = 0.5 0
–0.55 0.9
1 0.8 0.4
(I – A)–1 =
0.5 0.55 0.9
Hence the gross output levels of two goods are 496 and 516 units respectively.
140
(ii) Equilibrium prices, when the price of primary input is `10 per unit, are given by
Hence the equilibrium prices per unit of two goods are `97 and `86 respectively.
l w 40
(iii) Total value added = x y 1 496 516 35, 320 .
l2 w 30
Example. In a two sector economy, it is known that Industry I uses 10 paise worth of its own
product and 60 paise worth of commodity II to produce a rupee worth of commodity I; industry
II uses 30 paise worth of its own product and 50 paise worth of commodity I in producing a
rupee worth of commodity II; and the final demands are `1100 billion worth of commodity I and
`2200 billion worth of commodity II.
0.1 0.5
Solution. (i) The input-output matrix is: A
0.6 0.3
x 1100
(ii) Let X be the output matrix required to meet the final demand D . Then, by
y 2200
Leontief Principle, we have
X = AX + D or (I – A)X = D
1 0.7 0.5
(I – A)–1 =
0.33 0.6 0.9
141
Thus, the gross outputs for the two sectors are 5666.67 and 8000 units respectively.
(iii) The total of primary input requirement to produce the solution output, if there is only one
primary input requirement, is given by
5666.67
0.3 0.2 1700.001 1600 3300.001 .
8000
Industry I II
Final Demand Gross Output
I 20 40 40 100
II 30 50 40 120
(i) Gross output required to satisfy the new final demand of 110 units and 220 units for
industry I and II respectively.
(ii) Total requirement of capital and the labour days.
(iii) Total value addition, if cost of capital is 10% and the labour cost is `200 per labour
day.
(iv) Is the system viable?
Solution. (i) The input-output coefficient matrix is:
x 110
Let X = 1 be the gross output required to meet the final demand D = . Since
x2 220
production equals consumption, we have
X = AX + D or (I – A) X = D
1 0 1 / 5 1 / 3 4 / 5 –1 / 3
Now I–A= –
0 1 3 / 10 5 / 12 –3 / 10 7 / 12
11
|I – A| = 0
30
30 7 / 12 1 / 3
(I – A)–1 =
11 3 / 10 4 / 5
30 7 / 12 1 / 3 110 375
X = (I – A)–1 D =
11 3 / 10 4 / 5 220 570
Thus the gross output for the two sectors are 375 and 570 respectively.
21, 750
(iii) The total value addition = 0.10 200 4,37,175
2175
(iv) Yes, because each entry on the main diagonal of the input-output matrix A is less than 1 and
|I – A| > 0.
Note. Suppose there are n industries in an economy and it is required to find the change in the
gross output of each of the industries if the final demand of Industry 1 changes by d1 units, final
x1
x 2
demand of Industry 2 changes by d2 units and so on. In such a situation, if we let X
x
n
143
d1
d2
denote the change in the gross output and D denote the change in demand, then X is
d
n
given by X = (I – A)–1 D.
a11 = 0.5, a21 = 0.2, a31 = 0.1, a12 = 0.1, a22 = 0.6, a32 = 0.2, a13 = 0.1, a23 = 0.2, a33 = 0.6
(ii) Determine the gross output for the three sectors when the final demand values for them are
21,000, 42,000 and 63,000 units respectively.
(iii) Determine the new level of output if the final demand increases by 1500, 3000 and 4500
units.
Also, all the elements on the main diagonal of matrix A are less than 1. Hence Simon-Hawkings
conditions are satisfied and the system is viable.
x1 21, 000
(ii) Let X = x2 be the output matrix required to meet the final demand D = 42, 000 . Since
x3 63, 000
production equals consumption, we have
X = AX + D or (I – A) X = D X = (I – A)–1D
(iii) If the final demand for the three sectors are increased by 1500, 3000 and 4500 units
respectively, then the new level of output is given by
22, 500 0.12 0.06 0.06 22, 500 2, 25, 000
(I – A)–1 45, 000 1 0.10 0.19 0.12 45, 000 4, 50, 000 .
0.042
67, 500 0.08 0.11 0.18 67, 500 4, 50, 000
(i) Explain the economic meaning of the elements 0.33, 0.00 and 200.
(ii) Explain the economic meaning (if any) of the third-column sum.
(iii) Explain the economic meaning (if any) of the third-row sum.
Solution. (i) In the given model : 0.33 = a21. This means that industry I uses 33 paise worth of
the output produced by industry II to produce a rupee worth of its product.
0.00 = a33. This means that industry III does not require its own product for producing its output.
200 = d2. This means that the economy needs 200 units of the output of industry II.
(ii) The third-column sum : 0.34 + 0.72 + 0.00 = 1.06 shows that `1.06 worth of output is
required from all the industries to produce a rupee worth of output in industry III. Thus the
system is not feasible.
(iii) The third (or any other) row sum has no economic meaning.
145
After obtaining all these partial derivatives of the function, the maxima and minima can be obtained
by the following steps :
z z
z = f(x, y), i.e., and
x y
equal to zero. It gives two simultaneous equations whose solution gives some values of x and y
which are also known as critical values. The function may have relatively maximum or minimum or point
of inflection or saddle point at these critical values of (x and y).
(ii) (a) Function will take relatively maximum at critical values x and y if both second order partials
are negative and their product exceeds the equare of cross derivative. Technically if
a2 z a2 z
0 and 2 0 with
x 2
y
2
a 2 z a 2 z a2 z
.
x 2 y 2 x ay
Is also taken as if one of the second-order partial is negative with their product exceeding the square
of cross derivatives. It implies that both the second order partials must be negative because only in that
case their product will exceed their square.
(b) Function will take relatively minimum value at (x, y) if both the second order partials are
positive and their product exceeds the square of cross partial derivatives, Technically,
a2 z a2 z
and 0 with
x 2
y 2
2
a 2 z a 2 z a2 z
.
x 2 y 2 x y
It is also put as one of the second-order partials in positive and product of both second-order
partials exceeds the square of cross partial derivatives. It will be possible only if both the second
order partials are positive.
(c) Function will be at the point of inflection, means neither increasing nor decreasing if both the
second order partiais are either positive or negative but their product is less than square of the
cross derivatives. Technically, if
a2 z a2 z
0 and 2 0
x 2
y
a2 z a2 z
or 0 and 2 0 with
x 2
y
a2 z a2 z a 2 z
.
x 2 y 2 x y
(d) Function will be at saddle point if second order partials take opposite signs with their product is
less than the square of cross-partial derivatives. Saddle point means the point at which function
has maximum value when viewed from one axis and mimimum when viewed from one axis and
mimimum when viewed along another axis. Technically,
147
a2 z a2 z
0 and 0
x 2 y 2
a2 z a2 z
or 0 and 0 with
x 2 y 2
a2 z a2 z a 2 z
.
x 2 y 2 x y
(e) No conclusion can be arrived at if
2
a2 z a2 z a2 z
. =
x 2 y 2 x y
For proof, see any text book on calculas.
Exampale. Given z = 8x – 2x2 + 12xy – 12y2 + 6y. Determine
(a) the critical values of x and y
(b) whether function is at minimum, maximum, point of inflection or saddle point, and
(c) calculate it at critical values.
Solution : Given 8x – 2x2 + 12xy – 12xy + 6y.
(a) it will have extreme value when its first order partials are equal to zero.
z
= 8–4x + 12y = 0 ...(i)
x
z
= 12x – 24y + 6 = 0 ...(ii)
y
By solving (i) and (ii) equations simultaneously for x and y, we get x = –5.5 and y = –2.5. So critical
values are x = –5.5 and y = –2.5.
(b) At these critical values, second order partials are :
a 2 z z
= [8–4x + 12y] = –4
x 2 y x x
a 2 z z
= [12x – 24y + 6] = –24
y 2 y y y
and cross partial will be
a 2 z z
= [8 – 4x + 12y] = 12.
y 2
y y y
Both the second order partials are negative and their product is less than the square of cross partial,
i.e., (–4) (–24) < (12)2
It implies function z has point of inflection at the critical values.
(c) when x = –5.5 and y = –2.5
z = 5(2)2 –30(2)+4(2) (2.5) –3 (2.5)2 + 7(2.5)
= –21.25.
148
2 x, y x, y
= [–16y + 2x + 40] = –16
y 2
y y
149
2 x, y x, y
and = [–16y – 2x + 40] = –2
y y x y
(ii) Putting x = 4 units and y = 2 units in corresponding
demand functions:
P = 36–3x Q = 40–5y
= 36–12 = 40–10
= Rs. 24. = Rs. 30.
(iii) Maximized profit will be :
(4, 2) = –4(4)2 – 8(2)2 – 2(4)(2) + 36(4) + 40(2)
= Rs. 112.
Note. Another form of same optimisation of bi-variate function is the profit-maximisation in case
the production function involving two inputs is given together with the cost per unit of inputs
and price per unit of output. The method is the same as in the case of equilibrium of firm
producting two products.
In this situation, the profit function can be obtained in this way. Let z =0 (x, y) is a production
function stating that z units of output can be produced from x units of input 1 and y units of input 2. the
price per unit of output is Rs. p and cost per unit of input 1 is Rs. C1 and of input 2 is Rs. C2.
Then total revenue of z units is
TR(z) = P z
and total cost of two inputs,
TC(x, y) = c1x + c2y.
This follows that profit function,
(x, y) = TR(z) – TC(x, y)
= Pz – TC(x, y)
= P. (x, y) – TC (x, y)
= P. (x, y) – C1x –c2y.
Its miximisation according to the method stated above gives the values of inputs x and y which
maximizes profit. The same can be used for determining production at that level by putting these values
of x and y in production function. It can also be used for finding maximised profit.
Example. A firm’s production function stating output and input relationship is given by
z = 20 – x2 + 10x – 2y2 + 5y.
If the price per unit of output is Rs. 5 with cost of input x as Rs. 2 per unit and if input y as Re. 1 per
unit, determine (i) the units of two inputs which maximizes profit, (ii) production at that level, and (iii)
maximized profit.
Solution : Given production function.
z = 20 – x2 + 10x – 2y2 + 5y.
with P = Rs. 5 per unit,
C1 = Rs. 2 per unit and
C2 = Re. 1 per unit.
150
2 x, y x, y
= = [–20y + 24] = –20 < 0
y 2
x y y
2 x, y x, y
= = [–20y + 24] = 0
x y x y x
–(10) (–20) > 0
So x, y takes maximum value when x = 4.8 units and y = 1.2 units
(ii) Production at this level is given by putting x = 4.8 units and y = 1.2 units in production
function z.
z = 20 – x2 + 10x + 20y2 + 5y
= 20–(4.8)2 + 10(4.8) – 20(1.2)2 + 5(1.2)
= 43.76 units.
(iii) Maximised profit will be
(4.8, 1.2) = 100–5(4.8)2 + 48(4.8)–10(1.2)2 + 24(1.2)
= Rs. 229.60.
2. Equilibrium of Monopolist under Price-discrimination : Maxima and minima bi-variate
function can be applied for determining the profit-maximising output of monopolist discriminating prices
in different markets. Price-discrimination means charging different prices for the same product in
different markets. There are three different degrees of price discrimination and it is possible only under
151
certain conditions as resale is not possible, demand different markets [For details, see some text-book on
economies]. This results into that demand functions for the same product will differ in different markets
sltough cost function is the same.
If all the conditions of price discrimination are fulfilled, the problem is to divide the output among
different markets in such a way that the profit is maximized.
It can be obtained with the help of maxima and minima of bi-variate functions in this way. Let
P1= f(x1) and P2 = f(x2) are the two demand functions in market 1 and market 2. Here x1 and x2 denotes
the units demanded when market price is Rs. P1 and Rs. P2 Per unit in respective markets. Total cost
function is TC(x) for x units where
x = x1 + x2 or TC(x1 + x2).
Therefore total revenue function of market 1 is
TR(x1) = P1 x1
and of market 2 is
TR(x2) = P2 x2
with total cost function as TC(x1 + x2). This follows that profit function (x1, x2) will be :
(x1, x2) = TR(x1) + TR(x2)–TC(x1 + x2).
If becomes a bi-variate function whose maximisation as per the procedure gives the values of x1 and
x2 which maximizes the profit. The same divides the monopolist’s output in market 1 and 2 as x1 and x2.
Example. A monoplist sells his product in two different markets at different prices P1 and P2 where
demand functions are :
market 1 x1 = 16–0.2P1
market 2 x2 = 9–0.05P2
Determine the firms profit maximizing output, prices and maximized profit if firm’s total cost
function is
TC(x) = 20 + 20x
where x = x1 + x2.
Solution : Given demand function of market 1 as
x1 = 16–0.2P1
16 x1
P1 =
0.2 0.2
= 80–5x1
or TR(x1) = P1 x1= 80x1 – 5x12
and TR(x1+ x2) = 20 + 20 (x1 + x2)
For maximizing t is. take its first-order direct partials, but these equal to zero and solve for x1 and
x2.
x1 , y 2
So = 80 – 10x1+20 = 0
x1
x1 , x 2
= 180 – 40x2 – 20 = 0
x2
Solving (i) and (ii), x1 = 10 units, x2 = 4 units. At x2 = 10 units and x2 = 4 units.
2 x1 , x 2
= [80 – 10x1 + 20] = –10 < 0
x 2
1 x1
2 x1 , x 2
= [160 – 40x1 ] = – 40 < 0
x 2
2 x 2
2 x1 , x 2
and = [160 – 40x1 ] = 0
x1 x2 x1
(–10) (–40) > 0
400 > 0.
Since both the second-order partials are negative and their product exceeds the square of cross
partial, profit function, (x1, x2) take maximum value when x1 = 10 units and x2 = 4 units.
Price corresponding to this are given by putting x1 = 10 units and x2 = 4 units in corresponding
demand functions.
P1 = 80 – 5x1
= 80–50 = Rs. 30.
P2 = 180–20x2
= 180–80 = Rs.100.
Maximized Profit,
(10, 4) = TR(10) + TR(4)–TC(14)
= 300 + 400 – 300
= Rs. 400.
3. Minimization of joint cost function : Optimisation of bi-variate function can also be applied
directly for minimisation of joint cost function. Let TC(x, y) is the joint cost function of x units of A
commodity any y units of B commodity. Its minimisation involves determining the units of A and B
commodity (i.e., values of x and y) in such a way that overall cost is minimiscd. The steps involved are
same as stated earlier.
Example. The joint cost function of a firm producing two products is
TC = 6x3 – 9x – 3xy – 7y – 5y2 + 20
where x and y denotes their units. Find (i) the valuce of x and y which minimises TC(x, y) and (ii)
minimized TC(x,y).
Solution : Given
153
Solving (i) and (ii) simultaneously x = 1 unit, y = 1 unit, y = 1 unit. At this level, TC(x, y) is
minimum as both the second order partials are positive and their exceeds the square of cross partial as
shown below :
2tc x, y
= [12x – 9 – 3y] = 12 > 0
x 2
x
tc x, y
2
= [–3x – 7 – 10y] = 10 > 0
y 2 y
2tc x, y
= [–3x – 7 + 10y] = –3
x y x
(12) (10) > (–3)2
(ii) Therefore minimised TC(x, y) will be
TC(1, 1) = 6 (1)2–3 (1) (1) – 7(1) + (1)2 + 20
= Rs. 12
Example. A closed rectangular box of 16 cubic feet volume is to be made of three kinds of
materials. The cost of the top and bottom material of Rs. 0.09 per sq. ft; cost of material for front and
back side is Rs. 0.08 per sq. and cost of materials for other two side is Rs. 0.06 per sq. ft. Find the
dimensions of box to minimize cost of material and minimised cost.
Solution : Let tength = x ft, breadth = y ft.
volume
ther height = = ft.
length.breadth
Cost of the top and bottom material is Rs. 0.09 per unit
Total cost of to and bottom material
= (Area of front + Area of bottom) × Rate
= 2xy (0.09) = Rs. 018xy.
Cost of the front and back side material is Rs. 0.08
Total cost of sides
= (Area of front + area of back) x Rate
16
= 2. .x (0.08)
xy
154
256
= Rs.
y
Cost of the other two sides material is Rs. 0.06 per sq. ft.
Total cost of sides
= (Area of two sides) x Rate
16
= 2. . y (0.06)
xy
1.92
= Rs.
x
So total function of rectangular box will be :
2.56 1.92
TC(x, y) = Rs. 0.18 xy
y x
It will have extreme value when its first-order partials are equal to zero
tc x, y 2.56 1.92
= 0.18 xy y x
x x
1.92
= 0.18y – =0
x2
tc x, y 2.56 1.92
= 0.18 xy 2
y y y x
2.56
= 0.18x – =0
y2
Solving (i) and (ii) simultaneously
0.18x2y – 1.92 = 0 ...(iii)
0.18xy2 – 2.56 = 0 ...(iv)
0.18 x 2 y 1.92
or 2
=
0.18 xy 2.56
x 3
or =
y 4
3y
or x =
4
3y 8
Putting x = in (i) equation y = ft. (breadth), x = 2 ft. (length)
4 3
16
So height = = 3 ft.
8
.2
3
When length = 2 ft., breadth = 8/3 ft. and height = 3 ft. Total cost is minimum as the second partials
are positive and their product exceeds the square of cross partial as shown below :
155
3.84 5.12 2
8 (8 / 3) 2 > (0.18)
Therefore rectangular box has minimum cost when length = 2 ft. breadth = 8/3 ft. and height =3ft.
(ii) Minimized total cost :
8 8 2.56 1.92
TC 2, = Rs. 0.18(20)
3 3 8/3 2
= Rs. 2.88.
