UNIT ONE

LINEAR EQUATIONS AND

THEIR INTERPRETATIVE APPLICATIONS

Unit Objectives

After a thorough study of this unit, you will be able to:

 Understand basic concepts of linear equations and functions.

 Develop acquaintance of graphic representation of linear equations.
 Compute and formulate slope and equation of a line.
 Systematically apply the linear equation algebra and geometry in solving real world
situations.

Unit Introduction

In the face of changing business environment, organizations encounter diverse set of

problems and challenges as well as prospects. Consequently, managers are expected to make

appropriate decisions and take actions that enable the organization take advantages and

overcome difficulties. In making such decisions and actions, one may be required to apply

mathematical tools and quantitative techniques. Correspondingly, it is not uncommon to face

so many cases demanding the application of mathematics of linear algebra and geometry in

making a viable decision that enhance the achievement of organizational objectives. In other

words, there are various subjects of decision of which relation to one another is at least

approximated and explained by linear equations, for instance, sales volume can be linearly

related to advertisement expense. The same holds true between output level and number of

employees engaged on some activity and cost of production. Furthermore, demand for and

supply of a given product can be well approximated and explained by a linear equation. In

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such real business instances, the concept and interpretative application of linear equations

have a considerable importance.

Cognizant to the above fact, we need to be well acquainted with the fundamentals of linear
equations algebra and geometry as related to its business application. This chapter, therefore,
is dedicated to our study of linear equations. To this end, the unit is organized in to two
sections. In the first section, you will learn about basic concepts of linear equations and their
graphic representation and then you will proceed to the application of mathematical concepts
of linear equations in solving business problems.

Section One: Linear Equations, Functions and Graphs

Section Objectives:

Up on completing this section, you will be able to:

- Identify the mathematical expression for linear equations and functions.
- Plot graph of a linear equation and compute slope and distance between two
points.
- Understand three approaches of developing equation of a straight line.

Section Overview:

1.1 Basic Concepts of Linear Equations and Functions

1.2 Graph of a Linear Equation
1.3 The Distance between Two Points
1.4 Developing Equation of a Line

1.1 Basic Concepts of Linear Equations and Functions

An equation is a statement of equality, which shows two mathematical expressions are equal.
Equations always involve one or more unknown quantities that need to be solved. Among the
different types of equations, linear equation is the one that we are going to deal with in some
detail. Linear equations are equations whose terms1 are a constant times a variable to the first
power. Accordingly, equations that can be transposed to the form,

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Terms of a linear equation represent the parts of equation that are separated by plus, minus, and equal signs.

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 a1 x1+ a2 x2+ …+ an xn = c
are said to be linear equations.

Where, a1, a2, a3, … an and c are constants

x1, x2, x3, …xn are variables (unknown quantities)
a1 x1, a2x2, … an xn and c are the terms of the equation (terms of a linear
equation represent the parts separated by plus, minus, and equal signs)

As it occurs in many business application cases, a linear equation may involve two variables,
x and y, and constants a, b, and c in which case the equation relating x and y takes the form,
ax+by=c
The following are all examples of linear equations.
2x + 3y = 9, 3x – 9y + z = 23, 4y + 7.5x – 11 = 14

On the other hand, 4xy + 7x = 8 is not a linear equation because the tem 4x y is a product of a
constant and two variables. Likewise 5x 2 + 3y = 25 is not linear because of the term 5x 2
which is a constant times one variable to the second – power.

Dear student, we observe many business situations in which linear relationships arise.
Consider the following example.

Example 1.1

Assume that Ethiopian Electric Power Corporation charges Birr 0.55 per kilowatt-hour
consumed and a fixed monthly charge of Birr 7 for rent of electric meter. If y is the total
monthly charge and x is the amount of kilowatt-hours consumed in a given month, write the
equation for y in terms of x.

Solution
The total monthly charge will be, 0.55 times the number of monthly KWh consumption plus
Birr 7 for meter rent.

Thus, using the symbols given,

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 y = 0.55x + 7
The equation of this example is linear with two variable x and y. In such linear equations, we
need to note that the constants can be positive or negative, and can be fractions when graphs
of these equations is plotted it will be a straight line. This is the reason for the term equation.

Linear Functions: functional relationship refers to the case where there is one and only one
corresponding value of the dependent variable for each value of the independent variable.
The relationship between x and y as expressed by
y = 0.55x + 7.
is called a functional relationship since for each value of x (independent variable), there is a
single corresponding value for y (dependent). Thus if we write y as expression involving x
and constants x is called the independent variable, then the value of y depends upon what
value we may assign to x and as a result it is called the dependent variable. Therefore, a
linear function refers to a linear equation, which does have one corresponding value of
dependent variable for each value of the independent variable.

Exercise 1.1

Suppose that a car rent company charges Birr 65 per hour a car is rented. In addition, Birr 150
for insurance premium. Write the equation for the total amount charged by the company in
terms of the hours the car is rented.

1.2 Graph of a Linear Equation

Linear equations in two variables can be plotted on a coordinate plane with two dimensions.
Such equations have graphs that are straight lines. This means that the graph of the
relationship between the variables takes the form of a straight line. Any straight-line graph
can be sketched by plotting just two points which satisfy the linear equation and then joining
them with a straight line. Now let us further develop this approach by considering the
following example.

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Example 1.2

Sketch the graph of the equation 2y - 3x = 3.

Solution
To plot the graph, you may arbitrarily select two values for x and obtain the corresponding
values for y. Therefore, lets set x = 0. Then the equation becomes 2y – 3(0) = 3.
That is, 2y = 3
y = 3/2
This means that when x = 0, the value of y is 3/2. So, the point with coordinates (0, 3/2) lies
on the line of 2y – 3x = 3.
In the same way, let y = 0. Then the equation becomes -3x = 3.
That is, x = 3/-3 = -1.
This means, when y = 0, the value of x is -1. So, the point with coordinates (-1, 0) lies on the
line of equation 2y – 3x = 3. These two points are plotted on the coordinate plane with
horizontal “x – axis” and vertical “y-axis” as follows.

2 (0, 3/2)

(-1, 0) 1

-2 -1 0 1 2 3 4 x

Fig 1.1 Linear Equation Graph

Exercise 1.2
Find two coordinate points that satisfy the equation 3x + 4y = 24. Then, using the two
coordinate points plot the graph of the given function.

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1.3 The Distance between Two Points

The distance between two points is the length of a straight-line segment that joins the points.
To determine the length of a given segment in coordinate geometry, algebraic procedures are
applied to the x – and y coordinates of the end points of the segment. Distance on horizontal
and vertical line segments are used in the computation of the distance. Distance on a vertical
segment (also called vertical separation) is found by computing the positive difference of the
y- coordinates of the end points of the segment. Distance on the horizontal segment (also
called horizontal separation) is found by computing the positive difference of the x-
coordinate of the end points of the segment.

Thus, given two points (x1, y1) and (x2, y2), the quantity / x2 – x1 /, is called the horizontal
separation of the two points. Further, the quantity / y 2 – y1 / is the vertical separation of the
two points.

Example 1.3

Given the points A (-5, 7), B (-3, -9), C (-5, 15), D (12, 6), find the horizontal and vertical
distance of the segment,
a. AB b. AD c. BD

Solution
a. The horizontal distance (Separation) of the points A (-5, 7) and B (-3, -9) is given by
Horizontal distance = / x 2 - x1 /
= /-3-(-5)/
= /-3+5/ = 2
Vertical distance = / y 2 - y1 /
= / -9 - 7 /
= /-16/ = 16
b. Horizontal distance = / x2 - x1/
= / 12 - (-5)/
= 12+ 5/ = 17
Vertical distance AD = / y2 - y1 / = / 6 – 7 /

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 = / -1 / = 1
c. Horizontal distance BD = / x2 - x1/ = /12- (-3)/
= / 12+3/ = 15
Vertical distance BD = / y2 - y1/ = / 6- (-9)/
= / 6 + 9/ =15

Exercise 1.3

Find the vertical and horizontal separation of the following points.

a. (5, 7) and (-3, 2)
b. ( 5, - 3) and (-11, -7)
c. (6, 2) and (6, -4)
d. (3, 4) and (9, 4)
Dear student, as you recall all lines in a coordinate plane are not vertical and/or horizontal.
Hence, in case the segment is slant to any direction the actual distance between (x 1, y1) and
(x2, y2) may be calculated from Pythagoras’ Theorem, using their horizontal and vertical
separations.
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Fig 1.2 Places of Coordinates

In the above diagram, AB2 = AC2 + BC2.

That is, the distance d between point A and B is given by:
d2 = (horizontal separation) 2 + (vertical separation) 2
d2 = (x2 – x1)2 + (y2 – y1)2
d =

Example 1.4

Calculate the distance d between the points (5, -3) and (-11, -7).

Solution
d =

d =
That is, d = =

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 d = 16.5

Example 1.5

The coordinates of three cities, A, B, and C, forming a triangle are A (30, 20), B (30, 160),
and C (150, 70) in miles. What will be the total distance traveled if one goes from A to B,
then B to C, then back to A?

Solution
Total distance traveled = d = (A to B) + (B to C) + (C to A). Therefore, given the distance
formula above, the total mites raveled can be computed as follows:

d= )
d=
d = 242.8992

Exercise 1.4

Find the distance between the points given below.

a. (5, 10) and (11, 8)
b. (0, 0) and (9, 12)
c. (-2, -5) and (3, -4)
d. (4, 7) and (6, -5)

1.4 Developing Equation of a Line

We have three alternative forms of developing the equation of a straight line. These are,
slope-intercept form, slope-point form, and two-point form. Let us consider these approaches
further.

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The Slope – Intercept Form
Dear distance student, before considering slope intercept form of developing equation of a
line lets have a brief look at the concept of slope or gradient. Slope is a measure of steepness
or inclination of a line and it is represented by the letter m. the slope of a non-vertical line is
defined in several ways. It is the rise over the run. It is the change in y over the change in x.
Thus, given coordinates of two points (x1, y1) and (x2, y2)
Rise y 2  y1
Slope = m = = , Where, x1 ≠ x2
Run x 2  x1
If the value of the slope is positive, the line rises form left to right. If the slope is negative, the
line falls from left to right. If the slope is zero, the line is horizontal. If the slope is undefined
then the line is vertical.