156
LESSON 2
INDEFINITE INTEGRATION
(i) Algebraic function : If the function to be integrated is an algebraic function, the itnegral can be
obtained by increasing the power of variable by one and dividing the variable by increased power. Some
standard forms of simple integration are as follows:
1. If dy = f(x)dx, f (x)dx = f(x) + c
af ( x)dx = a f ( x)dx af ( x) c
3. If dy = f1(x) f2(x) dx
f ( x) f ( x)dx
1 2 = f ( x)dx f ( x)dx
1 2
= f1(x) + f2(x) + c.
x n 1
4. If dy = xn . dx, x .dx c.
n
n 1
Example. Find the integral of the following:
(i) xdx (ii) dx (iii)
3
x2
1 1
x dx x 2
2
(iv) 4 (v) dx
x
x2
Solution. (i) x.dx c
2
(ii) dx 1.dx x c
2
1
x3
(iii) x .dx = x dx c
2 2 2/3
2
1
3
3 5/3
= x c
5
1 1
x dx x x1/ 4 dx
4
(iv) 4 =
x
x 3 x 3 / 4
= c
3 3 / 4
x 3 4 3 / 4
= x c
3 3
x 2 x 4 x 4 dx
2 2
(v) dx =
x3
= 2x2 4x c
3
158
(ii) Logarithmic function : If a logarithmic function where independent variable appears with a log
dy 1
ratio is given as y = lnx (ln is denoting natural log with the base e). Its derivative, , so the integral
dx x
1 1
of with respect to x is lnx or dx = lnx + c.
x x
Therefore, it can be generalised that whenever in a rational function, numerator is the derivative of
the denominator or is equal to some constant multiplied by numerator, the integral of the function is the
1
natural log of denominator. For example in dx , 1 the numerator is the derivative of the x appearing in
x
denominator; therefore, its integral is lnx + c.
Example. Evaluate the following:
4x 6 x2 2x x3 x
(i) x3 3x 1 dx (ii) x3 3x 2 5 dx (iii) x4 2 x2 2
dx
dy
= 3x2 + 6x
dx
1
It show that numerator is 3x 2 6 x
2
Applying log form.
x2 2 x 1 3x2 6 x
x 3
3x 5
2
. dx = 3
3 x 3x2 5
. dx
1
= in x3 3x 2 5 c
3
(iii) Let y = x4 – 2x2 + 2,
dy
= 4x3 – 4x
dx
1
It shows that numerator is 4 x 3 4 x
4
So applying log form:
x3 x 1 4 x3 4 x
x 4
2x 2
2
. dx =
4 x 2x2 2
4
dx
= ln [x4 – 2x2 + 2] + c.
159
(iii) Exponential function : All those functions where independent variable appears as a power of
constant base, are known as exponential function. If the base is equal to e, the function is known as
dy
e x . So its integral, e .dx e c
x x
natural exponential function as y = ex. If derivative,
dx
dy
Similarly if y = ebx; = bebx and b.ex dx ebx c
dx
Example. Evaluate the following :
du du
Solution. (i) Put u = bx, = b or dx =
dx b
Making this substitution :
du
abe ae u du = a e . du
b
u u
.
= aeu + c
= aebx + c.
du
(ii) Putting u = –x, = –1 or dx = –du.
dx
Making this substitution :
4e
x
. dx 4eu . du = 4 e u . du
= –4eu + c
= –4e–x + c.
2e e x dx = 2e . dx e x . dx
3x 3x
(iii)
2e3 x x
= –e + c.
3
(b) Integratio by substitution : In case of some function, especially for composite functions, the
integral can be obtained by making substitution. For example, f x dx can be obtained by
n
du 1 u n 1
u .
n
+ c. f(x) must be a constant, otherwise it is not possible. The
f x f ( x) n 1
substitution is made in such a way that the integral can be simplified to the possible extent.
Example. Find the integral of the following :
3x 4 . dx x 5 3x
28
(i) (ii) dx
x 2x
2
e3 x
(iii) . dx (iv) . dx
x3 3x2 1 1 2e
3 x2
du du
= 3 or dx = .
dx 3
Making this substitution,
du 1
3 x 4 . dx = n.
3 3
u . du
1 u3/ 2
= +c
3 3/ 2
2
= 3 x 4 + c.
3/ 2
9
du du
(ii) Let u = 5 + 3x2, = 6x or dx =
dx 6x
Making this substitution
du
x 5 3 x x. u . 6 x
8 8
2
. dx =
1
u . du
8
=
6
1 u9
= +c
6 9
=
5 3x 2 2
+ c.
54
du
(iii) Let u = x3 + 3x2 + 1, = 3x2 + 6x
dx
du
or dx =
3 x 2x
2
Making this substitution :
x2 2x x2 2x du
x 3 3x 2 1
.dx = u . 3 x2 2x
= 1 1 .du
3 u
1/ 2
1u
= +c
3 1/ 2
2
=
3
x 3
3x 21 + c.
du
(iv) Let u = 1 – 2x3x, = –6e3x
dx
du
or dx =
6e3 x
Making this substitution
e3 x e3 x du
. dx = u .
1 2e 6e3 x
2
3x 2
161
1 1
6 u2
= . du
1 u 1
= +c
6 1
1
= + c.
6 1 2e3x
(c) Integration by parts : Integration can also be done by parts. This method is used when function
involves product of two or more functions. The integration of such functions is based on reversing the
process of differentiation of product form as explained below :
Let y = uv. (both u and v are taken as functions of x)
dy dv du
= u. +v.
dx dx dx
Integration both sides
dy dv du
dx = u. dx v. dx
uv = u.dv v.du
u.dv = uv – v.du
So according to this method, if a function involves product of two functions, one is taken as u and
other equal to dv. Usually the function which can be differentiated easily is taken as u and which can not
be integrated easily is taken as dv. In addition to this, the choice should simplify v.du .
Example. Evaluate the following :
x .e lnx . dx x . lnx dx
3 x2 n
(i) dx (ii) (iii)
xe x 1 x lnx x
(iv) x 1 2
. dx (v) x
e . dx
du du
Solution. (i) Let u = x2 = 2x or dx =
dx 2x
Making this substitution :
du
x e x . u . e . 2x
3 x2 u
dx =
1
=
2 u . e u . dx
1 2 x2
x e ex + c
2
=
2
1 x2 2
= e x 1 + c.
2
(ii) lnx dx = 1. lnx dx
Using integration by parts:
1
Let u = lnx, du =
x
dv = 1 v = x
1
1. lnx dx = x . lnx – x . . dx
x
= x . lnx – x + c
= x [lnx – 1] + I.
x
n
(iii) For integration by parts . lnx . dx
1
Let u = lnx, du =
x
xn1
dv = xn, v=
n 1
xn1 x n 1 1
x n 1 . x . dx
n
. lnx dx = lnx . –
n 1
xn1 1
= lnx .
n 1
–
n 1 x n . dx
n1
xn1 x
= lnx . – +c
n 1 n 1
2
xn1 1
= lnx + c.
n 1 n 1
xex x 1 e x e x
(iv) x 1 2
. dx = x 12 dx
ex ex
= x 1 x 12 dx
dx
ex
Integrating x 1 dx by parts,
1 1
u = , du =
x 1
2
x 1
dv = ex v = ex
163
ex 1
ex
x 1 x 12
x
dx = – e .
x 1
ex ex
= +c
x 1 x 12
Putting this in (i)
xe x ex ex ex
x 1 2
dx =
x 1
x 1 x 1
2
2
+c
ex
= + c.
x 1
1 x lnx e x 1
xe dx lnx . e x dx
x
(v) dx =
x
1
xe
x
Integrating dx by parts
1
Let dv = , v = lnx
x
u = ex du = ex
1
x e . dx
x
= ex . lnx – lnx . ex + c
x
= ex lnx + c.
(d) Integration by partial fractions : In case a function appears as a quotient of two polynomials,
the integration can be done by partial fractions. Such functions are known as rational functions as f(x) =
g x
. These may be proper rational functions or improper rational functions. If the power of numerator
h x
is less than the power of denominator, the function is known as proper rational function. But if the power
of numerator is equal to or less than the power of denominator, the function is known as improper rational
functions. Such functions can be changed to proper rational function by long division. For example, f(x) =
2 x 2 3x 4 3
is an improper rational function which is equal to (2x + 1) + is a rational form.
x 1 x 1
The integration of such functions can be obtained by resolving the function into partial fractions
except when the derivative of denominator is equal to or multiple of numerator (where log form can be
used). After resolving the rational function into partial functions, integration of each partial fraction can
be obtained by simple integration either algebraic functions or logarithmic functions as the case may be.
The standard forms of partial fraction are as follows:
Factors of the denominator The partial fraction corresponding to factor
1. Linear factor
A
(ax + b)
ax b
164
A A
2. (i) Repeated linear factor (ax + b)2
ax b ax b
2
A B N
(ii) Repeated linear factor (ax + b)n .......
ax b ax b
n 1
n
ax b
Ax B
3. Quadratic factor (ax2 + bx + c) which
ax bx c
2
dx x5
(iv) (v) . dx
x 1 x 2
2
x x3
x 1
Solution. (i) Converting into partial fractions.
x 4x 5
2
x 1 x 1 A B
=
x 4x 5
2
x 5 x 1 x 5 x 1
x 1 A x 1 B x 5
x 5 x 1
Putting x = 1, 2 = 6B
B = d.
Putting x = –5 –4 = –64
A = d.
x 1 2 1
So x 2 4 x 5 dx = 3 x 5 . dx 3 x 1 . dx
2 1
= ln x 5 ln x 1 + c
3 3
(integrating using log)
x 1
(ii) Converting into partial fractions
x3 x 2 2 x
x 1 x 1
=
x x 2x
3 2
x x 1 x 2
A B C
=
x x 1 x 2
x 1 A x 1 x 2 B x x 2 C x x 1
=
x x 1 x 2
For solving A, B and D
165
u
Resolving into partial fractions
u 3u 2
2
u u A B
=
u 3u 2
2
2 2 u 1 u 2 u 1
u A u 1 B u 2
u 2 u 1
For solving A and B.
Set u = –1, –1 = B (–1 + 2)
B = –1
u = –2, –2 = A (–2 + 1) or A=2
1 u
dx = 1 2 du 1 du
2 u 3u 2
2
2 u2 u 1
= 2 ln u 2 ln u 1 + c
ln u 1
= ln (u + 2) – +c
2
ln x 2 1
= ln (x2 + 2) – +c
2
(Putting u = x2)
166
1
(iv) Converting into partial fractions
x x3
1 1 A B C
=
xx3
x 1 x 1 x x 1 x 1 x
1 A 1 x 1 x B x 1 x C x 1 x
x 1 x 1 x
Simplifying it for A, B and C.
Set x = 0, 1 = A
or A = 1
Set x = 1 1 = C(1) (2)
1
C =
2
if x = –1 1 = B (–1) (2)
1
B = –
2
1 1 1 1
So x x3
. dx = x . dx 21 x . dx 21 x dx
1 1
= lnx ln 1 x ln 1 x + I
2 2
x5
(vi) Converting into partial fractions
x 1 x 2
2
x5 A B C
=
x 1 x 2 x 1 x 2 x2
2 2
x 5 A x 2 B x 1 C x 1 x 2
2
x 1 x 2
2
3
= 4 ln (x + 1) + – 4 ln (x + 2) + c
x2
= 4 ln x 1 3 + c.
x 2 x2
MC x dx = TC (x) + C
where TC(x) is denoting the integral of MC(x) and C is arbitrary constant which was eliminated
from TC(x) in the process of differentiation. TC (x) is same as total variable cost function.
The value of C can be obtained if the total cost of some units of x is given. Put the value of x in TC
(x) = TC (x) + C = given cost and solve for C. So TC (x) = TC (x) + C (value obtained). This C is the
fiexed cost part of total cost and is same as total cost at zero level of output. So it can be obtained by
setting x = 0 in such case.
If the total cost function is obtained, average cost function can be obtained just be dividing the TC
(x) by x (as averate cost is the total cost divided by number of units produced).
TC ( x )
Therefore AC(x) = .
x
Example. The marginal cost function of manufacturing x pairs of shoes is MC (x) = 6 + 10x – 6x2.
The total cost of producing one pair of shoes is Rs. 12.00. Determine the total and average cost function.
Solution. Given MC(x) = 6 + 10x – 6x2
TC(x) = f MC(x) . dx
= f (6 + 10x – 6x2) dx
= 6x + 5x2 – 2x3 + C.
Given TC(1) = 6(1) + 5(1) – 2(1) + C = 12
C = 3
Putting C = 3 in TC(x)
TC(x) = 6x + 5x2 – 2x3 + 3
TC ( x ) 6 x 5 x 2 2 x 3 3
and AC(x) =
x x
3
= 6 + 5x – 2x2 + .
x
168
represents the unit produced. Determine its total cost function and average cost function if cost at zero
level of output is Rs. 900.
Solution. MC(x) = x
x 400
2
TC(x) = x
x 400
2
. dx
= 1
1
.du
2 u
1 u1/ 2
= +C
2 1/ 2
= u +C
= x2 400 + C
Given total cost at zero level is Rs. 900.
TC(0) = 0 400 + C = 900
C = 880
Putting C = Rs. 880 in TC(x),
20e 0.5 x
= +C
0.5
= 40 e0.5x + C.
Using TC (0) = Rs. 80
TC (0) = 40 e0.5(0) + C = 80
C = Rs. 40
Putting C = Rs. 40 TC(x) = 40 e0.5x + 40
169
40 e 0.5 x 40
AC(x) = .
x
Example. The marginal cost function of a firm is MC(x) = lnx if x 1. Find its total cost function
and average cost function if total cost function if total cost of one unit is Rs. 10.
Solution. Given MC(x) = lnx
TC(x) = flnx dx
= f 1.lnx dx
= x . lnx – x + C [integrating by parts]
= x [lnx – 1] + C.
Using TC(1) = Rs. 10
TC(1) = 1[ln 1 – 1] + C = 10
C = 11 [ln 1 = 0]
Putting C = 11
TC(x) = x (lnx – 1) + 11
x lnx 1 1
AC(x) = .
x
(b) Derivation of total revenue function and average revenue function from marginal revenue
function: This indefinite integration can also be applied for obtaining total revenue function, TR(x) from
marginal revenue function, MR(x), which in turn can be used for deriving average revenuie function,
AR(x) also known as demand function. It is as follow.
TR(x) = MR x dx = TR(x) + C
where TR(x) is simply the integral of MR(x) and C is the abritrary constant. The value of C is
evaluated assuming total revenue at zero level is zero. So setting TR(0) = 0, value of C is obtained.
Corresponding to the TR(x),
TR x
AR(x) =
x
Example. The additional revenue of xth unit is given by MR(x) = x2 – 12x + 27. Determine its total
revenue function and average revenue function.
Solution. Given MR(x) = x2 – 12x + 27
x 12 x 27 dx
2
TR(x) =
x3
= – 6x2 + 27x + C
3
Assuming TR(0) = 0
TR(C) = 0 + C = 0
C = 0.
x3
So, TR(x) = – 6x2 + 27I
3
x3
6 x 2 27 x
AR(x) = 3
x
170
x2
or P = – 6x + 27.
3
Example. Find the total revenue function TR(x) and demand function of the marginal revenue
function.
ab
MR(x) = – C.
x b
2
ab
Solugion. Given MR(x) = –C
x b
2
ab
TR(x) = x b 2
C dx
ab
= – – Cx + C1 [C1 is arbitrary constant]
xb
putting TR(0) = 0
ab
TR(0) = – – C(0) + C1 = 0
0b
C1 = a
ab ab
TR(x) = – – CX + a = – Cx (Simplified form)
x b xb
ab
Cx
and AR(x) = + x b
x
a
or P = + – C.
xb
Example. A firm’s marginal revenue function
a ax
MR(x) = +k
x b x b 2
a
Show that is demand function is P = + k.
xb
a ax
Solution. Given MR(x) = +I
x b x b 2
a ax
TR(x) = x b x b2 dx
k
a ax
= x b dx x b 2
dx kdx
171
ab
= a ln (x + b) – – a lin (x + b) + kx + C
xb
ab
= – + kx + C
xb
Assuming when x = 0, TR(0) = 0,
ab
TR(0) = + k(0) + C = 0
0b
C = a
Putting C = a
ab
TR(x) = + kx + a
xb
ax ab
= + kc (Simplifying +
xb xb
a)
ax
kx
AR(x) = x b
x
a
or P = +k
xb
ax
[Note. is obtained by partial fraction method]
x b
2
100
Example. The additional revenue of xth unit of a commodity is given by MR(x) = . Determine
x2
the corresponding total revenue function and demand function.
100
Solution. Given MR(x) =
x2
100
TR(x) = x 2 . dx
= 100 ln (x + 2) + C
Assuming TR(0) = 0
TR(0) = 100 [ln 2] + C = 0
C = –100 ln 2
So, TR(x) = 100 ln (x + 2) – 100 ln 2
x 2
= 100 ln
2
x
= 100 ln 1
2
x
100 ln 1
2
Corresponding AR(x) =
x
172
x
100 ln 1
2
P =
x
(c) Derivation of demand function: Another application of indefinite integration is for obtaining
the demand function if the price elasticity of demand is given. Although it involves differential equation,
but if price elasticity is constant at all prices, the demand function can be obtained easily b indefinite
integration. If it is given as –k at all prices, the demand function corresponding to this will be as follow.
dx P
Price elasticity of demand EP = . where d is the derivative of demand function in relation to
dP x
P . P and x denotes the price and quantity respectively.
Given Ep = –k
dx P
So, . = –k
dP x
dx dP
or, = –k .
x P
dx dP
integrating both sides x
= –k
P
[as –k is constant]
Definite Integration
Integration is broadly classified as indefinite and definite integration. Indefinite integration involves
antiderivative of a function. It is basically used for obtaining original function from its derivative
function. It is known as indefinite because the constant of integration, c is arbitrary.
Definite integral is one step ahead of indefinite integral. It is mainly used for the measurement of
b
area under a curve. If a function f(x) is continuous in the close interval [a, b], then the symbol f x dx
a
denotes the value of definite integral of F over the interval [a, b].
Historically the basic concept of the definite integration was used in about 200 B.C. But Newton and
Leibnitz first evolved out a fundamental theorem of the calculas which states how to calculate the area
under a curve with the help of definite integration.
According to this theorem, if f(x) is a continuous function in the close interval [a, b], then the area
under the curve between a and b is given by evaluating the integral of f(x) with respect to x with the limits
173
a and b. (These are known as lower bound and upper bound respectively). It is shown in figure 1. Its
value can be obtained in this way.
Fig. 1
b
b
f x dx = F (x) |
a a
= F(b) – F(a)
This gives a numeric value denoting area.
[Note : Value of the arbitrary constant c is zero in this case].
Example. Evaluate the following:
3 5 8
3
3x 2 5 x 2 3
3x 5 x 1 dx =
2
Solution. (i) x |
1 3 2 1
= x 3 5 x 2 x |
3
2 1
= 33 5 . 3 2 3 13 5 . 12 1
2 2
83
=
2
5 5
e dx e
x x
(ii) | = e5 – e1
1
1
= 145.69 app.
174
= (8ln 8 – 8) – (2ln 2 – 2)
= 8ln 8 – 2ln 2 – 6
= 9.249
[value of ln 8 and ln 2 are given by natural log table]
Example. Find the area under the curve y = 4x – x2 in between x = 1 and x = 3 on x-axis.