Dear student, please consider equally ranged graph and try to find slope of any coordinates on
the graph before reading the next example.

Example 1.6
Obtain the slope of the straight-line segment joining the two points (8, -13) and (-2, 5).

Solution

Therefore, the line that passes through these two points falls downwards from left to right. On
the other hand, if the equation of a line is given, then the slope can be determined more
simply. Thus, if a liner equation is written in the form y = m x + b, “m” is the slope and “b”
is often referred as the intercept term and it is the value at which the straight line intercepts
the Y-axis.

Example 1.7

An agent rents cars for one day and charges Birr 22 plus 20 cents per mile driven.
a. Write the equation for one day’s rental (y) in terms of the number of miles driven (x).
b. Interpret the slope and the y – intercept.

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 c. What is the renter’s total cost if a car is driven 100 miles? What is the renter’s cost per
mile?

Dear student, please try to solve the above example before going to the solution!

Solution
Given fixed (constant) cost of Birr 22 = b
Slope = m = 20 cents = Birr 0.2
y = Total cost for one day rental
x = Number of miles driven
a. The equation
y=mx+b
y = 0.2x + 22

b. Interpretation
The slope, m = 20 cents (Birr 0.2) means that each additional mile driven adds 20
cents to total cost. b = Birr 22 is the fixed cost (the amount to be paid irrespective
of the mile driven). Hence, it will be the total cost when no mile is driven.
c. Total cost of driving 100 miles (x = 100)
= 0.2 (x) + 22
Total cost of the renter = 0.2 (100) + 22
= 20+22 = Birr 42
Cost per mile when x = 100 miles is given by total cost of driving 100 miles divided
by 100 miles. Putting it in equation form,

= 42 ÷ 100 = Birr 0.42

Example 1.8

Write 8x – 2y – 6 = 0 in slope intercept form and determine slope and y-intercept of the
equation. In addition, find the coordinates of x- and y-intercept.

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Solution
We proceed to isolate y with a coefficient of one on the left-hand side of the equation to
obtain;
y = m x + b form finally.
Thus, 8x – 2y – 6 = 0 is equivalent with
8x – 2y = 6
-2y = -8x + 6
-2y = -8x + 6
-2 -2 -2
y = 4x – 3
Therefore, y = 4x – 3 is an equation in the y = m x + b form that is, 4 is the slope and -3 is the
y-intercept of the line. Further, the x-intercept is found by setting y = 0. Thus, the value of x
when y=0 is,
y = 4(x) – 3
0 = 4(x) – 3 = -1
The x intercept coordinate is (3/4, 0). In the same manner, we can obtain the y-intercept
coordinate is (0, -3).

Exercise 1.5

It costs Birr 2500 to set up the presses and machinery needed to print and bind a paper back
book. After setup, it costs Birr 2 per book printed and bound.
a. Write the equation for the total cost of making a number of books
b. State the slope of the line and interpret it.
c. State the y-intercept of the line and interpret it.

The Slope – Point Form

In this form, we will be provided with the slope and a point on the line, say (x 1, y1). Then, we
determine the intercept from the slope and the given point and develop the equation.

Accordingly, the expression we need further is the equation that is true not only for the point
(x1, y1) but also for all other points say (x, y) on the line. Therefore, we have points (x 1, y1)

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and (x, y) with slope m. The slope of the line is y - y 1 / x - x1 and this is equal for all pair of
points on the line. Thus, we have the following formula for slope-point form:

Alternatively,

y – y1 = m (x – x 1)

Example 1.9

Find the equation of a line that has a slope of 3 and that passes through the point (3, 4).

Dear student, please try to solve the example before you go to the solution part.

Solution
Given m = 3 and (x1, y1) = (3, 4). By substituting these values in the formula
y – y 1 = m (x – x 1)
We will obtain y – 4 = 3 (x – 3).
Then, y–4=3x–9
y=3x–9+4
y = 3 x – 5.
In another approach, y = m x + b where (x, y) = (3, 4)
y = 3x + b
4 = 3(3) + b
4=9+b
4 – 9 = b = - 5 is the y-intercept.
Thus, y = 3x – 5 is the equation of the line.

Exercise 1.5

It costs Birr 2500 to set up the presses and machinery needed to print and bind a paper back
book. After setup, it costs Birr 2 per book printed and bound.
a. Write the equation for the total cost of making a number of books
b. State the slope of the line and interpret it.
c. State the y-intercept of the line and interpret it.

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The Two – Point Form

In this case, two points that are on the line are given and completely used to determine
equation of a straight line. In doing so, we first compute the slope and then use this value
with either points to generate the equation. Taking two points designated by (x 1 – y1) and (x2
– y2) and another point (x, y), we can develop the expression for the equation of the line as
follows.

Therefore, (y – y 1) (x 2 – x 1) = (y 2 – y 1) (x – x 1)
is the expression for the two-point form of generating equation of a straight line.

Example 1.10

A publisher asks a printer for quotations on the cost of printing 1000 and 2000 copies of a
book. The printer quotes Birr 4500 for 1000 copies and Birr 7500 birr for 2000 copies.
Assume that cost (y) is linearly related to the number of books printed (x).
a. Write the coordinates of the given points
b. Write the equation of the line

Solution
Given the values
x 1 = 1000 Books y1= Birr 4500
x 2 = 2000 books y2= Birr 7500

a. Coordinates of the points are:

(x1, y1) and (x2, y2)
Thus, (1000, 4500) and (2000, 7500)

b. To develop the equation of the line, first let’s compute the slope.
m = y2 – y1
x2 – x1
= 7500 – 4500
2000 – 1000

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 = 3000 ÷ 1000 = 3

Then, consider the formula of two-point form of developing equation of a line as given by,
y – y1 = y2 – y1
x – x1 x2 – x1
We have obtained the value for the slope m = 3 as it’s expressed by

Subsequently, by substitution this value in the above formula will result in;

In continuation, substitute the value (1000, 4500) in place of x1 and y2 in the equation
y – y1 = 3 (x – x1). As a result, you will obtain,
y – 4500 = 3 (x – 1000)
y – 4500 = 3x – 3000
y = 3x – 3000 + 4500
y = 3x + 1500 ……………………… is the equation of the line.

Exercise 1.7

As the number of units manufactured increases form 100 to 200, manufacturing cost
increases form 350 birr to 650 birr. Assume that the given data establishes relationship
between cost (y) and the number of units made (x), and assume that the relationship is linear.
Find the equation of this relationship.

Section Two: Applications of Linear Equations

Section Objectives:

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After a thorough study of this section, you will be able to:
- Solve out real world business problems by relating and applying your concept and
mathematical approaches of dealing with linear equations.
- Conduct linear cost-output relations analysis, break-even analysis and market
equilibrium analysis as main areas of business application.

Section Overview:

1.5 Linear Cost – Output Relations Analysis

1.6 Market Equilibrium Analysis
1.7 Break – Even Analysis

1.5 Linear Cost – Output Relations Analysis

As of the very beginning, we aimed at developing our understanding on the interpretative

application of linear equations in business. Consequently, our interest and purpose in this
section is to learn how we can approximate and relate the mathematical terminology and
technique of linear equations in addressing real world business issues. In dealing, we are
going to consider three application areas of linear equations. These are the linear cost –
output relations analysis, break – even analysis, and market equilibrium analysis. In this
particular section, we will consider these application areas to some detail.

Dear student, can you list different types of cost that make up the total cost in business
operations?

In order to grasp the concept of linear cost output relations, let us consider the relationship
among different types of cost on the following a coordinate plane.

Total
cost I Total cost line

G VC

H
Variable
cost (VC)

F
E
D FC FC
Fixed cost (FC)
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D
A
B C Number of units (Q)
 Total cost (TC)

Fig. 1.2.1 Classifiaction of costs

Definitions

Fixed cost is a cost component that does not change with the number of units produced. The
variable cost is a cost component that varies with the number of units produced. Then at each
level of production, total cost is the summation of fixed cost and variable cost. Marginal cost
is the additional cost incurred in producing one more unit of output.

Observations
Assume that total manufacturing cost and the number of units produced are linearly related.
The total cost originates from the fixed cost line because of zero level of production the total
cost will be equal to the fixed cost (see the above figure (Fig 1.2.1)). Accordingly,
- Fixed costs (FC) = AD = BE = CF
- The segment BG is the Total Cost (TC) of producing AB units of outputs.
- The segment CI is the TC of producing AC units of outputs.
- The segment AD is the TC of producing zero units of outputs.
- The ratio

- Marginal cost is given by change in TC divided by change in Quantity (Q). Thus,

Marginal cost (MC) = = VC per unit.

- Therefore, marginal cost and VC/unit are the considered as the slope of TC line and
they are constant as long as total cost and quantity produced are linear.
- When TC ÷ Q = Average cost per unit (AC).

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 - Unlike MC and VC per units, AC per unit is not constant although cost and quantity,
produced are linearly related.

Example 1.11

Given the total cost function C = 5Q + 10 and if 10 units are produced, find TC, AC, MC, FC
and VC per unit.

Solution
i. TC = 5(10) + 10 = 60
ii. AC = Total cost of producing 10 units = 60 ÷ 10 =6
Number of units produced

=>Suppose, if 5 units were produced,

TC = 5(5) + 10 = 35.
In this case, AC = 35 ÷ 5 = 7. Therefore, the AC is not constant.
iii. MC = is the same as the slope of the equation. Thus MC = 5
iv. FC = the fixed cost remains constant at any level of production. Thus, 10 is the
fixed cost.
v. VC/unit = Variable cost ÷ Number of units
= 5(Q) = 5(10) = 5
Q 10

Example 1.12

If the total factory cost (y) of making x units of a product is given by y = 3x + 20, and if 50
units are made,
a. What is the variable cost (VC)?
b. What is the total cost (TC)?
c. What is the variable cost per unit (VC/unit)?
d. What is the average cost per unit (AC/ unit)?
e. What is the marginal cost of the 50th unit?