3
4 x x dx
2
Solution. Area =
1
x3 3
= 2x2 |
31
3 2 1 2 1
2 2
2
= 2 3
3 3
22
= square units.
3
Example. Calculate, by integration, the area of the portion of the parabola y2 = 4ax which is cut off
by the line y = 3x.
Solution. Both y2 = 4ax and y = 3x, cut each other at the points satisfying both
equations.
y2 = 4ax ... (i)
y = 3x
or y2 = 9x2
if left hand side is equal, putting right hand expressions equal and solving for x ... (ii)
4ax = 9x2
or 9x2 – 4ax = 0
or x (9x – 4a) = 0
4a
or x = 0 or x=
9
Corresponding values of y are y = 0 and
4a
y = .
3
4a / 3
y
where dx = dy
2a
(Differentiating y2 = 4ax with respect to x)
4a / 3
y2
=
0
2a
. dy
175
4a /3
1
=
2a
0
y2 . dy
1 y3
4a / 3
= |
2a 3 0
32 a 2
= square unit.
81
Exercise
1. Evaluate the following definite integral
4 3
x 1
xx 4 dx
2
2
(i) dx (ii)
1 x 1
2 1 2
4 x 1 x x 1 dx
2
(iii) 2 dx (iv)
0 3
2a
(v) a x dx
a
2. Find the area bounded by the curve x2y = x2 – 4 on x-axis when x = 2 and x = 4
3. Find the area bounded by the curve y = x3 – 4x on the x-axis.
4. Find the area bounded by the curve y = x2 – 5x + 6 on the x-axis.
x 2 if x 2
5. Find the area under the curve f(x) =
x 6 if x 2
In between x = 0 and 3.
Answers
20 76 13 13 7 2
1. (i) , (ii) , (iii) , (iv) , (v) a
3 x 3 12 2
2. 1 sq. unit 3. 8 sq. unit
1 37
4. sq. unit 5. sq. unit
6 6
consumer is purchasing x units. Then total price consumer is willing to pay, is given by the integral of f(x)
with the limits 0, x whereas price actually paid is p x . So the difference, i.e., area of is the
measurement of consumer’s surplus.
x
Figure 2
An alternative method is to measure consumer’s surplus with the help of integrating demand
function in relation to price [i.e., x = f (p) which is inverse of price function]. It involves obtaining the
demand function corresponding to price function and integrating it with respect to P with the limits
P , B where B is the price at which quantity demanded is zero. It can be obtained by setting x = 0 in the
demand function.
B
Therefore consumer’s surplus = f p dp
p
45 2x x dx 10 5
2
Consumer’s surplus =
0
177
x3 5
= 45 x x 2 | – 50
3 0
475
= – 50
3
375
= Rs. or Rs. 108.33 app.
3
Alternatively, inhere function of the given price function, i.e., demand function will be
45 – 2x – x2 – P = 0
or x2 + 2x – 45 + P = 0
2 4 4 45 P
x =
2
= 46 P – 1
[negative value not possible, so ignored]
45
Consumer’s surplus =
10
46 P 1
[P = Rs. 45 when x = 0]
2 45 45
46 P | P |
3/ 2
=
3 10 10
= 2 144 – 35
3
325
= Rs. on Rs. 108.33 app.
3
Example. The demand equation of a commodity is P – ln (25 – x) = 0. Find the consumer’s surplus
if he purchases 15 units.
Solution. Given P – ln (25 – x) = 0
P = ln (25 – x)
When x = 15 units, p = ln 10
15
Example. A monopolist’sk demand and total cost function are P = 25 – x and TC(x) = 10 + 9x
respectively. Determine the consumer’s surplus (assuming monopolist maximises profit).
Solution. In case of monopoly, the firm supplies units where it makes maximum profit. It is given
by setting marginal revenue equal to marginal cost. It is shown below.
Given P = 25 – x TC(x) = 10 + 9x
So TR(x) = P . x = 25x – x2 MC(x) = 9
dTR( x)
MR(x) = = 25 – 2x
dx
Setting MR(x) = MC(x) and solving for x
25 – 2x = 9
x = 8 unit.
Profit is maximum at x = 8 unit as marginal cost is constant.
P = 25 – 8 = Rs. 17
8
x2 8
= 25 x | – 136
2 0
= 168 – 136
= Rs. 32.
(b) Measurement of Producer’s Surplus. As in the case of consumer’s surplus, producer’s surplus
is the difference between the price received by the producer and the price at which producer is willing to
supply. For example, if producer sells product at Rs. 10.00 per unit whereas he is willing to sell at Rs.
8.00, per unit, the producer’s surplus is Rs. 2.00. The price producer is willing to accept is given by his
supply curve; and the price he actually gets is determined by demand and supply. Diagrammatically it is
shown by figure 3.
179
Figure 3
x
Example. The supply equation of a commodity is 10P – 2 x + 200 = 0 and market price is Rs.
8.00. Find the producer’s surplus.
Solution. Given surplus equation
10 P 2 x 300 = 0
or 10 P 2 = 0
x 300
1
P = x 300
5
1
when P = 8, quantity supplied will be 8 = x 300
5
or, 1600 = x + 300
x = 1300 units.
1300
1
Producer’s surplus = 8 (1300) –
0 5
x 300 dx
1 3/ 2 2
1300
= 10,400 – x 300 . |
5 3 0
= 10,400 – 2 x 300 3 / 2 |
1300
15 0
= 20,400 – 7,840 (simplification)
= Rs. 2560.
Example. The supply function of a firm is x = 1 (2P – 3). Find the producer’s surplus if P = Rs. 5.
Solution. Given supply function, x = ln (2p – 3),
So when p = Rs. 5, x = ln (10 – 3)
= ln 7 units
Also when x = 0, 0 = ln (2p – 3)
or, p = Rs. 2 [as ln 1 = 0]
5
Producer’s surplus = ln 2 p 3 dp
2
180
5
= 2 p 3[ln 2 p 3 1]| (integrating by parts)
0
= 7 [ln 7 – 1] – 1 [ln 1 – 1]
= 7 ln 7 – 7 – ln 1 + 1
= 7 ln 7 – 6 [ln 1 = 0]
= 7 (1.9459) – 6
= Rs. 7.62 app.
Example. Under pure competition, the demand and supply functions of a commodity are P =
8
2 and P = 1/2 (x + 3) respectively. Determine the consumer’s and producer’s surplus at
x 1
equilibrium price.
8
Solution. p = 2 (Demand)
x 1
1
p = (x + 3) (Supply)
2
So equilibrium quantity is given by
8 1
2 = (x + 3)
x 1 2
or, 16 – 2 (x + 1)2 = (x + 3) (x + 1)
x2 + 8x – 9 = 0
(x + 9) (x – 1) = 0
So x = –9 or 1
x = 1 [as x = –9 is not possible]
Putting x = 1, in demand or supply function, equilibrium price, P = Rs. 2.
1
8
So consumer’s surplus = x 1 2 dx 2 1
0
1
= [8ln x 1 2 x] | 2
0
1 x 2 1
= 2– 3 x |
2 2 0
= 2 – 1 7
2 2
7
= 2–
4
181
1
= Rs. or 0.25 app.
4
(c) determination of maximized Profit : Definite integration can also be applied for determining
the maximized profit if the marginal revenue and marginal cost functions are given. Marginal revenue
gives the rate of change in total revenue and marginal cost gives the rate of change in total cost. The firm
makes maximum profit when the rate of change in both are equal and afterwards rate of change in total
cost is more than the rate of change in total revenue (i.e., marginal cost is increasing). Diagrammatically it
is shown in figure 4.
Figure 4
The area shaded represents the maximized profit. It is the area bounded by marginal revenue
function MP(x) and marginal cost function MC(x) with the limit X I . X is denoting the profit
maximizing output obtained by setting MR(x) = MC(x) and solving X. At this MC(x) must be increasing
for maximum profit.
X
This actually gives the additional profit only. So loss at zero level of output must be subtracted from
this for obtaining actual profit. It is same as fixed cost in the short-run
X
Figure 5
Till OX, marginal cost lies above marginal revenue representing loss. From X to X1, marginal
revenue lies above marginal cost represent profit. So maxmimized profit is the difference between profit
area and loss area.
X1 X
X1
= MR x MC x dx
X
Example. A firm’s marginal revenue function, MR(x) = 1000 – 4x and marginal cost function,
MC(x)3x2 – 118x + 1315. Determine the maximized profit using definite integration assuming fixed cost
is Rs. 595.
Solution. Given MR(x) = 1000 – 4x, MC(x) = 3x2 – 118x + 1315.
For profit maximizing output, put MR(x) = MC(x) and solve for x.
1000 – 4x = 3x2 – 118x + 1315
or, 3x2 – 114x + 315 = 0
35
x 57 x2 315 x | 595
35
3
=
0
= Rs. 1000.
(d) Determining the present value of an annuity: Annuity is the fix amount which flows after
regular intervals. It may be inflowing as regular monthly income or it may be outflowing as payment of
insurance premium or loan instalment. If it is inflowing, the present value involves discounting of each
annuity at a given rate. The sum of the present value of each annuity gives the total present value of the
annuity. It may be discounted with time intervals as annually, half yearly, quarterly, monthly or
continuously. If the annuity is discounted annually the present value can be obtained easily using ready
made tables. If it involves, half-lyearly ormonthly, the same tables can be used with effective rate and
time corresponding to discounting time (as half yearly amounts to yearly if rate is half and time doubled).
But if annuity is discounted continuously, the present value can be obtained using definite integratin.
It is given by
t
Ae
rt
P = dt
0
5000e
08t
Solution. Total present value = dt
0
5000e 08t 5
= |
0.8 0
5000
= 1 e 4
0.8
= 62,500 [1 – 67032]
= Rs. 20,605 app.
(e) Determining the future value of an annuity: The definite integration can also be used for
determining the future value of an annuity. It involves compounding at a given rate. It can also be with
different time intervals as yearly, half yearly, quarterly, monthly or continuously.
184
If annuity is compounded annually, half yearly, monthly, the future value can be obtained by using
ready made tables. But if compounding is continuously, the future value can be obtained using definite
integration. It is as follows:
t
Pe dt
rt
Future value, A =
0
1000e
0.10t
Solution. Total balance, A = dt
0
1000 e 0.10 t 10
= |
0.10 0
= 10000 [e1 – 1]
= 10000 [2.7183 – 1]
= Rs. 17183.
(f) Other Applications: In addition to various applications described above, there are other
applications in business and economics based on definite integration. In general, whenever, rate of change
is given for a continuous function, the accumulated value for certain limits can be obtained using this. For
instance, if marginal revenue function denoting rate of change in total revenue is given and additional
revenue is required if sale is increased from 10 units to 20 units; it can be obtained directly using definite
20
integration as to additional revenue = MR x dx . Similarly if the marginal cost function is given and
10
additional cost of increasing output from one level to another level is required, it can be obtained by
integrating the given marginal cost function with the given limits. If the rate of cost of repairing is given,
total repairing cost for certain period can be obtained by this integration. All these situations are
exemplified below:
Example. A firms cost of producing xth unit is given by MC(x) = 10 + 2x. Find the additional cost if
output is increased from 10 to 20 unit.
20
= Rs. 400.
Example. The daily rate of sales for a new product is given by f(t) = 100 t e–0.05t where t is the
number of days, the product has been in market. Determine the total sales of first 10 days.
20
100te
0.05t
Solution. Total sales = dt
10
20
= 100 t e
0.05t
dt
10
t e 0.05t 20 20
e 0.05t
= 100 | 0.05 [Integrating by parts]
0.05 0
0
= Rs. 15,000.
So it will not pay for itself in 5 yrs. Let it pay for Rs. 28,000 in t years, then
t
500 x 50 x |
t
2
=
0
6001 e dt
0.5t
Solution. Total cumulative repair cost =
0
e0.5t 5
= 600 t |
0.5 0
e25 e0
= 600 5
0.5 0.5
= 600 [3 + 2e–2.5]
= 600 [3 + 2 [.0821]]
= Rs. 1898.50 app.
Let total repair cost equal to initial cost in t years, then equation will be:
t
6001 e dt
0.5t
= 75000.
0
Improper Integral
Definite integral can be of two types, i.e., proper definite and improper definite integrals. Proper
integral is one where the function is defined in the close finite interval as the definite integral of f(x) being
defined in the closed finite interval of [a, b]. So symbolically
b
x dx
a
is an example of proper integral. So if the function is defined in the interval and interval is finite, the
integral is known as proper integral.
But i. the integral is not proper, it is known as improper integral. It may be either because the
interval is not finite or because function is not defined in the interval. Both these are discussed below.
(a) Improper integral due to infinite limits of integration. It may be in any of these three forms.
b
(c) both upper and lower bounds are tending towards infinity as f x dx as shown in fig. 8.
Fig. 6
187
Fig. 7
Fig. 8
These improper integrals can be evaluated in the same way as proper integrals with some difference.
The important steps are as follows.
1. Evaluate the indefinite integral of the integrand by suitable method, i.e., if
y = f(x) and f(x) = F(x).
2. Evaluate it assuming finite limits as [a, b], i.e.,
b
F x | = F(b) – F(a).
a
3. Take the limit of definite integral when any of the bounds or both the bounds are tending towards
infinity which will be as follows:
(a) if lower bound is tending towards infinity
lim F b F a
a
So improper integration involves the limit of proper integral if any or both bounds are tending
towards infinity. It means improper integral is the limit of proper. Such an integral is known as
convergent if the limit exists and divergent if the limit does not exist.
In case of convergent area under the curve is finite but it is infinite if integral is divergent. This
improper integral has a number of applications in commerce and economics. Area under the normal curve
188
involves evaluation of improper integral. Similarly discounting in perpetuity involves improper integrals.
These are discussed in the latter part of chapter.
Example. Evaluate the following improper integrals and determine whether integral is convergent
or divergent.
0
1
e dx (iii) x e dx
2
3x 3 x
(i) (ii) dx
1 x 0
1
e dx x dx
x
(iv) (v)
1
e dx = lim
3x
a
a
e3 x 0
= lim |
a
3 a
1 e3 a
= lim
a 3 3
1
= 1 e
2
1
as e 0
=
3
So limit is existing and integral is convergent with finite area.
(ii) Let upper bound is b
b
1 1
1 x
dx = lim
b
1 x
= lim 2. x |
b
b 1
= lim 2. x 2
b
=
So limit is not existing and integral is divergent with no finite area.
du du
(iii) Let u = x2, = 2x or dx =
dx 2x
Substituting this in the integrand, it becomes
u . e . eu du 1
0 2 x = 2 0 u . e du
u
1
2 0
Assuming upper bound is b = u . e u du
189
1
b
b u . e . e du
u
= lim
2 0
1
b u
b e
= blim ue u | du (integrating by parts)
2
0
0
1
1
= lim ue b 0 d b 1
2
b
1
= lim 1 be b e b
2 b
1
= [as both be–b & e–b are zero when b ]
2
Since limit is existing, integral is convergent and area is finite.
(iv) Let lower bound is a and upper bound b,
b
e dx = lim
x
e
x
dx
a
b a
b
= lim e x |
a a
b
= e – e–
= .
Since limit is not existing, integral is divergent and area is infinite.
1
(vi) Let upper bound is b 1 x dx = blim
1
b
= lim ln x |
b
1
1
= lim ln b ln 1
b
= .
So limit is not existing, integral is divergent and area is infinite.
(b) Improper integral due to an infinite integrand. If the second condition that integrand is not
defined in the interval, the integral is improper due to an infinite integrand. Limits of integrand may be
finite or infinite. In this case also, there are three different possibilities which together with their
evaluation methods are as follows:
(a) Infinite discontinuity at lower bound a, let it is equal to x, then, (as shown in figure 9)
b
lim
x a
x
b
lim F x | = is the integral.
xa x
190
Fig. 9
Fig. 10
191
Fig. 11
(b) Infinite discontinuity at the upper bound b, let it is equal to x, then (as shown in figure 10).
x
lim f x dx = lim F x | is the integral
x
xb xb a
a
(c) Infinite discontinuity at a point c in the interval [a, b], let it is equal to x, then integral can be
obtained by summation form (as shown in figure 11).
b x b
f x dx = lim f x dx lim f x dx
a
x c
a
xc
x
if the limit of both the integrands is existing when x c the integral is convergent. If the limit of
any of the integrand is not existing (or both are not existing), the integral is divergent.
Example. Evaluate the following definite integrals:
1 1 3
1 1 1
(i) 0 x dx (ii)
0 x
dx (iii) x 3 dx
0
1
x x lnx dx
3
(iv) dx (v)
1 1
= lim ln x |
1
x0 x
= [ln 1 – ln 0]
= – [as ln 0 is not defined and taken as –]
So limit is not existing and integral is divergent.
1
1
(ii) Given 0 x
dx . At lower bound, the integrand is infinite, so let it is x, then
1 1
1 1
0 x
dx = lim
x0
x x
dx
= lim 2 x |
1
x0 x
= lim 2 2 x
= 2
So limit is existing, integral is convergent.
(iii) At uppe bound, integrand is infinite, so it is x, then
3 x
1 1
0 x 3 dx = lim
x 3 x 3
0
dx
= lim ln x 3 |
x
x3 0
= lim ln x ln 3
x3
= ln 0 ln 3
x dx = lim x dx lim x dx
3 3 3
x 0 x 0
1 1 x
x 2 x x 2 1
= lim | lim |
x 0 2
1 x0
2 x
1 1 1 1
= lim
x 0
2x 2 2 2x
= – +
So neither limit is existing, the integral is divergent.
x
x2 1 x x2 1 b
= lim lnx | lim lnx |
x0
2 2 1 bx
0
2
2 x
x2 1 1 1
= lim
x0 2 lnx 2 2 ln 1 2
b2 1 x2 1
lim lnb lnx
x0
b
2 2 2 2
= – +
Therefore neither limit exist, the integral is divergent.
Applications of improper integrals in business and economics
Such improper integrals are often used in business and economics as area under the normal curve
involving improper integration, Similarly discounting in prepetuity is also based on this. Some examples
in support of this are as follows:
Example. A businessman is expected to earn Rs. 20,000 per annum in perpetuity. If it is assumed
that rate of discount is 10 per annum being discounted continuously. What is the total present value?
t
Ae
rt
Solution. Total present value = dt where t
0
e.10t t
= 20000 lim |
.10 0
t
20000
= lim e.10t 1
.10 t
= 2,00,000 lim 1 e.10t
t
= Rs. 2,00,000
t
Ae
rt
[Note: Present value of annuities = dt
0
194
A
= 1 e rt
r
as proved in definite integration.]
If it is in perpetuity, t
Present value = lim A 1 e rt
t
r
A rt
e 0 if t
=
r
Example. A company has taken a newly constructed commercial complex on lease on which rent is
paid perpetually. If the average rent is paid in a month is Rs. 1000 and rate of discount is 10 per cent
being discounted continuously. Determine the total present value. (Annual rent = Rs. 12,000)
t
Solution. Total present value = lim 12,000 e .10 t dt
t
0
e.10t t
= lim 12000 |
t
.10 0
1000 e
0.5 t
= dt
0
e 0.5t 3
= 1000 |
0.5 0
1000
= 1 e 1.5
0.5
= 2000 (1 – 0.7768)
= Rs. 1553.60 app.
1000 e
0.5 t
(ii) Total sales of campaign = dt
0
t
= lim 1000 e0.5t dt
t
0
1000
= lim e 0.5t 1
0.5
t
Example. The equity share of a company with the face value of Rs. 100 is expected to ykeld 20 per
cent in perpetuity. Determine the value of equity share if rate of discount is 10 per cent per annum.
Solution. Give face value = Rs. 100 Yield = 20 per cent
Dividend per year = Rs. 20
t
20 e
0.10 t
So value of equity share = dt where t
0
t
= lim 20 e 0.10 t dt
t
0
20 A
= = Rs. 200[Using standard form ]
10 r
Example. A company’s dividend on equity share is according to Dt = D0 (egt) where D0 is the
constant, g is the growth rate growing continuously. Determine the total present value of dividend of first
t years if rate of discount is r per cent. Also determine total present value if t . [Assuming r > g]
Solution. Given D1 = D0 egt. So present value = D0 egt e–rt.
= D0 e(g – r)t
t
e
g r t
Total present value = D
0
0 dt
t
g r t
= D0 e dt
0
e g r t t
= D0 |
g r 0
= D 0 g r t
e 1
gr
Taking its limit when t
D0
= lim e 1
g r t
g r t
D0
= 1
gr
[because e(g – r)t = 0 when t as r > g or (g – r) t < 0]
= D0
gr
Example. In a certain industry revenue flows according to function. TR(x) = a + bx where x denotes
the time. Determine the present value of total revenue of the first x years. Also determine total revenue if
x . (if discounted continuously)
Solution. Given TR(x) = a + bx, so its present value, P = TR(x) . e–rx
196
a bx e
rx
P = dx
0
= e rx a bx b2 |
x
[integrating by parts]
r x 0
= e rx a bx b2 d 0 a b2
r x r r
a b bx
= 1 e rx 2 1 e rx e rx
r r r
when x
a b bx
P = 1 e 2 1 e e
r r r
a b ar b
=
r r2 r2
197
UNIT-IV
COMPOUND INTEREST
—SHYAM SUNDER
Bhagat Singh College
Delhi University
Mathematics of finance deals with simple interest, compound interest, trade discount, present and
the future values of annuities, nominal and the effective rate of interest, yield to maturity etc. It is very
important as all these concepts are commonly used in the financial decision making.
Simple Interest
It refers to the interest on principal only. In practice, it is applicable only when interest is paid as and
when it is due. Therefore, every year, it is calculated on principal only. For example, if interest is due
annually, it is paid annually and if it is due on six month basis, it is paid on six month basis. Simple
interest can be computed as below:
Simple Interest (S.I.) = P.r.t.
where P = principal; r = rate of interest in relation to 1, if r is in percentages it is divided by 100: t =
time period in years.
Corresponding Amount = P + S.I. = P + P.r.t. = P (1 + rt)
Note 1. Principal also denotes the present value or value in the beginning or value in the zero period
whereas Amount denotes the future value in the tth period.
Note 2. Whenever interest is paid as and when it is due, it is always assumed to be a case of simple
interest.
Example 1. A sum of Rs. 5000 is deposited by Mr. X in a finance company under quarterly interest
scheme. Find the total interest earned by him in 5 years at 12% per annum.
Solution: Interest of each quarter = Prt
12 1
= 5000 × = Rs. 150
100 4
Total interest earned = Rs. 150 × 5 × 4 = Rs. 3000
The main feature of the simple interest is that the total interest for the given period is always same
whether paid annually, six monthly, quarterly or monthly.
Example 2. What time will be required for a sum of money to double itself if simple rate of interest
is 10% per annum.
Solution. Let the sum of Principal = Rs. P
Amount = P (1 + rt)
2P = P (1 + .10t)
.10t = 1
t = 10 years
198
Example 3. If in four years Rs. 2520 amounts to Rs. 3024, in what time at the same rate will Rs.
520 amounts to Rs. 611 at simple interest.
Solution. Let the rate of interest = 100%
Amount = P (1 + rt)
3024 = 2520 (1 + 4r)
or r = 0.05 or r = 5%
Let the time period = 1 years
611 = 520 (1 + .05t)
t = 3.5 years
Example 4. What is the cash payment equivalent to Rs. 297.54 due in 3 years and 6 months, simple
interest being reckoned at 4% per annum?
Solution. Cash payment = Principal
A 297.54
Principal =
1 rt 7
1 .04
2
= Rs. 261
Example 5. What sum will discharge a debt of Rs. 5300 due after one and half year at 5% per
annum simple interest today?
Solution. Sum required to discharge the debt today = Principal
A 5300
Principal =
1 rt 3
1 .05
2
= Rs. 4930.24.
Example. In how many years at 4% per annum simple interest will the interest be one quarter of the
principal.
Solution. Let the principal = Rs. P.
1
Simple Interest = P = P (.04)t
4
1 1
t = 6 years.
16 4
So the flows which are on the left hand side of the focal date their future value is required and the
flows which are on right hand side, their present value is required. (This rough time scale enables us in
deciding whether future value of present value of the particular flow is required to arrive at the equivalent
value).
Example 7. At 5% simple interest, find the value today of the following obligations: Rs. 1000 due
today, Rs. 2000 due after 6 months with interest at 6% and Rs. 4000 due in one year with interest at 8%.
Solution. Since value is required in the beginning or in zero period and the flows are at the end of 6
months and 1 year (which are on the right hand side of focal date), present value of both the flows due at
the end of 6 months and one year is required.
Amount due at the end of 6 months = P (1 + rt)
6
= 2000 1 .06
12
= Rs. 2060
Amount due at the end of 1 year = 4000 [1 + .08(1)]
= Rs. 4320
The value of all the flows in the beginning at 5%
2060 4320
= 1000 +
1 1 .05 1
1 .05 2
= Rs. 7124.04
Same can be analysed using time scale in this way
Example 8. A man owes Rs. 500 due in 3 months with interest at 5% and Rs. 1500 due in 9 months
with interest at 4%. If money is worth 6%, what single payment made at the end of 6 months will
discharge his debts?
Solution. Let the single payment at the end of six months = Rs. X
200
Example 9. X owes Rs. 500 due in 2 months, Rs. 1000 due in 5 months and Rs. 1500 due in 8
months. He wishes to discharge his obligation in two equal payments; one in six months and other due in
10 months. Find the payment of money is worth 6% simple interest and the 10th month is taken as focal
date.
Solution. Let each payment is of Rs. x. Therefore the value of both the payments at the end of 10
months should be equal to value of all the obligations at the end of 10 months.
4
x 1 .06 + x
12
8 5
= 5000 1 .06 + 1000 1 .06 12
12
201
2
+ 1500 1 .06
12
2.02x = 520 + 1025 + 1515
x = Rs. 1514.85
1
Example 10. X owes Y Rs. 1000 due in 6 months without interest and Rs. 2000 with interest for 1
2
year at 6% due in 9 months. Y agrees to accept 3 equal payments; first due today, second at the end of 6
months and the third at the end of 1 year. Find the equal payments using one year from today as the focal
date if money is worth 8% to Y.
Solution. Let each payment is of Rs. A
6
A 1 .08 1 + A 1 .08 + A
12
6 3 3
= 1000 1 .08 + 2000 1 .06 1 .08 2
12
2
1.08A + 1.04A + A = 1040 + 2223.6
3.12A = 3263.6
A = Rs. 1046.03
Compound Interest
It carries interest on the principal and on the interest due also. It is mainly used when interest is not
paid as and when due. Therefore, in each successive periods interest will be calculated on the principal
plus the interest due. In other words, amount of each successive period becomes the principal of next
period. Thus interest of each successive period will go on increasing. For the first period, both the simple
interest and the compound interest are equal. In this case–
Amount (A) = P (1 + r)t
where A is the amount also known as future value, P is the principal or present value, r = rate of
interest per annum in relation to 1 and t = time period in years.
202
mt
r
Amount = lim P 1
mD
m
rt
m
r r
= lim P 1
m D m
m
r r
= Pert where e = lim 1
m D
m
Example 17. Accumulate Rs. 5000 for 6 years at 10% per annum compounded quarterly.
Solution. Given P = Rs. 5000
.10
r = , t = 4 × 6 = 24
4
24
.10
Amount (A) = 5000 1 ... (i)
4
= 5000 (1.8087)
= Rs. 9043.63
It can also be solved using log and compound interest-tables. Compound interest table gives the
compound value of Re. 1 at different rates of interest for different periods. Using log it can be written as
log A = log 5000 + 24 log 1.025
= 3.69897 + 24 × .01072
= 3.95634
A = Antilog (3.95634)
= Rs. 9043.63
Example 18. On March, 1, 1990, X borrowed Rs. 5000 at 12% compounded quarterly. What did he
owe on 1st Sept, 1997?
Solution. Given P = Rs. 5000
.12
r = = .03
4
t = 7 years and 2 quarters
= 30 quarters
A = 5000 (1 + .03)30
= Rs. 12136.32.
Example 19. How long will it take the sum to double itself if compound continuously at 10% per
annum?
Solution. Let Principal = Rs. P.
Amount = P . ert
2P = P e.10t
2 = e.10t
Taking log
log 2 = .10t log e
205
log 2 .3010
t =
.10log e .04343
= 6.93 years [log e = log 2.7183 = .4343]
Example 20. Mr. X deposits Rs. 5000 in a bank for 3 years. Bank offers interest at the rate of 10%
compounded quarterly during first year, at 12% per annum compounded monthly during second year and
at 15% per annum compounded continuously during 3rd year. Find his balance after 3 years.
4
.10
Solution. Balance after 1st year = 5000 1
4
= principal for second year
4 12
.10 .12
Balance after second year = 5000 1 1
4 12
= principal for third year
4 12
.10 .12
Balance after 3 years = 5000 1
1
4
e
12
151
= Rs. 5519.06 (1 .1268) (1.1618)
= Rs. 7225.26
9000
or 1652.89 + 2049.04 + 1866.03 =
1 .10
n
9000
or (1.10)n = = 1.61639
5567.95
Using log
n log 1.10 = log 1.61639
log1.61639 .2085
n =
log1.10 .0414
n = 5.038 years
The other alternative is that the focal date may be taken at the end of nth year. So the value of given
flows at the end of nth year should be equal to Rs. 9000.
2000(1.10)n–2 + 3000(1.10)n–2 + 4000(1.10)n–8 = Rs. 9000
Same expression is given by multiplying both sides by (1.10)n in the first alternative. But it should
be solved carefully. Each term is to be evaluated separately using log and not be taking log of both the
sides (As log properties are not applicable in case of addition and subtraction).
Example 23. If the money is worth 5% effective, what equal payments of Rs. x at the end of first
year and at the end of third year will equitably replace the obligations: Rs. 30,000 at the end of 2nd year
with interest at 6% per annum compounded semi-annually and Rs. 50,000 at the end of 5th year with
interest at 4% compounded quarterly.
Solution. If the focal date is taken as zero period, then present value of both set of floes should be
equal.
2 2
.06
Amount due at the end of 2nd year = 30,000 1
2
1 .03
4
4 5
.04
Amount due at the end of 5th year = 50,000 1
4
1 .01
20
r1 r2
= 1 1
4 2
r
r1 = 4 1 2 1
2
209
Example 27. Find the nominal rate r compounded monthly equivalent to 6% compounded semi-
annually.
12 t 2t
r .06
Solution. P 1 = P 1
12 2
r 1
= 1.03 6 1
12
r = .05926 = 5.926%.
210
ANNUITIES
An annuity denotes amount (which may be constant or varying regularly with time) flowing after regular
intervals say monthly, quarterly or yearly. It may be inflowing or out flowing.
All annuities are broadly is known classified as annuity certain and contingent annuity. Annuity
certain is that annuity where time period is known with certainty whereas contingent annuity is that whose
time period depends upon the happening of certain event. As pension by a retired employee may be
received till the person is alive. In case of annuity certain time period may be finite or infinite. If it is
infinite, annuity is known as perpetual annuity.
These are further classified as annuity due, annuity immediate and deferred annuity. Annuity due
implies that annuity starts flowing in the beginning of first period, therefore each successive flow is in the
beginning of each period, e.g., the payment of rent in advance. Annuity immediate commonly known as
ordinary annuity denotes that annuity which starts flowing from the end of first period, so each successive
flow will be at the end of each period as the payment of loan installments. Deferred annuity denotes that
annuity which is deferred for some periods before the first flow. Therefore, if the annuity is deferred for n
periods, first-flow will be available at the end of (n + 1) period. For example, installments of a bank loan
which begins from the end of 5th year implies that it has been deferred for four years.
A 1 A
= 1
(1 r ) (1 r ) (1 r )t 1
Inside the bracket it is finite geometrical progression of t terms with first term = 1 and the common
1
ratio = which is less than one. Sum of the n terms of a geometrical progression.
1 r
= a + ar + --- + arn–1
a (1 r n )
=
1 r
211
t
1
1
1 r
= (using g.p. formula)
r
The same is denoted by at/r
The present value of ordinary annuity of Rs. A using table = A.at/r
1 t
1
= A 1 r
1
11 r
= A
1 r
[1– (1 + r)–t]
r
A 1 1
= 1
1 r 1 r 1 r
n+1 t 1
212
1 1 r t
A
=
1 r
n
r
Using table, present value of deferred annuity
= (1 + r)–n – . A. at/r
Where n denoted thye periods for which annuity is deferred t is the number of periods for which
annuity is flowing.
A 1 1
= 1
1 r 1 r 1 r 2
A 1 A
= .
1 r 1 1 r
1 r
A
[Note–For an infinite G.P. a + ar + ar2 + ........ = ; r < 1]
1 r
For perpetual annuity due, present value
= A
1 r
r
In all these situations, the time period of annuity flow must be equal to interest period. For example,
if annuity is flowing annually, interest must also be compounded annually and if annuity is flowing
quarterly, interest must also be compounded on quarterly basis. Therefore, if interest is compounded m
r
times in sa year, annuity must also flow m times in a year. Here r is replaced by and t is replaced by
m
mt in all above cases. For example, if an annuity of Rs. 1000 is flowing quarterly for 5 years, rate of
interest being 8% per annum compounded quarterly then its present value
1000
1 1 .02
20
=
02
08
as r 4 and t 4(5)
= Rs. 16351.43
Using present value table
Present value = 1000a20/.02
= 1000 (16.35143)
= Rs. 16351.43
213
1000
Its future value = [1 + .02]20–1]
.02
= Rs. 24297.37
Using table, future value
= 1000 S20/.02 = 1000 (24.2974)
= Rs. 24297.40
Example 1 : A machine is purchased under installment system such that Rs. 20,000 is paid on
signing the contract and the balance in 4 annual installments of Rs. 5000 each at the end of each year. If
interest is charged at the rate of 10% per annum, what would be the cash price of machine?
Solution : Cash Price = Down payment + Present value of four installments
5000
= 20,000 + [1 – (1.10)]–4
.10
= 20000 + 15849.33
= Rs. 35849.33
Example 2 : A man borrowed Rs. 10,000 with an understanding that it is to be paid back in five
quarterly installments the first payment made at the end of first quarter. Find the value of each installment
if interest rate is 8% per annum compounded quarterly.
Solution : Let each installment is of Rs. A. So, the present value of 5 quarterly installments at r =
.0 8
= .02 should be
4
= Rs. 10.000
A
10,00 = [1 – (1.02)–5]
02
= A.a5/.02 (using table)
10,000 = A (4.71345)
1000
A = = Rs. 2121.58
4.71345
Example 3: On June 1, 1996, Mr. X borrows Rs. 5000 from a bank which charges interest at 8%
com pounded quarterly. He agrees to discharge his indebtness by making quarterly payments of Rs. 400
each, the first payment on Sept. 1, 1996
(a) When will he make the last payment of Rs. 400?
(b) What final payment 3 months later will be required?
Solution : Given Present value = Rs. 5,000
.0 8
r = = .02
4
Quarterly installment A = Rs. 400, t = ?
500 = 400 [at/.02]
at/.02 = 12.5
Using table t ties between 14 and 15 periods, so X will pay 14 installment of Rs. 400 each and the
balance say Rs. y in the 15th installment.
214
500 = 400a14.02 + y
(1 .0 2 ) 15
A 1 1 r 1
= 50000 +
1 r
n
r
A1 1.0510
= 50000 +
1.05 .05
7
Using table
200000 = 50000 + A (1.05)–7.a10.05
Example 6 : On April 1, 1992. M borrowed Rs. 75,000 with interest at 4% compounded monthly.
He plans to discharge the debt by monthly payment of Rs. 1000, the first due on April 1, 1995. Find the
no. of full payments and the additional payment one month later to discharge the debt.
Solution : It is a case of deferred annuity as first payment is made 3 years later. So it has been
deferred for 35 months.
.04 .01
r = , Present value = Rs. 75,000
12 3
monthly installment A = Rs. 1000
.01 t
1 1
1000 3
75000 =
.01 .01
35
1 3
3
Using table
.35
.01 a
75000 = 1000 1 |
10 01
3 3
35
.01
= 75 1
3
= 84.2625
As per table, t lies in between 99 and 100, so M will make 99 full payment and the balance say Rs. x
in 100h installment.
35
.01 a x
75000 = 1000 1 99 01 | 135
3 .01
1
3
3
35
x .01 a
135 = 75000 – 1000 1 |
99 01
.01 3
1
3
3
= 75000 – 7446.578
x
135 = 53.422
.01
1
3
135
.01
x = 53.422 1
3
= Rs. 83.72
135
.01
Note : 1 can be solved using log.
3
Example 7 : Find the present value of a perpetuity of Rs. 800 payable at the end of year if money is
worth (a) 6% effective (b) 6% compounted semi-annually (c) 6% compounded quarterly.