Dear student, please slove this example before you see the solutions given below.

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Solution
Given, total cost = y = 3x + 20
x = Units produced
x = 50 Units
a. Variable cost is the cost that varies with the level of production and it can be obtained
by multiplying the slope or the marginal cost with the number units produced (x).
That is, VC =mx
= 3x 50 = Birr 150

b. TC is the sum of fixed cost and variable cost. In the equation given y =3x + 20, the
term 3x represent the VC and the constant 20 is the fixed cost. Thus
TC = y = 3x+20
= 3(50) + 20 + 150 + 20
= Birr 170

c. Variable cost per unit = vc / unit = vc / x = 150 / 50 = Birr 3

d. AC is given by total cost divided by Number of units produced. Thus,

AC/ unit = TC/ x = (VC+FC)/ x = (150 + 20) / 50 = 170 / 50 = Birr 3.40

e. The slope of a linear equation is equal to the marginal cost of any given level of
production thus, MC = 3.

In alternative approach, MC is the extra (additional) cost of producing one more unit
of output. Thus, the marginal cost of producing the 50 th unit is equal to the additional
cost in producing the 50th unit.
Therefore, MC= ΔTC = TC of producing 50 units – TC of producing 49 units
50 – 49

= (3 (50)+20) – ( 3 (49) +20)

50 – 49
= 170 – 167 = Birr 3
1

Exercise 1.8

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If total factory cost, y, of making x units of a product is y = 10x + 500 and if 1,000 units are
made:
a. What is the variable cost?
b. What is the total cost?
c. What is the variable cost per unit?
d. What is the marginal cost of the last unit made?

1.6 Break – Even Analysis

Dear student, can you define break even point and its analysis? Please try!

Break-even analysis is an economic theory that states that profits arise from the excess of
total revenue over total cost.
This is, Profit = Total Revenue – Total Cost

In the application of break-even analysis, there are two important concepts we need to
distinguish. These are the break-even point and break-even chart. The break-even point
(BEP) is the volume or level of output resulting in neither a loss nor a profit. It is a point at
which revenue and cost are equal. The break-even chart is a convenient means of graphically
describing the relationship between cost and revenues at different levels of output.

In business concept, we have two cases of applying break-even analysis based on the type of
business activity under consideration. The first case is break-even analysis for manufacturing
companies. The other is for retail businesses. The distinction between the two cases is that
manufacturing companies usually state their cost equation in terms of quantity (output) as
their business involves producing and selling. In such a case, the break-even point is
commonly computed in terms of output level. On the other hand, as retail businesses are
concerned with purchase and sell of merchandise, they state their cost equation in terms of
revenue, which is the same as the Birr (dollar) volume of sales. Thus, the break-even point is
commonly computed in terms of break-even level of sales (dollar sales volume).

Dear student, let us consider the two cases to some detail here below.

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Case 1: Break-Even Analysis for Manufacturing Businesses

In this case, we shall consider a manufacturer who produces q units of a product and sells the
product at a price of p per unit. In proceeding, let us specify the symbols to be used in our
study of the case before hand.
C = total cost of producing and selling q units
q = number of units produced and sold
v = variable cost per unit made (assumed to be constant)
FC = fixed cost (constant amount)
P = Selling price per unit
R = total revenue received, which is equal to sales volume in terms of dollar or birr.

The cost function then is given by:

C = v q + FC ……………………. (1)
and,
Revenue = Price per unit x Number of units sold
R = p q …………………………… (2)
Thus, if the manufacture is to break – even on operations, which is to neither incur loss nor
earn profit, revenue (2) must equal cost (1).

That is, at break – even

p q = v q + FC …………………… (3)
You may now solve equation (3) for the production volume q;
p q = v q + FC
p q – v q = FC
q (p – v) = FC

Thus, the Break – Even Quantity denoted by qe, is given by;

To further our understanding of break-even analysis, let us consider the following break-even
chart.

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 Revenue/ cost
Profit (R > C)

Revenue

BEP

Variable cost

FC
R= p qe and
C = v qe + FC
Loss Fixed cost (FC)
(R < C)

0 Number of units (q)

qe

Fig 1.2.2 Break Even Point (BEP) and other points

Dear student, what did you observe from the above figure?