A 800
Solution : (a) Present value of Perpetuity = = Rs. 13333.33
r .06
216
(b) In this case compounding is semi-annually where as annuity if flowing annually since the time
period of both must be same. So corresponding effective rate or annual rate is required.
m
r
Effective rate = 1 –1
m
2
.06
= 1 –1
2
= (1.03)2 –1 = .0609
800
Present value = = Rs. 13136.29
.06.9
4
.06
(c) Effective rate = 1 1
4
= (1.015)4 –1 = .06136
800
Present value = = Rs. 13037.06
.06136
Example 8 : An investor estimates an annual income of Rs. 5000 on an equity investment for ever.
How much should be invested if he wants an annual return of 20%.
Solution : Amount to be invested = the Present value of all the income flows at the required rate of
20%.
A 500
Present value = Rs. 25,000
r .20
Example 9 : How much is needed to endow a series of lectures costing Rs. 3000 at the beginning of
each year indefinitely, money worth 4% compounded quarterly.
Solution : It is a case of annuity due as payments are in the beginning of each year. Further annual
rate is required corresponding to 4% compounded quarterly as annuity if flowing annually.
effective rate or annual rate (r1),
m
r .04
r1 = 1 1 1 1
m 4
= .0406
A 1 r1
Its present value =
r1
3000 1.0406
=
.0406
= Rs. 76884.03
Example 10 : The timber used in a certain construction costs Rs. 4000 and will last 12 years. If
given a preservative treatment it will last 20 years. How much can be paid for the treatment, money worth
5% per annum?
Solution : The price which can be paid for the preservative treatment should be equal to the present
value of reduction in the annual cost for 20 years. Reduction in the annual cost is a difference between per
year cost without preservative and with preservative.
217
Let the annual cost without preservative is Rs A1 and with preservative Rs. A1
400 = A1 1a2 |.0 5
A1 = 4000
a
4000 = Rs. 451.30
|
12 .05 8 .8633
A2 = 4000
a
4000 = Rs. 320.97
|
20 .05 12.4622
So annual saving is (Rs. 451.30 – Rs. 320.97) available for 20 years
Price for preservative = Rs. (451.30 – 320.97)
= 130.33. a
|
2 0 .0 5
= 130.22 (12.4622)
= Rs. 1624.19
Example 11 : A college estimates that its new building will require Rs. 800 for up keep at the end of
each year for next 10 years and Rs. 1500 ft the end of each year indefinitely. If the money is worth 4%,
how large an endowment is necessary for the future upkeep of the building?
Solution : Endowment fund = Present value of cash out flows.
Present value = 800 800 2 800
1.04 (1.04) (1.04)10
+ 150011 150012
(1.04) (1.04)
The first 10 years is a finite annuity and the remaining is a perpetual annuity
Using table
a
Present value = 800 30 | r
12
a
|
30 r = 20
12
Using Present value table, (look for 20 inside the table corresponding to 30 periods)
r 1
lies between 2 % and 3%
12 2
3
It may be taken as 2 % approx.
4
Corresponding effective rate
m
r
= 1 1
m
= (1 + .0275)12 –1
= .3847 = 38.47%
Example 13 : What sum must be deposit today in an account paying 4% compounded quarterly will
provide 20 quarterly withdrawals of Rs. 600 each, the first to be made 2 years from today?
Solution. It is a case of deferred annuity as first withdrawal is made at the end of 2nd year. So it has
been deferred for 7 periods. The amount to be deposited = Present value of 20 withdrawals of Rs. 600
each.
218
Using table
A = 100000
a
100000 = Rs. 21631.64
|
6 .08 4.6224
Now amount payable at the time of 4th year to discharge the remaining loan is the total of the
present value of 4th payment, 5th payment and 6th payment.
21631.54 21631.54
So money payable at the time of 4th payment = 21631.54 +
1.08
2
1.08
= Rs. 60206.30
Example 15 : Today X takes a loan with interest at 8% compounded quarterly which he agrees to
discharge be payments of Rs. 200 at the end of each quarter for the next 4 years, followed by payments of
Rs. 400 at the end of each quarter for the next 3 years. Find the loan.
Solution : Loan = Present value of both the annuities.
First annuity will be an ordinary ordinary annuity whereas second annuity will be deferred annuity.
.0 8
For first annuity r = = .02 and t = 4 (4) = 16 and for second annuity r is same and t = 4 (3) = 12, but
4
it has been deferred for 16 periods.
loan = 200. 1a6 |.0 2 + (1.02)–16.400. a
|
1 2 .0 2
Future value of a annuity (also known as amount of annuity) denotes the equirvalent lump-sum
available at a future date. It is the sum total of the future value of different value of different annuity
flows. If is required whenever the flows are on the left hand side and the equivalent value is required on
the right side. It can also obtained using formula based on geometrical progression as well as the future
value table of the annuity of Rs. 1.
A
= [(1 + r)t –1]
r
Since it is a G.P. with first-term equal to 1, common ratio is (1 + r) which is greater than than 1 for t
years.
Using table, which gives the future value of ordinary annuity of Rs. 1 for years at 100r% per annum.
= 1. (1 + r)t–1 + 1. (1 + r)t–2 --- + 1
1 r
t
1
= denoted by ts | r
r
future value of the ordinary of Rs. A = A. ts | r
= A ts1|r 1
Example 3 : X deposits Rs. 500 in a savings account on June 1, 1990 which pays 4% compounded
semi-annually and continue to make similar deposits every deposits six month thereafter. After June, 1,
1996, the bank paid 6% compounded semi-annually. How much will be to his credit just after the deposit
of December 1, 1998?
Solution : It can be divided into two parts. First part can be accumulated upto June 1, 1996, i.e. for
.06
13 periods (and not 12) which remain in the account as lump-sum for another 5 periods at =.03 rate.
2
The second part is a deferred annuity which will be separately accumulated for 5 periods at.03 rate.
Balance as on December 1, 1998
= [500 13s |10.2 ] (1 + .03)5 + 500. 5s |.03
= 500 (14.680) (1.15927) + 500 (5.3091)
= Rs. 11163.76
Example 4 : M purchased a machine paying Rs. 5000 down and promising to pay Rs. 500 every 3
months for the next 10 years. Seller charges interest at 8% compounded quarterly (a) what is the cash
price of the machine? (b) If M missed the first 10 payments, what he pays to the time of 11 payments to
bring him up-to-date? (c) After making 8 payments, M wished to discharge the entire debtness by a single
payment at the time of 9th regular payment was due, what must he pay in addition to regular payment? (d)
If M missed the first 10 payments, what must he pay when the 11th payment is due to discharge his entire
indebtness.
.0 8
Solution : (a) Cash Price = down payment + present value of Rs. 500 for 40 periods at =.02
4
rate.
Cash price = 5000 + 500 a4 0 |.0 2
= 5000 + 500 (27.3555)
= Rs. 18667.75
(b) Amount payable at the time of 11th payment
= Future value of ordinary annuity of 11 periods
= 500. 1s 1 |.0 2 = 500 (12.1687)
= Rs. 6084.35
(c) The additional payment will be equal to the present value of remaining 31 payments
Additional payment at the time of 9th period = 500 3a 1 |.0 2
= 500 (22.9377)
= Rs. 11468.85
(d) Amount payable at the time of 11th payment to discharge the entire indebtness will be the sum
total of future value of first 11 payments and the present value of remaining 29 payments.
Amount payable at the time of 11th payment.
= 500 1s 1 |.0 2 + 500 a2 9 |.0 2
= 500 (12.1687 + 21.8444) = Rs. 17006.54
Example 5 : As soon as B has saved Rs. 20,000 he intends to start a business. If he can save Rs. 600
every 3 months and invest at 4% compounded quarterly, find the number of Rs. 600 deposits, he must
make and the size of the final deposit.
Solution : The number of deposits can be obtained using future value table. Here r = .01
223
1.045 1
= A
.04
6000
A = = Rs. 1107.77
5.4163
Example 7 : A debt of Rs. 10,000 bearing interest at 12% compounded semi-annually is to be
discharged by sinking fund method. If 10 equal semi-annual deposits, the first due in 6 months are made
into a fund which pays 6% interest compounded semi-annually, find (a) the size of the deposit (b) the
semi-annual cost of the debt.
Solution : (a) Let each installment is of Rs. A. Therefore the present value of all the 10 installments
.06
at r = =.03 should be equal to Rs. 10,000.
2
10,000 = A 1a0 |.0 3
10000 .03
or A = = Rs. 1172.30
1 1.03
10
Replacement of Assets
In case of assets, annual cost will include repair cost (or operating cost) + interest lost by investing
the lump-sum in the asset + deprecation to be provided each year to accumulate funds required for the
replacement of the asset. This depreciation is fixed in such a way that if it is accumulated at the given
rate, it will be sufficient to replace the asset. Interest Cost is based on the required rate of return.
Example 8. A mine is expected to yield Rs. 30,000 each year for the next 20 years. If M desires an
8% return on his investment and can invest money safely at 4% per annum, what is the value of mine now
to M if after 20 years, (a) it is worthless (b), it can be sold for Rs. 5000.
Solution : Let the mine cost Rs. C. Therefore interest cost to meet the required return of 8% = .08 C
depreciation (D) to be fixed in such a way that if it is accumulated at 4% for 20 years, it accumulates Rs.
C after 20 years in the first case and Rs. C Rs. 5000 in the second case.
(a) D. 2s 0 |.0 4 = C
D = C/ 2s 0 |.0 4
30,000 = .08C + s C
|
20 .04
1 1
30,000 = C .08 s C .08
20 |.04 29.7781
30000
C = = Rs. 264126.99
.08 .0336
(b) 30,000 = .08C + C s 5 0 0
|
2 0 .0 4
C = Rs. 26560.30
General Annuities
Annuities are also classified as (1) Simple annuities annuities (2) General annuities! Simple
annuities are those where the time period of he annuity is same as the interest period. For example if
annuity is flowing quarterly, interest is also compounded quarterly.
General annuities are those where annuity period is not coinciding with interest period. Therefore
either annuity is flowing more than once in an interest period or interest is compounded more than once
during an annuity period.
All there general annuities can be grouped into two types (a) More than one annuity flows are there
are there in each interest period. For example : Annuity is flowing quarterly with interest compounded
annually. Here either corresponding annual flow is obtained by combining the four flows of each interest
period or corresponding quarterly interest rate is obtained rate is obtained using the relationship between
nominal and the effective rate of interest as to quarterly interest rate is obtained using the relationship
m
r
between nominal and the effective rate of interest as to R = 1 1 where R is the effective rate, r is
m
the nominal rate and m denoted the interest compounded in a year. If the first alternative is used, it is
known as combining the annuity.
Example 9 : If interest is at 6% compounded semi-annually, replace the payments of Rs. 1000 at the
end of each month by a six monthly payment.
Solution : Let the corresponding 6 monthly payment = Rs. x
225
Therefore it should be equal to the future value of ordinary annuity of Rs. 1000 flowing for 6
12 2
r .06
months with r1 rate per month given by 1 1 1
12 2
r1 1
or = 1.03 6 –1
12
s
x = 1000 6|r1
12
1000
6
r1
= 1 1
r1/12 12
= 1000 [1.03 1] = Rs. 6074.57
1
(1.03) 6 1
If an annuity of Rs. A is flowing P times in an interest period with interest rate 100r% per time
no min al A(r)
period (given by ), then the combining factor is given by 1 , but r must be the rate per
m
(1 r) 1
p
time period.
(b) Annuity flowing period is greater than the interest period i.e. interest is compounded more than
once in an annuity period. For example. Annuity is flowing annually but interest is compounded
quarterly. In this case also corresponding annual rate is obtained using the relationship between two
nominal rates and the relationship between nominal and the effective rate of annuity is split according to
interest period.
Example 10 : If interest is at 6% compounded quarterly, replace a payment of Rs. 2000 at the end of
the year by an equivalent payment at the end of each quarter.
Solution : Let each equivalent quarterly payment is Rs. x. So if the four quarterly payments ae
.06
combined together at r = =.015, their future value should be equal to Rs. 2000.
4
200 = x 4s |.0 1 5
or x = 2000
s
= 2000 (.02444)
|
4 .015
= Rs. 488.88
Alternatively corresponding annual rate, R can be obtained by
4
r
R = 1 1
4
4
.06
= 1 1
4
= (1.015)4 –1
x 1s |R = 2000
x = 2000
s
1 R |
226
2000[1.015 1]
4
=
1.015
4
Example 11 : Find the amount and the present value of an annuity of Rs. 1500 per year for 6 years
with interest at 6% compounded semi-annually.
Solution : Here annuity period is twice the interest period as interest is compounded twice in each
annuity period. So one alternative is to split the annuity.
Let each six monthly flow is of Rs. x which amounts to Rs. 1500 at the end of each year.
x 2s |. 0 3 = 1500
x = 1s5 0 0
|
2 .0 3
Now both the annuity period and the interest period are equal.
.06
Amount of the annuity at = .03 rate for 12 periods will be
2
Amount = x 2s |. 0 3
= 1s5 0 0 s
|
1 2 .0 3
2 |.0 3
1500[(1.03)12 1]
= .03
(1.03)2 1
.03
= Rs. 7355.17
Alternatively interest rate may be modified according to annuity period using the relationship
between effective and nominal rate of interest. Let the annual rate is R corresponding to the nominal rate
6% compounded six monthly.
R = (1.03)2 –1
Using this rate R
Amount = 1500 6s |R
1 r 6 1
= 1500
R
1.0312 1
= 1000
1.03 1
2
= Rs. 10486.72
Present value = 1500 6a |R
1 1 R 6
= 1500
R
227
1 1.0312
= 1500
1.03 1
2
= Rs. 7355.17
Example 12 : If the money is worth 6% compounded quarterly, replace the payments of Rs. 2000 at
the end of each year by equivalent of Rs. x (a) at the end of each monthly (b) at the beginning of each
month.
Solution : If is a case of combining the annuity as annuity period is less than interest period.
Annuity is flowing 3 times in each interest period.
One alternative is to ascertain the monthly rate corresponding to quarterly rate using the relationship
between two nominal rates. Let the monthly rate is r/12 corresponding rate 6% compounded quarterly.
12 4
r .06
1 = 1
12 4
r 1
or = 1 .015 3 1
12
r
Let the monthly payments is of Rs. x at rate for 12 periods.
12
(a) It is a case of ordinary annuity. Therefore future value of annuity of Rs. x should be equal to Rs.
2000.
s
2000 = x 12 | r
12
2000
or x = s
12 | r
12
= 2000
12
r
1 1
12
r
12
1
1.015 1
3
= 2000
4
1.015 1
= Rs. 162.15
(b) It is a case of annuity due
2000 = x 13s | r 1
12
2000
or x = s
13 | r
12
228
2000
x =
r
13
1 – 1
12 – 1
r
12
2000
=
13
(1.015) 3 – 1
1
(1.015) 3 – 1
= Rs. 161.35
Ae
–rt
Present value = dt
0
t
e – rt A
= A
–r
t
1 – e – n
0
Ae
–rt
= dt
0
5000
= (–1 + e5)
.10
= Rs. 32436.06
But in case it is continuously decreasing at the rate of 10% per annum, then cummulative sales of
first 5 years is given by
5
5000
–10t
= dt
0
229
5000
= (–1 e5 )
.10
= Rs. 19673.46
Example 14 : A bank pays interest at the rate of 6% per annum compounded continuously. If person
deposits Rs. 2000 in the bank each year, how much will be his balance after 5 years?
Solution : Balance after 5 years
= Future value of annuity of Rs. 2000 of 5 years at 6% compounded continuously.
5
2000e
.06t
Balance = dt
0
2000 3
= (e – 1) = Rs. 11661.96
.06
Example 15 : A bank pays interest at the rate of 10% p.a. compounded continuously. How much
should be deposited each year is order to accumulate Rs. 15000 in 10 years.
Solution : Let he deposits Rs. A each year
then its future value = Rs. 15000
10
Ae
.10t
15000 = dt
0
A
= (e – 1)
.10
15000(.10)
A = = Rs. 872.95
e –1
Example 16 : How much should invested every month in an account paying 12% p.a. compounded
continuously so as to accumulate Rs. 10,000 in 5 years.
.12
Solution : Let the monthly deposit be Rs. A. then its future value at = .01 rate for 60 months
12
should be equal to Rs. 10000.
60
Ae
.01t
10000 = dt
0
A
= (e6 – 1)
.10
15000 (.10)
A = = Rs. 121.64
e –1
Example 17 : Find the present value of annuity of Rs. 100 per annum assumed to be payable
continuously for 10 years at the rate of 4% p.a. compound continuously.
t
Ae
–rt
Solution : Present value = dt
0
10
= 100 e
–.04t
dt
0
230
100
= (1 – e–4) = Rs. 824.20
.04
Example 18 : An income stream decreases continuously over time for m years, the income rate at t
years firm now being ae–bt per year. What is its present value if interest is reckoned at 100r%
compounded continuously. Show this equals the present value of a uniform income stream of Rs. a per
for m years if the rate of interest is raised to [100 (r + b)]% per year.
Solution : In the first situation,
A = ae–bt t = m years, r = 100r%
t
e
–.rt
Present value = dt
0
m m
ae e dt = ae dt
–bt – rt –(b+r)t
=
0 0
a
= (1 – e–m(b+r))
.b e
In the second case A = Rs. a, t = m years and r = 100 (b + r)%
m
ae
–(b+r)t
Present value = dt
0
a
= (1 – e–m(b+r))
br
So both the present values are equal.
Example 19 : A company’s dividend on enquiry shares is according to Dt = D0egt where D0 is
constant g is the growth rate growing continuously. Determine the total present value of the dividend of
first t-years if the rate of interest is 100r% compounded continuously. Also determine the total present
value if t (assuming r > g)
t
De
–rt
Solution : Total present value of t years dividend = 1 dt
0
D e
gt – rt
= 0 e dt
0
= D0 e
–t(r–g)
dt (as r > g)
0
= D 0 (1 – e–t(r–g))
r–g
In case t
Total Present value = lim D 0 (1–e–t(r–g))
t r–g
= D0
r–g
231
Example 20 : Assume that is 1996, the annual world use of natural gas was 580 trillion cubic ft. The
annual consumption of the gas is increasing at the rate of 3% compounded continuously. How long will it
take to use all available gas, if it is known that in 1996, there were 2200 trillion cubic ft of the proven
reserves? Assume that no new discoveries are made.