Observations: From the above break – even chart, we observe certain important points.
i. As such, the total revenue line passes through the origin and hence has a y-
intercept of zero while the total cost line has a y – intercept which is equal to the
amount of the fixed cost.
ii. The fixed cost line which is parallel to the quantity axis (x – axis) is constant at all
levels of output.
iii. To the left of the break – even point the revenue line is found below the cost line
and hence any vertical separation indicates a loss while to the right the opposite is
true.
iv. The total variable cost, which is the gap between the total cost and the fixed cost
line increases as more units are produced.
v. Important linear cost – output expressions (equations):
 C = v q + FC
 R=pq
 Average Revenue (AR) = R ÷ q = p q ÷ q = p
 Average Variable Cost (AVC) = v q ÷ q = v = Slope (m)

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  Average Fixed Cost (AFC) = FC ÷ q
 Average Cost = C ÷ q = AVC + AFC
 Profit ( ) = R – C

Example 1.13

A book company produces children’s books. One time fixed costs for Little Home are
$12,838 that includes fees to the author, the printer, and for the building. Variable costs
amount to $14.50 per book the books are then sold to bookstores around the country at
$39.00 each. How many books must be printed and sold to break-even?

Solution
Given, v = $14.50
FC = $12,838
p = $39
Let q = the number of books printed and sold
Thus, C = v q + FC
C = 14.5q + 12,838 is the cost equation.

The revenue (R) is also given by,

R=pq
= 39q
Then to obtain the quantity of books to be printed and sold to break-even, you need to equate
the R and C equations.
39q = 14.5q + 12,838
39q – 14.5q = 12838
24.5q = 12838
q = 12838/24.5
q = 524 books must be printed and sold to break – even.

Example 1.14

22
A manufacture has a fixed cost of Birr 60,000 and a variable cost of Birr 2 per unit made and
sold at selling price of Birr 5 per unit. Required:
a. Write the revenue and cost equations
b. Computer the profit, if 25,000 units are made and sold
c. Compute the profit, if 10,000 units are made and sold
d. Find the breakeven quantity
e. Find the break-even birr volume of sales
f. Construct the break-even chart

Solution
Given the values,
FC = Birr 60,000 , v = Birr 2 , p = Birr 5
a. Revenue equation = p q
R = 5q
Cost equation = v q + FC
C = 2q + 60,000

b. Level of production = q = 25,000 units

Thus, R= 5q = 5 x 25,000
R = Birr 125,000
Likewise, C = v q + FC
C = (2 x 25,000) + 60,000
C = 50,000 + 60,000 = Birr 110,000
Then, Profit = R – C
= 125,000 – 110,000
= Birr 15,000

c. Level of production = q = 10,000 units

Thus, R = 5q = 5 x 10,000
R = Birr 50,000

Likewise, C = v q + FC
= 2 (10,000) + 60,000
= Birr 80,000

23
 Then, Profit = R – C
= 50,000 – 80.000
= (Birr 30,000)
The manufacturer losses Birr 30,000 at 10,000 units level of production.

d. The break-even quantity is given by;

Units are required to be produced to

break-even on operation.

e. The break – even birr volume of sales can be simply obtained by substituting the
break – even quantity in the revenue (R) equation. This is,
R = 5q

Substituting qe in place of q will result in,

R = p qe = 5 x 20,000
R = Birr 100,000

f. In sketching break – even chart, first we need to find x – and y – interests for both the
revenue and cost equations. To this end, considering the cost equation, C = 2q +
60,000 we can obtain; the y – intercept (at q = 0) = FC = Birr 60,000.
Revenue/ cost
(in Birr)

Therefore, the cost equation arises from the point 60,000 on the y- axis (cost and
Revenue
revenue axis). Alternatively, in a simple way, the total cost line starts at the point of
fixed cost.
Break – Even Point
(20,000, 100,000)
On the other hand, the graph for the revenue originates from the origin because the
60,000 Profit
revenue at zero production level is zero. Further, the two lines crosses each other at
Total Cost
the BEP which has a coordinate of (20,000, 100,000), the 20,000 units on the quantity
100,000
axis (x – axis) and Birr 100,000 on cost revenue axis (y – axis).
Loss
FC

24
0
qe = 20,000 Number of units (q)
Fig 1.2.3 Solved example of BEP

Note: The BEP coordinate is given by (qe, p qe)

Exercise 1.9

Suppose a company has a fixed cost of Birr 35,000 and a variable cost of Birr 1.75 per unit
for its products. Let us further consider that selling price is Birr 2.70 per unit.
a. Write the revenue and cost equations of the company.
b. At what level of output is the company break-even?
c. What is the amount of revenue when the company produces 300,000 units?
d. Plot the break-even chart and show the break-even point.

Case 2: Break – Even Analysis for Retail Businesses

Retail businesses and other financial managers are more likely think of break-even analysis in
accounting terms. In this case, we shall consider a retailer or company that purchase products
and sell them at a price above the cost. The difference between the purchase cost and retail

25
price is known as ‘markup’. Markup is the component of profit but not exactly the same as
profit. Thus, certain costs must be deducted to obtain the profit.

Example 1.15

An item that costs Birr 360 is priced to sell at Birr 940. Calculate the markup.

Solution
Given the values, Cost = Birr 860 and Retail price = Birr 940
Markup = Retail Price – Cost
= 940 – 860
Markup = Birr 80
Markup is viewed in one of the following two ways: as a percentage of retail price or as a
percentage of cost.

a. Markup as a Percentage of Retail Price

The markup percentage on retail price is also called ‘margin’ in financial statements is given
by

Suppose, for example, that an item that cost Birr 70 is priced to sell at Birr 92. The margin is,
therefore,

b. Markup as a Percentage of Cost

Markup as a percentage of cost is given by

26
1.16 Example

Assume an item that cost Birr 40 is made available for sale at a price of Birr 48. Find the
markup percentage on cost.

Solution

= 8/40 x 100%
= 20%

Exercise 1.10

Naïf supermarket purchases an item at Birr 115 and resells it at a price of Birr 128.
a. Compute the markup.
b. Compute the margin or markup as a percentage of retail price.
c. Compute markup as a percentage on cost.

Dear student considering the above concept about markup let us proceed to determining the
break-even level of sales.

Driving the Break-Even Level of Sales

Let us symbolize some important components of the formula. Thus, consider the equation
y = m x + b , where y = represent the total cost
m = represent the variable cost per dollar of sales
x = represent the sales volume (Revenue)

27
 m x = total variable cost
b = the fixed cost

As we have considered in the former case, at break even revenue is equal to cost. That is, y =
x. Further, at break – even, the amount of dollar sale is equal to the cost, thus the break –
even level of sales (xe) is equal to y and x.

Therefore, y = x = xe

Then at the break-even point, y and x can be substituted by xe in the equation of

y = mx + b.
Accordingly, xe – m (xe) = b. Now let us solve for xe.
xe = m(xe) + b
xe – m (xe) = b
xe (1 – m) = b

Thus, is the expression for the break – even level of sales.

Or,

xe =

Example 1.17

Suppose that in making a budget for next year’s operations top management of Hirmata
Business Group has set a sales goal of Birr 200,000 per week. Margin is to be 45% of retail
price and other variable cost is estimated at Birr 0.05 per birr of sales. Fixed cost is projected
at Birr 56,000.
a. What is the linear sales-cost equation?
b. What is the breakeven volume of sales in birr per week?

28
 c. What is the company’s profit if sales goal is attained?
d. What is the company’s profit if it sells merchandise that worth Birr 100,000?
e. Plot the company’s cost-sales model.

Solution
Given values, Margin = 45% = 0.45
Other variable cost = 0.05 per birr of sales
Fixed cost (b) = birr 56,000
Sales goal (Revenue R) = Birr 200,000
x = the monetary (dollar) amount of sales (sales volume)
In addition, if margin is given as 45% the remaining 55% or 0.55 represent the cost.
Thus, the variable cost per birr of sales is equal to
m = (100 % - margin percentage) + Other variable cost
= (100% - 45%) + 0.05
= 0.55 + 0.05 = 0.60
Taking these values, we can solve out the problem
a. The equation
y=mx+b
y = 0.6 x + 56.000

b. Break-even volume of sales

= Birr 140,000

c. For any amount of sales volume (Revenue) greater than birr 140,000 profit will be
attained. At the targeted level of sale, the profit will be obtained as follows.
Profit = Revenue – Cost – R-C
= 200,000 – (0.06x200 + 56,000)
= Birr 24,000

d. Profit if the sales volume (revenue) is birr 100,000.

29
 Profit (A) = R – C
= 100,000 – (m x + b), since cost (c) or y = mx + b
= 100,000 – (0.6 (100,000) + 65,000)
= 100,000 – (60,000 + 56,000)
= 100,000 – 116,000
= (Birr 16,000)

Hence, at sales volume of birr 100,000 the company incurs a loss of Birr 16,000.

e. Graph of cost – sales model or break – even chart

Total cost
(In Birr)

Revenue
y=x

Profit
Total Cost
140,000 y = 0.6x + 56,000

56,000 Loss
FC (b = 56,000)

Fig 1.2.4 Solved0 example for BEP

xe = 140,000 Sales in birr (x)

Remark:
i. The break-even chart for sales volume is plotted in the same manner with chat of
loran-even quantity except the x-axis in the former case represents dollar amount
of sales volume (revenue).
ii. In the above diagram we note that the break-even point coordinates are equal for
both x and y axis since at this point the cost and the revenue amount are equal
and both are expressed in terms of monetary (dollar) sales.
iii. In the break even sales volume computation, the cost equation, y = m x + b, is
given in terms of sales volume (Revenue) which is represented by x but, in case of
competing the break-even quantity, in the cost equation y = m q + b, q represents
the number of items or units produced. Thus, do not confuse x and q in the former
and later cases respectively.

30
Exercise 1.11

A company expects fixed cost of Birr 23,400. Margin is to be 52% of retail, and variable cost
in addition to cost of goods is estimated at birr 0.07 per dollar of sales.
a. Write the equation relating sales and costs.
b. Find the break-even birr of sale.
c. What will be profit on sales of Birr 62,500?
d. Make the break-even chart.

Exercise 1.12

If variable cost per dollar of sales remains at last year’s level of $ 0.40 and given fixed cost of
$3600 for this year as compared to $3000 of the last year, how much greater will this year’s
break-even level be than last year’s?

1.7 Market Equilibrium Analysis

The third major area in to which the concept of linear algebra and geometry applied is in the
analysis of market equilibrium. Market equilibrium analysis is concerned with the supply and
demand of a product in a case they are linearly related.