Solution : Let the reserves are lasting for t years. So the cumulative consumption of t years should
be equal to the reserves.
t
50 .03t
2200 = 50.e
.03t
dt
.03
e –1
0
2200(.03)
e03t = +1
50
= 2.33
Taking log on both sides
.03t log e = log 2.32
t = log 2.32 log 2.32
.03 log e .03 log 2.7183
(ii) A sum of money is put at compound interest for two years at 20% per annum. It would fetch
`482 more, if the interest were payable half yearly than if it were payable yearly. Find the sum.
Solution. (i) Let P be the original principal, which is being invested at 4% compounded
annually. Then
P(1.04)2 – P(1.04) = 25
P(1.04) (1.04 – 1) = 25
= P(1.04)2 (1.04 – 1)
232
= `26
(ii) Let the sum invested be `P. Then the amount of `P at the end of two years at 20% per annum
compounded annually is:
P(1.20)2 = P(1.44)
Also, the amount of `P at the end of two years at 20% per annum compounded semi-annually is:
P(1.10)4 = P(1.4641)
Example. A sum of money is deposited in a bank which compounds interest semiannually. The
amount at the end of 4 years is `6333.85 and the amount became `8023.53 at the end of 8 years.
Find the money deposited and the interest rate.
Solution. Let P (in `) be the money deposited and r be the rate of interest compounded semi-
annually. Then
8 16
r r
P 1 6333.85 and P 1 8023.53
2 2
8
r 8023.53
On division, we get 1 1.2667698 1.267
2 6333.85
r r 0.1028
8 log 1 log(1.267) 0.1028 log 1 0.01285
2 2 8
r r
1 AL(0.01285) 1.030 0.03 r 0.06 or 6%
2 2
Example. A person deposit `5000 in a bank which pays an interest of 11% per annum
compounded continuously. How much amount will be in his account after 10 years?
Solution. Substituting P = 5000, r = 0.11 and t = 10 in the formula S = Pert, the amount S after
10 years is given by
233
Example. Mr. X deposited `10,000 in a bank for 3 years offering interest at the rate of 6%
compounded half yearly during first year, at the rate of 12% compounded quarterly during
second year and at 10% compounded continuously during third year. Find his balance after 3
years.
Example. Find the effective rate equivalent to the nominal rate 6% converted (i) monthly,
(ii) continuously.
Solution. (i) Here r = 0.06 and m = 12. Thus the equivalent effective rate re is given by
m 12
r 0.06
re 1 –1 1 – 1 (1.005) – 1 1.0616 – 1 0.0616
12
m 12
(ii) Using Formula (2), the effective rate equivalent to the nominal rate 6% converted
continuously is given by
Example. Find, the each of the following, the amount to which `100 will accumulate:
(i) At the rate of interest 12% per annum compounded quarterly for 100 years.
(ii) At the force of interest 3% per annum for 3.5 years.
(iii) At the effective rates of interest 3% per annum for 10 years, 4% per annum for 4
years and 5% per annum for 2 years.
(iv) At the rate of interest corresponding to 3% per annum effective rate effective rate of
discount for 8 years.
(v) What constant force of interest would produce the same amount after 16 years as the
rates in (iii) above?
Solution. (i) Required amount = 100(1.03)40 = `100(3.2620) = `326.20
= 100[AL (0.04561)]
= 100(1.7331) = `173.31
(iv) Let i be the rate of interest corresponding to an effective rate of discount of d = 0.03 per
annum. Then it is known that
1 1 1
1– d 1i
1 i 1 – d 0.97
8
1
Required amount = 100 100(1.0309) 100(1.2756) `127.56
8
0.97
log1.7333 0.2388
= 0.0343 or 3.43%
16 log e 16 0.4343
235
Remark. It may be remarked that effective rates are used to compare different interest rates, that
is, which is “best”, as is illustrated in the following example.
Example. A machine depreciates at the rate of 8% for the first two years, at 10% for next three
years and then at the rate of 15% p.a. Find the value of the machine at the end of 10 years, if the
value of the machine is `1,00,000 initially. Find also the average rate of depreciation.
= `27377.42
Example. An asset costing `4500 will depreciate to a scrap value of `500 in 10 years. Find the
rate of depreciation.
(1 – r)10 = 1/9
1 – r = AL 1.9046 0.8028
Example. Machine A costs `10,000 and has a useful life of 8 years. Machine B costs `8000 and
has a useful life of 6 years. Suppose machine A generates an annual labour savings of `2000
while machine B generates an annual labour savings of `1800. Assuming the time value of
money is 10% per annum, find which machine is preferable?
Solution. Machine A costs `10,000 and has a life of 8 years, If ` C1 is the equivalent annual cost
of machine A, then the cost of machine A may be considered as the present value of an annuity
of ` C1 for 8 years at 10% per annum. Hence C1 is given by
Machine B costs `8000 and has a life of 6 years. If `C2 is the equivalent annual cost of machine
B, then the cost of machine B may be considered as the present value of an annuity of `C2 for 6
years at 10% per annum. Hence C2 is given by
8000 8000
8000 C2 a6 0.10 C2 `1836.55
a6 0.10 4.356
Thus, the net annual savings of each machine can be obtained as follows:
Machine A Machine B
ALITER : Since machine A generates an annual labour savings of `2,000 for 8 years, therefore
present value of a sequence of annual savings of `2,000 for 8 years @10% per annum is given by
1 – (1 0.10) –8
2000 a8 0.10 2000 2000 5.335 `10, 670
0.10
Further, since machine B generates an annual labour savings of `1800 for 6 years @ 10% per
annum is given by
237
1 – (1 0.10) –6
1800 a6 0.10 1800 1800 4.356 ` 7840.80
0.10
Thus, Machine B cost `159.20 more than it will save in labour costs.
Example. A bond has a face amount of `1000 and matures in 15 years. The nominal interest is
7%. What is the price of the bond that will yield an effective interest of 8%?
V = F (1 i ) – n Ran i
Example. A house is sold for `50,000 down and 10 semi-annual payments of `5000 each, the
first due 3 years hence. Find the cash price of the house if money is worth 20% compounded
semi-annually.
Solution. The cash price of the house = `(50,000 + P), where P is the present value of a deferred
annuity consisting of 10 semi-annual payments of `5000 each, the first being deferred for 5
periods. Hence P is given by
P = R am n i – am i ,
P = 5000 a15 0.10 – a5 0.10
= 5000(7.606 – 3.791)
= 5000(3.815) = `19,075
238
Example. How much money is needed to endure a series of lectures costing `2500 at the
beginning of each year indefinitely, if money is worth 3% compounded annually?
Solution. It is required to find how much to be invested now that would provide for an unlimited
number of payments of `2500 each year, the first due now. Thus this is a perpetuity of Type II
and hence required money needed is given by
R
P = R ,
i
2500
P = 2500 `85,833.33
0.03
239
240
241
242
243
LESSON 1 UNIT-V
LINEAR PROGRAMMING
Various new branches has emerged in the study of mathematics over a duration of time. They
include operationl research, mathematical statistics and computer programming. Among these.
operational research is one of the most important branches. It deals with various mathematical models
which are often applied in managerial science. Among the mathematical models, linear programming is
the most important. It inculdes various models such as simplex model, transportation model and
assignment model. Simplex model is a generalised linear programming. These models assume that there
exist linear relations amongst different quantities appering in the programme. Prof. George B. Dantiz
developed simplex to solve lincar programming problems in 1951.
The linear programming models-are applicable to problems genes ally faced by Manage-ment and
Econonmts, e.g allocating the limited resources among competitive uses iii such a way that their
utilization is optimal. The type of problems which are solved by the. linear program-ming models has
certain objective function subjecting to certain restrictions. The solution of these problems need
optimizing the objective function in terms of profit and minimising in terms of loss. Let us take an
example :
A firm produces two products-Vitamin A and B requiring different mix-up of the materials Z and Y.
Vitamin A requires 2 units of Z and 3 units of Y and Vitamin B requires 2 units of X and one unit of Y.
Vitamin A yields a profit of Rx. 2/- per unit and Vitamin B yields Rs. 1/50- per unit. If the firm bas 200
units of material X and 150 units of Y. Determine the objective function and constraints assuming firm
produces X1 units of Vitamin A and X2 units of Vitamin B. If X1 units Vitamin A and X2 units of Vitamin
B are produced, the objective function will be.
Maximize P = 2x1+1.50 x2
subject to
2x1 + 2x2 < 200 (X material)
3x1 + x2 < 1500 (Y material)
where x1 > 0, x2 > 0
Hence values of x1 and x2 are to dctetiained in such a way that P can be maximized in terms of profit
within the available materials.
Programming is a technique which is applied for finding maximum values in problems confronting
the decision-making authorities subject to certain constraints or side-conditions., which limit decisions. In
fact such problems which require determination of maxima or minima could also be solved with the help
of Calculus. But calculus can not be applied in problems having Side conditions which are not exact but
limit the requirements. Programming helps us to find out maximum or minimum values when side
conditions are inequalities and not equations. The term linear implies that the relationship existing in the
problems must be linear "while the term programming refers to determination of particular programming
which gives the line of action which would achieve the desired objective. Linear programming uses, a
mathematical model-in which a linear objective function miximised of maximised subject to certain linear
constraints.
244
x1 0
(Non-negative constraints) ...(iv)
x2 0
where (i) is the objective function, (ii) & (iii) are structural constraints. (iv) Non-negative constraints
Since the objective function and constraints are .... function in x1, x2 we have linear programming
problem.
It can be put as
n
Maximize Z = Cij xj
j 1
Subject to
n
aij < bj where i = 1, 2,......m, xj > 0
j 1
Therefore it has m inequality constraints and n variables; a, b, c are constants. The constraints in a
linear programming problem may be of less than .or equal to type; greater than or equal to type, equality
type or mix type. Generally the constraints are of < type in maximization problems and > type in
minimization problems.
The first important step in solving a linear programming problem is the determination of objective
function to be optimised together wills constraints. This is known as formulation of problem.
Example : A media specialist has to decide OB the allocation of advertising in three media vehicles.
Let xi be the number of messages carried in the ith medium, . i -1, 2, 3. The unit costs of a message in the
three media are Rs. 1000, Rs. 750 and Rs. 500. The total budget available is Rs. 25,000 for the campaign
period of a year. The first media is a monthly magazine and it is desired to advertise not more than one
insertion in one issue. Al least six messages should appear in the second media. The number of messages
in … third media should be between 4 & 8. The effective audience for unit message is given below
Vehicle .... audience
1
2
3
246
It is required lo find optimal allocation that would ..... total effective audience.
Solution : The linear programming formulation shall be as below :
Maximize z = 80,000 x1+ 65,000 x2+ 50,000 x3
Subject to
1,000 x1 + 750 x2+500 x3 < 25,000
x1 < 12
x2 >6
x3 < 7
x3 > 5
where x1, x2, x3 > 0
Example.: A fanner has 100 acres of farm. He can sell all the tomatoes, lettuce or radish he
produces, The price he can obtain is Rs. 1 00 per kg. for tomatoes, Rs, 0,75 a head for lettuce and Rs. 2,00
per kg. of radishes. The average .yield per acre, is 2000 kg. of tomatoes. 3000 heads of lettuce and 1000
kg. of radishes-Fertilizer is available at Rs. 0,50 per kg and the amount required per acre is 100 kg. each
for tomatoes sad lettuce and 50 kg. for reddish. Labour required for sowing, cultivating and harvesting per
acre is 5 man-hours for tomatoes and radish and 6 man-hours for lettuce. A total of 400 man days of
labour are available at Rs, 20 per man day. Formulate the problem as a Linear Programming model to
maximise the farmer's total profit.
Solution : Let x1 acres of farm is used for tomtoes cultivtion, x2 acres for acres for lattice and x3
acters for radish, then the total salve will be :
Corp Acres Yield Total yield Rate per unit Total sales
per acre
Tomato x1 2000kg. 2000 x1 Rs. 1.00 per kg Rs. 2000 x1
Lettuce x2 300 heads 3000 x2 Rs. 0.75 per head Rs. 2250 x2
Radish x3 1000 kg 1000 x3 Rs. 2 per kg Rs. 2000 x3
Corp Acres Man days Total man cost per day Total cost
per acre day
Tomato x1 5 5 x1 Rs. 20 Rs. 100 x1
Lettuce x 6 6 x2 Rs. 20 Rs. 120 x2
Radish x3 5 5 x3 Rs. 20 Rs. 100 x3
Example : A city hospital has the following minimal daily requirements for nurses :
Period Clock Time (24 hours day) Minimal Number of Nurses required
1 6 A.M.-10 A.M. 2
2 10 A.M.-2 P.M. 7
3 2P.M.-6P.M. 15
4 6 P.M.-10P.M. 8
5 10P.M.-2A.M. 20
6 2A.M.-6A.M. 6
Nurses report to the hospital at the beginning of each period and work for 8 consecutive hours. The
hospital wants to determine the minimal number of nurses to be employed so that there will be sufficient
number of nurses available for each period. Formulate this as a Linear Programming problem by setting
up appropriate constraints and objective function.
Solution : Let x1, x2, x3, X4, x5 and xe nurses are employed in period 1, 2, 3, 4, 5 and 6 respectively.
So objective function is to minimize the number of nurses
Mininze Z = x1 + x2 + x3 + x4 + x5 + x6
Subject to
In the first period x1 nurses are new and x6 nurses employed in 6th period are still on duty. So
x1 +.......... ..........x6 > 2
x + x2 >7
248
Graphic Method
The following steps are considered :
(1) Formulate the appropriate Linear Programming problem
(2) Construct graph for all the structural constraints. Convert each inequality into equality for each
equation and select two points and plot them on the graph and connect by an appropriate line.
(3) After drawing the graph for each inequality constraints with their feasibility region determine
the common region of all the constraints including non-negativity restrictions. It is known as common
feasible region or area. All the points in this area represents a solution to the problem. This area lies in the
first quadrant of the graph because of non-negativity restrictions For less than or equal to and less than
constraints the feasible area is on or below these lines and for greater than or equal to and greater than
constraints, the feasible area will be on or above these lines.
(4) The last step is tracing the point from the common feasible region which optimises the objective
function. The optimal solution lies in the corner points. Therefore optimal solution can be evaluated at
various corner points.
Example : A factory manufactures two articles A and B. To manufacture the article A, a certain
machine has to be worked for 1.5 hours, and in addition a craftsman has to work for 2 hours. To
manufacture the Article B, the machine has to be, worked for 25 hours and in addition the craftman has to
work for i.5 hours. In a week the factory can avail of 80 hours of machine time and 70 hours of craftsman
time. The profit on each article A is Rs. 5 and on each article B is Rs. 4. if ail the articles produced can
be sold away, find how many of kind should be produced to earn the maximum profit per week.
Solution:
Step I :
Formulate the Linear Programming problem. Let us take
x1 = number of units of article A
x2 = number of units of article B
Maximise P – 5 x1 + 4x2
Subject to
1.5 x1+ 2.5 x2 < 80
2 x1 + 1.5 x2 < 70
x1, x2 >0
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Step II
We construct the graph by drawing a horizontal and verticle axis which are represented by the x1
axis and x2 axis in the Cartesian plane. Since any points which satisfies the conditions X1 > 0 and x2 > 0
lies in the first quadrant only and our explanation will also be restricted to the points of the first quadrant
only.
Now the inequalities are graphed taking them as equalities e.g., the first constraint 1.5
x1 + 2.5x2 < 80 will be graphed as 1.5 x1 + 2.5 x2 = 30, and the second constraint 2x1 + 1.5x2 < 70 as
2x1 + 1.5x2 = 70 and the third constraint x1, x2 > 0, merely restricts the solution to non-negative values.
Further since the functions to be graphed are linear, we need to plot only two points for each
constraint. Thus to graph each constraint, we arbitrarily assign a value to KI and determine the
corresponding value of x2. The procedure is then repeated for another pair of values for the same
constraint. Then for the first constraint we have two such points as N (0, 32) and Q (53.3, 0) which upon
joining represents
1.5 x1 + 2.5 x2 = 80
Similarly, converting the inequality into equality 2 x1 + 1.5 x2 =70 , we can obtain point R (0, 46.7)
and S (35, 0) and draw graph for 2x1 + 1.5 x2 < 70.
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Step III
The feasible region is the area of the graph which contains all pairs of values that satisfy all the
constraints. In other works, feasible region will be bounded by the two areas, and the two lines
1.5 x1 + 2.5 x2 = 80, 2 x1 + 1.5 x2 = 70, and will be the common area which falls to the left of these
constraint equations as both the constraints are of the 'less than equal to' type
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Step IV
After locating the feasible area consider the corner points of this area which are O, N, T and S Let us
evaluate the objective function at these corner points.
The optimal solution is that corner point for which the objective function has the largest value. Thus
the optimal solution to the present problem occurs at the point T = (20,20) where x1 = 20 and x2 = 20 with
the objective function value of Rs. 180.
Therefore the company should manufacture 20 units of article A and 20 units of article B per week
to maximise profits.
Example : A firm makes two types of furniture :.chairs and tables. The contribution for each
product as calculated by the accounting department is Rs, 20 per chair and Rs. 30 per table. Both products
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are processed on three machines M1, M2 and M3. The time required in hours by each product and total
time available! hours per week in each machine area follows
Machine Chair Table Available time
M1 3 3 36
M2 5 2 50
M3 2 6 60
How should the manufacturer schedule his production in order to maximize contribution.
Solution : Assuming firm decides to make x1 chairs and x2 tables, the objective function with
constraint will be :
Maximizing P = 30 |x1+30| x2
Subject to 3 x1+3 x2| < 36
5 x1 + 2 x2 < 50
2 x1 + 6 x2 < 60
x1 + x2 < 0
1t shows that corner point of common feasible regions are A(0, 10), G(3, 9) H(26/3, 10/3) and F (10,
0), but optimal solution occurs at (3, 9) where P is maximum P = Rs. 330.
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Example : A company sells two different products A and B. The company makes a profit of Rs. 40
and Rs. 30 per unit on both products. The two products are produced by a common production process
and are sold in two different markets. The production process has -a capacity of 30,000 man-hours. It
takes 3 hours to produce one unit of A and one hour to produce one unit of B The market has been
surveyed and company officials found out that the maximum units sold for product A and B are 8,000 and
12.000 units. Subject to these limitations, the products can be sold in any combinations. Formulate the
above as a linear programming problem and solve it by graphical method.
Solution : Let us assume that company sells: x1 units of A and x2 unite of B. Then objective function
will be
Maximize P = 40 x1 + 30x2
and the constraints will be limited capacity available
3x1 + x2 < 30000 (man hours)
x1 < 8000 (sales)
x2 < 12000
x1, x2 > 0
We can draw graph for the above formulated problem.
The graph shows that corner points of feasible area are B (0, 12000), E (6000, 12000), F(8000,600),
D (8000,0) and O (0,0) but the optimal solution occurs at E (6000,12,000) where the value of P will be
Rs. 6,00000. Therefore P will be maximum when the company sells 6000 units of x and 12000 units of
X2 product. So far we have considered problems for which unique optimum solution exist. But, in actual
practice linear programming may be such that a unique optimum solution does not exist. These
exceptional cases can be, where no feasible solution exist, unbound solution, multiple solution or
degenerate solution. Let us illustrate these situations in graph.
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No Feasible Solution : In a linear programming problem it may happen that no solution is possible.
It arises where constraints are such that they do not form a common feasible region.
Example : Maximize P = 2x1 + x2
Subject to
x1 + x2 < 4
x2 < 5
x1 + x2 > 0
Solution : By drawing grapy, we find
255
Multiple solution : Another possible outcome of linear programming problem may be in the form
of multiple solution. It means that there are more than one solution which optimizes the objective
function. According to extreme point theorem if the value of objective function is same are more than one
vertex of the feasible region, all the points on the boundary of common feasible region represents the
optimum solution.
Example : Maximize P = 6x1 + 4x2
Subject to
x1 + 2x2 < 16
3x1 + 2x2 < 24
x1, x2 > 0
257
The optimal solution is at E (4, 6) where P = Rs. 48 but as D (8, 0) also P = Rs. 48. Hence it means
that all the points at E D boundary line, has got optimum solutions. Therefore the objective function is
parallel to second constraint.
Degeneracy : Tie linear programming problem may be degenerate type. Degeneracy happens when
the two constraint boundary, where one constraint is redundant, intersect at one axis of graph, Redundant
constraint is that which is not affecting the feasible region in any way. in this situation, there can be two
possibilities either optimal solution exist or does not exist. If If exists, the solution may be degenerate or
non-degenerate.
Example :
Maximize P = 5x1 + 4x2
Subject to
x1 + 4x2 < 28
3x1 + 2x2 < 24
4x1 + x2 < 32
x1, x2 > 0
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Solution : By drawing a grapy, we find that the lines for 3x1 + 2x2< 24 land 4x1 + x2 < 32 intersect at
x-axis where 4x1+ x2 < 32 is redundant, But optimal solution is at point H (4, 6) where P = Rs. 44,
Example 1.
Consider the problem Solving the equations
3x2 + 5x2 < 15 3x1 + 5x2 = 15
5x1+2x2 < 10 5x1+2x2 = 10
x1 = x2 > 0 ----------------
Max Z = 5x1+3x2 we get
x1.....
x3 = 2.4
Draw the boundary lines 3x1 + 5x2 = 15, 5x1 + 2x2 = 10 determine the convex region of feasible
solutions.
259
It is clear that, all the points of the shaded region constitute the area of feasible solution. But which
point would maximise the objective functions? This we have to see. The co0ordinatesof the four vertices
O, A, B, and C are (0, 0), (2, 0), (1, 2.4), (0.3). The value of the objective function at these points are 0,
10, 12.2 and 9. Clearly the maximum value is 12.2 and it occurs at the point B i.e., (1, 2.4).
2. Maximise the function 8x + 4y + 4 given that x 0, y 0, x + y – 2 0, 6x + 7y 42, 6 – x 0
and 5 – y 0.
The region of feasible solution is the shaded area shown.
260
The value of the objective function at the corners (2, 0), (6, 0), (6, 1), (2, 5) and (0, 2) are
respectively 20, 52, 58, 45 and 16.
Thus the maximum value 58 occurs at (6, 1).
3. Maximise the function 9x + 4y given that x 1, y 2 and 2x + y 8, x 1 is the region to the
right side of x – 1, y 2 is the region above the line y = 2.
261
Clearly the shaded region is the region of feasible solutions. The optimum value will occur at a
corner. Since, we have to minimise the objective function. We have to move the line
3x1 + 5x2 = K
Parallel to itself and find out where it is minimum. K is proportional to the distance from the origin
k
and so the minimum value occurs at A, A is the point (3, 2).
34
Hence the solution is
x1 = 3 x2 = 2
and the minimum value = 9 + 10 = 19
x – 2y + z = 0
1 1 1 x 45
or 1 0 1 y = 8
1 2 1 z 0
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SIMPLEX METHOD
An another mathematical technique available for determining the optimal solution of allocational
problems is the simplex method. It is just a mathematical algorithm for finding the optimal solution. This
method can be applied even if the number of variables is more than two. This technique is more logical
also. It can be used for stating mathematical conditions for different peculiar conditions such as
degenerate solution, multiple solutions, unbounded solution etc.
This method can be generalised for various allocation problems appearing in the forms of allocation
of jobs, transportation models.
It can be applied in all the conditions of linear programming problems such as maximizing the
objective function with less than or equal to type constraints, minimization with greater than or equal to
type constraints, maximization with mix type of constraints, minimisation with mix type of constraints. In
general, the algorithm required in each case in same.
All these requires (i) formation of proble, involving determination of objective function subject to
constraints, (ii) obtaining the initial basic feasible solutions, (iii) testing whether basic feasible solution so
obtained is optimal or not, (iv) improving the solution if not optimal, (v) testing again and improving till
solution is not optimal. But there are some differences in each situation. So these together with the related
concepts are explained below:
Maximizing the objective function with less than or equal to type constraints
In this type of linear programming, the following are the steps—
(i) Formulating the problem: It involves the determination of objective function to be optimized
with inequality constraints.
Example. A firm produces two products A and B requiring 3 units of iron and 2 units of coal and 2
units of iron and 3 units of coal. The selling price of A is Rs. 2.50 and of B is Rs. 2. If the firm has at the
most 25 units of iron and 30 units of coal. Formulate the problem assuming firm produces x1 of A and x2
of B.
Solution. If firm produces x1 of A and x2 of B, the objective function is to maximize total sales.
Maximize S = 2.50x1 + 2x2
subject to 2x1 + 3x2 25 (iron availability)
3x1 + 2x2 30 (coal availability)
x1, x2 0.
(ii) Converting the inequality constraints in equality constrains: Since in this type of problem, the
constraints are of less than or equal to type constraints, left hand side is less than or equal to constant
value. Each of these structural constraints is converted into equality constraint by introducing a different
variable in each constraint. Such variables are known as slack variables. These represents the unutilized
capacity. So one slack variable is added in each constraint. The number of slack variables to be
introduced is equal to number of constraints in each case. Such variables assume non-negativity
restrictions. It means if there are m constraints in the problem with n variables, then total number of
variables after introducing stock variables will be (n + m) variables. Since these are just imaginary
variables only, their objective coefficients are taken as zero. In the above example, if x3 and x1 are
introduced as the slack variables in first and second constraints, the new problem with modified
objectives function will be:
Maximize S = 2.50x1 + 2x2 + Ox3 + Ox4
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In the above table, all the feasible solutions are known as basic feasible solutions. So any solution,
with exactly m positive variables (equal to number of constraints) and satisfying both the linear structural
constraints and non-negativity restrictions, the solution is known as basic feasible solution. It may be that
a solution contains more than m positive variables satisfying both the constraints, or less than m positive
variables satisfying both the constraints, the solution is known as feasible in the first condition and
degenerate solution in the second conditions. (For details, see the peculiar conditions at the end of this
chapter).
So in case number of variables exceeds number of equations, a solution can be obtained by setting
all the excess variables as equal to zero and solving the remaining equations. The same mathematical
technique is applied in the simple method for finding a basic feasible solution is this way: put all the non-
basic variables as equal to zero and solve for basic-variables.
265
The approach in the simplex method is to obtain the different basic feasible solutions being possible
and improving each solution. Fill it is not optional. It needs preparation of a tableau for each basic
feasible solution. The tableau for this may be prepared in different forms, the form used here is as follow
which gives the initial basic feasible solutions:
Tableau 1
ct xt x1 x2 x3 x4 bt bi/xi
0 x3 2 3 1 0 25 25/2
0 x4 3 2 0 1 30 30/3
ct 2.50 2 0 0 0=0
c i – zi 2.50 2 0 0
In this tableau 1 :
(a) xi and ci denote the basic variables and their objective function coefficient respectively. So in this
tableau x3 and x4 are basic variable whose objective coefficients are zero.
(b) x1, x2, x3 and x4 denote the columnar vectors each stating the coefficient of these variables in the
constraints. If a variable is not appearing in any constraint, the coefficient is implied as zero.
(c) It denotes the constraint of each constraint which in turn is also the value of basic variables
giving the initial basic feasible solution, i.e., x3 = 25, x4 = 30.
(d) ci denotes the objective co-efficient of each variable. It will be zero for all the slack variables as
stated in the modified objective function.
(c) S = 0 is the value of objective function which is given by
S 0(25) + 0(3) = 0 or c x i i
(f) ci – zi is the net evaluation row stating the loss of profit by not producing a unit of each product
as for x1 = 2.50 states that profit is reduced by Rs. 2.50, per unit ... production is not increased. In this zi =
m
c x
i 1
i i
(iv) Fasting the initial basic feasible solution : After obtaining the initial basic feasible solution
where x3 = 25, x4 = 30 and S = 0, the next step is to test whether it is optimal or not. It required the row ci
266
– zi are negative or zero. If any of the ci – zi is positive, the basic feasible solution is not optimal and can
be improved further.
(v) Improvement of basic feasible solution : If according to fourth step, a basic feasible solution is
not optimal, then it can be further improved. It involves the replacement of one of the existing basic
variables by one non-basic variable (as the total number of basic variables must remain same).
(a) It requires the determination of outgoing basic variable and incoming non-basic variable. The
variable which has the highest opportunity profit loss, i.e., the most positive ci – zi is the entering variable.
The column corresponding to it is known as key column or point column. It is x1 is tableau 1 as shown in
Tableau where ci – zi is most positive, i.e., 2.50. It is followed by dividing the constant of each
constraints, i.e., bi by corresponding variable coefficient of key column, i.e., xi in a separate column
named as bi/xi on the right of the tableau 1. This gives bi/xi being equal to 25/2 for first row and 30/3 for
second row.
The least positive of these denotes the outgoing basic variable representing key row or first row. It is
always taken as least positive with a view to satisfy constraints. The element where key row and key
column intersect is known as key element, i.e., 3 in the Tableau 1.
(b) Replacing the incoming variable in place of outgoing variable : It involves making the entering
variable as basic and outgoing as the non-basic. It is known as pivoting. It involves Gaussian elimination
method (As such, it has been ignored, and as simplex method is applied). It can be obtained in the way
shown in Tableau 2.
1. Divide all the elements of key row by key element including bi, i.e., 3/3, 2/3, 0/3, 1/3 and 30/3.
2. For all other elements of the xi and bi, the modified value is given by subtracting the product of
corresponding key row and key element being divided by key element from the corresponding element. In
other words:
corresponding key row × corresponding key column
New element = Old element
key element
For example in Tableau 2 :
3 2
New value of x1 = 2 – =0
3
2 30
b1 = 25 – =5
3
This transformation results in shifting of identity matrix to x1 instead of x4 resulting in x1 and x3 will
be basic variables in Tableau 2 instead of x3 and x4.
Tableau 2
ct xt x1 x2 x3 x4 bt b1/x1
0 x2 0 5/3 1 –2/3 5 3
ct 2.50 2 0 0 p = 25
c t – zt 0 1/3 0 –5/6
267
(vi) Testing the new basic feasible solution: This tableau 2 gives an another basic feasible solution
as x1 = 10, x3 = 5 where P = 2.50 (10) + 0(5) = 25. It is followed by testing this basic feasible solution in
the same way as explained in step (iv). Apply it again as shown in Table 2, one of ci – zi, i.e., 1/3 is again
positive so this basic feasible solution is also not optimal.
(vii) Improving the new basic feasible solution: If the new basic feasible solution is also not optimal,
improve this solution by applying step (v) As shown in Table 2, x3 is the entering variable being most
positive ci – zi and x3 is the outgoing variable having least positive bi/xi, i.e., 3.
Tableau 3
ct xt x1 x2 x3 x4 bt b1/x1
2 x2 0 1 3/5 –2/5 3
ct 2.50 2 0 0 p = 26
c t – zt 0 0 –1/5 –213/15 –
According to this table 3, the new basic feasible solution is x1 = 8, x2 = 3, x3 = 0, x4 = 0 and value of
objective function P = 8(2.50) + 3(2) + 0(0) + 0(0) = Rs. 26.
Testing this new basic feasible solution shows that all the ct – zt are negative or zero. So this solution
is optimal and optimized value of objective function is Rs. 26.0.
So some of the important features of simplex method are as follows:
1. Each tableau gives a basic feasible solution with m basic variables and n non-basic variables.
Each successive tableau involve the replacement of a non-basic variable by a basic are giving a
different basic feasible solution.
3. Each new basic feasible column often improves the value of objective function.
4. Usually optional solution is obtained after introducing all the primary variables as basic variables.
Tableau 4
ct xt x1 x2 x3 x4 x5 x6 bt b1/x1
m x5 3 5 –1 0 1 0 180 180/5
m x6 4 6 0 –1 0 1 220 220/6
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ct 1.50 .70 0 0 m m c=
400m
ci – zi 1.50–7m .70–11m m m 0 0
So it shows that x3 = 180 and x6 = 210 where c = 180 (M) + 220 (M) = 400 M which is very large.
(iv) Texting the basic feasible solution: After obtaining basic feasible solution, next is testing of
optional solution whether it is optimal or not. It involves determining ci – zi for each variables in the same
way as explained in case of maximisation. In this case each ci – zi represents the opportunity cost change
of including each variable. So if all the ci – zi are positive or zero, the value of objective function can not
be reduced further, so that basic fesible is also optimal. But if any of the ci – zi is negative, then value of
objective function can be reduced further, so that basic feasible is not optimal solution. So in the Tableau
4, the basic feasible solution is not optimal as ci – zi. For x1 and x2 are negative.
(v) Improving the basic feasible solution: If the basic feasible solution is not optimal as stated in the
previous step, it can be improved by replacing a basic variable by a non-basic variables. The step
involved are as follows:
(a) Determining key column and key row: The variable which has most negative ci – zi, i.e., highest
opportunity cost reduction possibility is the key column and entering variable. The key row will
be this which has least positive ratio of bi/xi (as in the case of maximisation). This will give
outgoing variable. In the Tableau 4, x2 is the key column as (0.7, 11M) is the most negative, so it
is the entering variable x5 is the outgoing variable as bi/xi is least positive i.e., 36 in this case. So
x5 is the outgoing variable as shown in Tableau 4.
(b) Replacing this basic variable by a non-basic variable: This involves obtaining modified value
given by the same method as explained in the case of maximisation. It is given in Tableau 5.
Tableau 5
ct xt x1 x2 x3 x4 x5 x6 bt b1/x1
(vi) Testing the new basic feasible solution: Applying the step (iv) again, the new basic feasible
solution, x1 = 0, x2 = 36, x3 = 0, x4 = 0, x5 = 0 and x6 = 4 where c = 25.2 + 4M is again not optimal as ci –
zi for x1 as well as x5 are negative.
(vii) Improving the new basic feasible solution: Since the basic feasible solution is not optimal,
improving it by steps (v), the new tableau 6 is as follow:
Tableau 6
ct xt x1 x2 x3 x4 x5 x6 bt b1/x1
ct 1.50 .70 0 0 m m
This problem is known as primal problem involving maximising of objective function subject to
“less than of equal to” type inequality constraints.
If we are interested in knowing how we should price one hour on machine 1 and 2 and man hour
than it requires another formulation of problem from the given problem. The objective will be to
minimise the price keeping in view the given constraints so that the total value of resources sequired for
producing a unit of each product is greater than or equal to the price of each product. Therefore two
important considerations should be taken care of:
(i) Determining the minimum price of each resource
(ii) The sum of the value of resources required for producing a unit of each product is greater than
or equal to the price of each product. For example in the above stated problem, one unit of
product A requires 10 hours on machine 1 and 5 hours on machine 2 and one man hour, their
value taken together must be greater than or equal to Rs. 23. Similarly one unit of product B
requires 6 hours on machine 1, 10 hours on machine 2 and 2 man hours. So the total value of
these must be greater than or equal to Rs. 32.
Let us assume price of one hour on machine 1 is Rs. y1, on machine 2, Rs. y2 and of man-hour, Rs.
y3.
The problem is stated as follows:
Minimise C = 2500y1 + 2000y2 + 500y3
Subject to 10y1 + 5y2 + y 23 (Product A)
6y1 + 10y2 + 2y3 32 (Product B)
The non-negativity conditions remain unchanged because each is representing price of resources.
y1, y2, y3 0
The optimisation of this dual will give the minimum price of each resource known as shadow price
or marginal worth., This derived problem is known as dual of the primal problem.
The basic features of dual are as follows:
(i) If the primal problem’s objective is to maximise, its dual’s objective will be to minimise and
vice-versa.
(ii) The objective coefficients of the primal appears on the right hand side of the inequality
constraints becomes the constraints of dual.
(iii) The constraints of the primal appears on the right hand side becomes the coefficients of the
objective function of dual.
(iv) The sign of equality of constraints changes from primal to dual.
becomes
and becomes
(v) The input output-coefficients of the dual are transpose of the input-output coefficients of the
primal.
The solution given by dual has a number of managerial applications. As in the above stated problem,
the management will be able to know at which price it should acquire more resources in the given price
condition of the products. Not only this it will enable the management in determining the minimum price
at which it may rent out the excess capacity. Moreover, dual often simplifies the linear programming
problem by reducing the number of constraints so that the tables required to solve the problem will be
less.
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Example. The manager of a company which applies office furniture, has asked you to prepare a
profit maximising schedule for their production of desks. This company sells a basic line of 4 desks (Type
A, B, C and D) to local distributors at the price given below:
Desk Type Selling Price Production Cost
(Rs.) (Rs.)
A 32 20
B 50 30
C 56 38
D 74 34
The desks production is a two step-process, each desk is first constructed in the carpentry shop and
is next sent to the flashing shop, where it is varnished, waxed and polished. The number of man hours of
labour required in each shop is as follows:
Desk Type Selling Price Production Cost
A 4 1
B 9 1
C 7 3
D 10 40
Because of the limitations in capacity of the plant, no more than 600 man hours can be expected in
the carpentry shop and 4000 in the finishing shop in a month.
(i) Build up a line programming model to the problem.
(ii) Write down its dual. Do not solve it.
Solution. Let the company produces x1, x2, x3 and x4 desks of type A, B, C and D respectively. It is
given that profit per desk of type A, B, C and D are Rs. 12, Rs. 20, Rs. 18 and Rs. 40 as profit is selling
price minus production costs.
The company objective function will be as follow:
Maximize P = 12x1 + 20x2 + 18x3 + 40x4
Subject to 4x1 + 9x2 + 7x3 + 10x4 6000
x1 + x2 + 3x3 + 40x4 4000
x1, x2, x3, x4 0
(ii) Let the price of one hour of carpentry is Rs. y1 and of finishing is Rs. y2, then the objective
function with constraints becomes:
Minimize C = 6000y1 + 4000y
Subject to 4y1 + y2 12 (Type A)
9y2 + y2 20 (Type B)
7y1 + 3y2 18 (Type C)
10y1 + 40y2 40 (Type D)
x1, x2 0
This is dual of the primal problem.
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Tableau 7
ct xt x1 x2 x3 x4 x5 bt
0 x5 0 0 0 –1/5 1 100
ct 23 32 0 0 p = 7700
c i – zi 0 0 –1 –13/5 0
Similarly in net evaluation row elements corresponding to the slack/surplus variables the final
tableau of dual gives the optimal solution of the primal. As shown in tableau 2, ci – zi, corresponding to
slack variables. y4, y5 are 1300/7 and 750/3 which is the optimal solution of the primal i.e., x1 = 1300/7, x2
= 750/7. Similarly in net evaluation row element corresponding to prime variables of the primal gives the
value of slack/surplus variables of the dual. As in tableau 1, ci – zi, corresponding to primary variables x1,
x2 are zero. Therefore the stock variables of the dual y2 and y4 are also equal to zero. In the tableau 2 in ci
– zi corresponding to primary variables y1, y2 and y3 are 0, 0 and 100 respectively, hence the value of
surplus variables x3, x4 and x5 of the primal are 0, 0 and 100 respectively.
All though both these optimal solution have altogether different interpretations, but optimized value
of the objective functions of both primal and dual is equal to Rs. 7,700.
Tableau 8
ct yt y1 y2 y3 y4 y5 y6 y7 bt
So the important relationship between the solution of the primal and dual are as follows:
(i) The optimized value of the objective is same both for the primal and dual.
(ii) The net evaluation row elements of the primary variables of the primal is the optimized value of
the surplus/slack variables of the dual.
(iii) The net evaluation row elements of the primary variables of the dual is the optimized value of
the slack/surplus variables of the primal.
(iv) The net evaluation row elements of the slack/surplus variables of the primal gives the optimized
of the solution dual.
(v) The net evaluation row elements of the surplus/slack variables of the dual gives the optimizing
solution of the primal.
Example 1. 3x1 + 5x2 15
5x1 + 2x1 10
x1, x2 0
Maximize Z = 5x1 + 3x2. Introduce slack and surplus variables. Then this will read
3x1 + 5x2 + x3 = 15
5x1 + 2x2 + x4 = 10
Y1, Y2....etc., will be used to denote the 1st, 2nd, 3rd....etc., columns, b denotes column on the right.
CB Basis Y1 Y2 Y3 Y4 b
0 x3 3 5 1 0 15
0 x4 5 2 0 1 10
Ci 5 3 0 0
CB Basis Y1 Y2 Y3 Y4 b
15
0 x3 3 5 1 0 15 =5
3
10
0 x4 5 2 0 1 10 =2
5
Ci 5 3 0 0
Zi 0 0 0 0
i 5 3 0 0
Now in the row listed as i, 5 is the largest. Hence x1 is the entering variable. In the column x y1
occur 3 and 5 we divide the elements of b by the corresponding elements of Y1. Then we get 5 and 2
written as the last column. Among these find the minimum. It is 2. So x4 is the departing variable.
The key element is 5. We make the transformations
R2 R2/5
and then R1 R1 – 3R3
Doing this we get
CB Basis Y1 Y2 Y3 Y4 b
0 x3 0 3.8 1 –0.6 9
5 x1 1 0.4 0 0.2 2
Ci 5 3 0 0
Zi 5 2.0 0 1.0
i 0 1 0 –1
CB Basis Y1 Y2 Y3 Y4 b
Ci 5 3 0 0
Zi 5 3 .25 .82
i 0 0 –.25 –.82
Now the last row i is –ve for all columns. Consequently we have obtained an optimal solution. The
solution is
x1 = 1.05 and x2 = 2.368
Max Z = 5 × (1.05) + 3 × (2.368)
= 12.315
Example 3. Max Z = 3x1 + 5x2 + 4x3 such that
2x1 + 3x2 8
3x1 + 2x2 + 4x3 15
2x2 + 5x2 10
x1, x2, x3 0
Adding slack and surplus variables the problem can be expressed as
2x1 + 3x2 + 0x3 + x4 + 0x5 + 0x6 = 8
3x1 + 2x2 + 4x3 + 0x4 + 0x5 + 0x6 = 15
0x1 + 2x2 + 5x3 + 0x4 + 0x5 + x6 = 10
CB XB Y1 Y2 Y3 Y4 Y5 Y6 b
0 x4 2 3 0 1 0 0 8
0 x5 3 2 4 0 1 0 15
0 x6 0 2 5 0 0 1 10
Ci 3 5 4 0 0 0
Zi 0 0 0 0 0 0
i = 3 5 4 0 0 0
Ci – Zi
Entering Departing
277
variable variable
8 15 10 8
Min , , =
3 2 2 3
[By dividing the elements of column b by the elements of column Y3]
Hence x4 is the departing variable.
Now by row, transformations reduce
3 1 Perform: R1 R1 / 3
2 to 0 and then perform R3 R2 2 R1
2 0
R3 R2 2 R1
We get,
CB XB Y1 Y2 Y3 Y4 Y5 Y6 b
5 x2 2/3 1 0 1/3 0 0 8/3
0 x5 5/3 0 4 –2/3 1 0 29/3
0 x6 –4/3 0 5 –2/3 0 1 14/3
Ci 3 5 4 0 0 0
Zi 10/3 5 0 5/3 0 0
i = –1/3 0 4 –5/3 0 0
Ci – Zi
Ci 3 5 4 0 0 0
11
Here is the largest. Hence x1 is the entering variable
15
8 2 89 41 14 4
Min , ,
3 3 15 15 15 15
89 7 89
4, ,
41 2 41
[ in considering the minimum the negative element is not to be taken.]
This occurs in the 3rd now. Hence x5 is the departing variable. We reduce
2
3
0
41 to 1 by the row transformation
15
0
4
15
15
R2 R
41 2
2
Then R1 R1 – R 2
3
4
and R2 R3 + R.
15 2
Performing these transformations we get the simplex table.
Step IV
CB XB Y1 Y2 Y3 Y4 Y5 Y6 b
15 10 8 50
5 x2 0 1 0 –
41 41 41 41
2 15 12 89
3 x1 1 0 0 – –
41 41 41 41
6 4 5 62
4 x3 0 0 1 –
41 41 41 41
Ci 3 5 4 0 0 0
45 11 24
Zi 3 5 4
41 41 41
45 11 24
i = Ci–Zi 0 0 0 – – –
41 41 41
279
CB XB Y1 Y2 Y3 Y4 b
0 x3 1 1 1 0 4
0 x4 1 –1 0 1 2
Ci 3 2 0 0
Zi 0 0 0 0
i = 3 2 0 0
Ci – Zi
The respective Zi are obtained by multiplying the elements of the column CB and the columns of Y.
Among the values of Ci – Zi we find 3 is the maximum. It occurs in the first column. So Y1 is the entering
vector. We mark the column Y1 by an upward arrow. Now we have to find the outgoing vector.
280
4 2
Divide the elements of the column b by the element of Y1 and determine the minimum. Min ,
1 1
= 2. This occurs in the 2nd row. So x is the departing variable. The variable Y4 is the departing vector.
This is marked by a downward arrow.
Now we should reduce Y1 to the form of Y4, i.e.,
1 0
to
1 1
by means of row transformation.
Perform, the transformation R1 R1 – R2.
We get
CB XB Y1 Y2 Y3 Y4 b
0 x2 0 2 1 –1 2
3 x1 1 –1 0 1 2
Zi 3 –3 0 3
Ci 3 2 0 0
j 0 5 0 –3
2 2
Dividing the elements of b we get ,
2 1
i.e., {1, –2}. But in considering the minimum negative elements will not be taken. So 1 is to be
taken. It occurs in the 1st row. So x3 is the departing variable, i.e., Y3 is the departing vector.
2 1
We must therefore reduce Y2 to the form 0 by row transformations
1
R1
Perform R1
2
and then perform R2 R2 + R1
Now we get
CB XB Y1 Y2 Y3 Y4 b
1 1
2 x2 0 2 – 1
2 2
281
1 1
3 x1 1 0 3
2 2
5 1
Zi 3 2
2 2
Ci 3 2 0 0
5 1
j 0 0 – –
2 2
Now in the last row j all the element are –ve, consequently we have obtained the optimal solution.
The solution is therefore
x1 = 3, x2 = 1, x3 = 0 and x4 = 0
Z = 3x1 + 2x2 = 3 × 3 + 2 × 1 = 11
Hence the maximum value is 11.
Example 4. Maximise Z = 3x1 + 4x2 + x3 + 7x4
subject to 8x1 + 3x2 + 4x3 + x4 7
CB Basis y1 y2 y3 y4 y5 y6 y7 b
0 x5 8 3 4 1 1 0 0 7
0 x6 2 6 1 5 0 1 0 3
0 x7 1 4 5 2 0 0 1 8
282
Cj 3 4 1 7 0 0 0
Zj 0 0 0 0 0 0 0
j = 3 4 1 7 0 0 0
C j – Zj
Here in the row j, is the largest. So x4 is the entering variable. Divide the elements of col. b by
those of y4.
7 3 8 3
Min , , = . This corresponds to the 2nd row.
1 5 2 5
1 0
So x4 is the departing variable. Now we should convert y4 = 5 to the form y6 = 1 by row
2 0
operations.
R
Perform R2 2
5
then R1 R1 – R2
R3 R3 – 2R1
CB XB y1 y2 y3 y4 y5 y6 y7 b
38 9 19 1 32
0 x5 0 1 – 0
5 5 5 5 5
2 6 1 1 3
0 x4 1 0 0
5 5 5 5 5
1 8 23 2 34
0 x7 0 0 – 1
5 5 5 5 5
Cj 3 4 1 7 0 0 0
14 42 7 7
Zj 7 0 0
5 5 5 5
1 22 2 7
j – – 0 0 – 0
5 5 5 5
32 38 3 2 34 1 32 3 32
Min. , , = Min. , , 34 = . So x is the departing variable. We
5 5 5 5 5 5 38 2 48
therefore convert
38 / 5 1
2 / 5 into 0 by row transformations.
1/ 5 0
283
5
R1 R 1 ×
38
R2 R2 – dR1
R3 R3 – dR1
CB XB y1 y2 y3 y4 y5 y6 y7 b
9 1 5 1 16
3 x1 1 0 – 0
38 2 38 38 19
21 1 4 5
7 x4 0 0 1 – 0
19 19 19 19
59 9 1 15 126
0 x7 0 0 – – 1
38 2 38 38 19
Cj 3 4 1 7 0 0 0
321 3 1 1
Zj 3 7 0
38 2 38 38
169 1 1 1
j 0 – – 0 – – 0
38 2 38 38
Since all j = Zj – Cj are negative an optimum basis feasible solution has been attained. The solution
is
19 5
x1 = , x2 = 0, x3 = 0, x4 =
16 19
48 35 83
Max. Z = 3x1 + 4x2 + x3 + 7x4 = +0+0+ =
19 19 19
Example. The cost of producing x units of TV sets by a monopolist is given by
x2
TC 3 x 100 and the demand function is given by x = 75 – 3p (where p is price). If a tax
25
of k per set is imposed by the government, determine the monoplist’s output and price under the
new situation. Find the value of k that maximizes tax revenue to the government.
Solution. Let CN denote the new cost after a tax of k per set is imposed. Then
x2
CN = C + kx = 3 x 100 kx
25
x x2
R = px = 25 – x 25 x –
3 3
284
x2 x2
PN = R – CN = 25 x – – – 3 x – 100 – kx
3 25
28 2
= – x 22 x – kx – 100
75
dPN
For maximum profit, we set 0, That is,
dx
56 75
– x 22 – k 0 x (22 – k )
75 56
d 2 PN 56
Also, 2
– 0
dx 75
75
Therefore, profit is maximum at x = (22 – k ) and price is given by
56
25 425 25
p = 25 – (22 – k ) k
56 28 56
75
T = kx (22k – k 2 )
56
dT d 2T
0 and 0
dk dk 2
dT 75
Setting 0 gives (22 – 2k ) 0 k 11
dk 56
d 2T 150
Also 2
– 0
dk 56
Example. The demand functions of two commodities, X1 and X2, are x1 = p1–14 p20.6 and
x2 = p10.5 p2–1.2 respectively, where x1 and x2 are the quantities demanded of X1 and X2 respectively,
and p1 and p2 are their respective prices. Find the four partial elasticities of demand and
determine whether the commodities are competitive or complementary.
Solution. We have
x1 x1
–1.4 p1–2.4 p20.6 , 0.6 p1–1.4 p2–0.4
p1 p2
x2 x2
0.5 p1–0.5 p2–1.2 , –1.2 p10.5 p2–2.2
p1 p2
p1 x1 p
11 –1.41 0.6 (–1.4 p1–2.4 p20.6 ) –1.4
x1 p1 p1 p2
p2 x1 p
12 –1.42 0.6 (0.6 p1–1.4 p2–0.4 ) 0.6
x1 p2 p1 p2
p1 x2 p
21 0.5 1 –1.2 (0.5 p1–0.5 p2–1.2 ) 0.5
x2 p1 p1 p2
p2 x2 p
22 0.5 2 –1.2 (–1.2 p10.5 p2–2.2 ) –1.2
x2 p2 p1 p2
Since 12 and 21 are both positive, we conclude that X1 and X2 are competitive.
Example. A production function is given by Q = f(L, K) = 27L2/3 K1/3, where L is labour and K
is capital.
Solution. (i) Differentiating the production function Q partially with respect to L gives
Q
MPL = 18L–1/3 K 1/3
L
( MPL ) –6 L–4/3 K 1/3 0,
L
which shows that the marginal product of labour decreases as L increases while K is held fixed.
Similarly,
Q
MPK = 9 L2/3 K –2/3
K
and ( MPK ) –6 L2/3 K –5/3 0,
K
which shows that the marginal product of capital decreases as K increases while L is held fixed.
(ii) We have f(L, K) = 27(L)2/3 (K)1/3 = 272/3 L2/3 L1/3 K1/3
Hence Q = f(L, K) is homogeneous of degree 1 and the production function exhibits constant
returns to scale.
(iii) If each factor is paid a price equal to its marginal product, then we have
Q Q
L K = L(18 L–1/3 K1/3) + K (9L2/3 K–2/3)
L K
= 27 L2/3 K1/3 = Q,
Example. For the Cobb-Douglas production function Q = AKL1–, find the elasticity of
Q Q
substitution by using the formula = L 2 K .
Q
Q
LK
287
Q Q
Solution. We have (1 – ) AK L– , AK –1 L1–
L K
2Q
and (1 – ) AK –1 L–
LK
Q Q
L K (1 – ) AK L– AK –1 L1–
1.
2Q AK L1– (1 – ) AK –1 L–
Q
LK
Example. Find the marginal rate of technical substitution and the elasticity of substitution for the
following production function:
1
–
x = f(l, k) = k – (1 – )l –
(where x is the total output obtained by using l and k units of labour and capital respectively)
x 1 1
– –1
MPl = – k – (1 – )l – (1 – )(– )l – –1
l
–1–
= (1 – )l – –1 k – (1 – )l –
x 1 1
– – –1
MPk = – k (1 – )l
–
(– )k – –1
k
–1–
= k – –1 k – (1 – )l –
1
MPl 1 – k
r = MRTS =
MPk l
288
r d ( k / l)
=
k / l dr
1– k
Now dr = ( 1) d (k / l)
l
1
1 – k
l d ( k / l) 1 .
=
k 1 – k 1
( 1) d (k / l)
l
Example. Use the method of Lagrange multipliers to find the maximum value of
f(x, y) = x y
Fx = y – = 0
Fy = x – = 0
F = –x – y + 1000 = 0
The first two equations yield y = and x = . Therefore x = y. Substituting in the third equation,
we obtain
Thus the only critical point is x = 500, y = 500 (since x = y). The second-order sufficient
condition for maximization requires that the Hessian determinant
0 gx gy
gx Fxx Fxy
gy Fxy Fyy
which are all constants and hence their values remain the same at x = 500 and y = 500.
0 1 1
1 0 1 20
1 1 0
Thus the second-order condition is satisfied. Hence f(x, y) is maximum when x = 500 and
y = 500, and the maximum value is f (500, 500) = 2,50,000.
Example. A monopolist charges different prices in the two markets where his demand functions
are x1 = 21 – 0.1p1 and x2 = 50 – 0.4p2, p1 and p2, being prices and x1 and x2 quantities demanded.
His total cost function is TC = 10x + 2000, where x is total output. Find the prices that the
monopolist should charge to maximize his profit. Also, verify that higher price will be charged in
the market having the lower price elasticity of demand.
Solution. Let R1 and R2 denote the revenue functions in the two markets, then
= 2710 – p1 – 4p2
P = R1 + R2 – TC
P P
= 22 – 0.2p1 and 54 – 0.8 p2
p1 p2
P P
For maximum profit, it is necessary that = 0 and = 0. That is,
p1 p2
290
2 P 2P 2 P
Also, –0.2, 0, –0.8
p12 p1 p2 p22
At (110, 67.5), A = –0.2 B = 0, C = –0.8. Thus AC – B2 = 0.16 > 0, and since A < 0, we
conclude that profit is maximum when the price charged in the market I is 110 and that in the
market II is 67.5.
We’ll now show that the price elasticity of demand in the market I is less than the price elasticity
of demand in the market II. If 1 and 2 are the price elasticities of demand in markets I and II
respectively, then
p1 d x1 110 11
1 = – – (–0.1) ....(1)
x1 d p1 [21 – 0.1(110)] 10
p2 d x2 67.5 27
and 2 = – – (–0.4) ...(2)
x2 d p2 [50 – 0.4(67.5)] 23