 Demand of a product: is the amount of a product consumers are willing and able to buy
at a given price per unit. The linear demand function has a negative slope (falls downward
from left to right as shown in the figure below) since demand for a product decreases as
price increases.

 Supply of a product: is the amount q, of a product the producer is willing and able to
supply (make available for sell) at a given price per unit, p. A linear supply curve or
function has a positive slope (rises upward from left to right as shown in the figure below)
and the price and the amount of product supplied are directly related. This is because of
the fact that suppliers are more interested to supply their product when the selling price
increases.

31
 Market equilibrium: shows a market price that will equate the quantity consumers are
willing and able to buy with the quantity suppliers are willing and able to supply. Thus, at
the equilibrium,

Graphically,

Demand (DD) = Supply (SS)

Price (p)

DD Market equilibrium point

SS
Fig 1.2.5 Market Equilibrium Point

Quantity (q)
Example 1.18

Suppose the supply and demand equation for a given product on a given day reveal the
following.
Demand (DD): P = 300 – 15q
Supply (SS): P = 500 + q
a. Find the market equilibrium price and quantity.
b. Plot the demand and supply equation on a graph.

Solution
a. First, let us compute the equilibrium quantity for the given supply and demand
functions.
Hence, at equilibrium: DD = SS
3000 – 15q = 500 + 5q
-15q – 5q = 500 – 3000
-20q = -2500
q = -2500 ÷ -20
q = 125 units
The market equilibrium quantity is 125 units.

32
 Now, we progress to find the equilibrium price for the supply and demand function of
the given product. In the same manner with the above one, we can obtain the market
equilibrium price by simply substituting the market equilibrium quantity in either of
the supply or demand equations. Thus, let us take the supply function of P = 500 + 5
q. Then substitute market equilibrium quantity of 125 units in place of q.
P = 500 + 5(125)
P = 500 + 625
P = Birr 1125
You will obtain the same result (i.e. Birr 1125), if you take the demand function of
P = 3000 – 15 q and substitute q = 125.

b. Graph of demand and supply function: In plotting the graph, first we need to get the x
and y intercept for both the supply and demand equations. The y – intercept for
demand equation is obtained by setting q = 0 in the equation P = 3000 – 15q.
Thus, P = 3000 – 15(0) = 3000
Therefore, (0, 3000) is the y-intercept. Likewise, the x intercept is obtained by setting
P = 0 in the equation P = 3000 – 15q. Consequently,
0 = 3000 – 15q
15q = 3000 = 3000 ÷ 15
q = 200
The point (200, 0) is the x-intercept of the demand function. The same procedure is to
be followed in computing the x and y intercept for the supply function of P = 500 +
5q. The y – intercept is the value of P when q = 0.

Therefore, P = 500 + 5(0)

P = 500
The y – intercept is the point with coordinate of (0, 500). In the same manner, the
x – intercept is the value of q at P = 0.
Thus, 0 = 500 + 5q
-5q = 500 = 500 ÷ - 5
q = -100
Hence, the x – intercept is given by the point (-100, 0). Off course, the graph (the
straight line) of the supply function is also passes through the equilibrium point of

33
 (125 units, 1125 birr). Thus, we do not need to extend the line to the negative
direction.

Price (P)
SS: P = 500 + 5q
3000

2000

1125

500 DD: P = 8000 – 15q

125 200 300 400 Quantity (q)

Fig 1.2.6 Solved Example of Equilibrium Point

Example 1.19

The market demand curve for a product is given by:

DD: P = 200 – q
SS: p = 50 + 0.5q
a. Find the excess demand at a price of Birr 80.
b. Find the excess demand supply at a price of Birr 130.
c. Find the equilibrium price and quantity.

Solution
a. Given DD: P = 200 – q and P = Birr 80
Thus, at a price of Birr 80 the quantity q, demanded is computed by substituting 80 in
place of p in the given function, P = 200 – q.
80 = 200 – q
80 – 200 = -q
-120 = -q
q = 120 units

34
 This implies, at the price of Birr 80, the supply will be 120 units. Now we progress to
computing the amount of supply at a price of p = 80.
Thus, SS: P = 50 + 0.5q
80 = 50 + 0.5q
80 – 50 = 0.5q
q = 30 ÷ 0.5 = 60 units.
In this case, also if the price is Birr 80, the supply will be only 60 units. Therefore, in
computing the excess demand, we take the difference between the demand and supply
for the product.

Accordingly, Excess Demand = Demand – Supply

= 120 units – 60 units
= 60 units.
Thus, if the price is Birr 80, there will be an excess demand for 60 units of the
product.

b. Following the same procedure with the above case (i.e. item a), we can find out the
excess supply for the product at a price of Birr 130. Accordingly, given demand
function DD: P = 200 – q, we substitute Birr 130 in place of p to get the quantity
demanded at the said price.
Thus, DD: p = 200 – q
130 = 200 – q
130 – 200 = - q
q = 70 units.

Therefore, at selling price of Birr 130, the demand is 70 units. On the other hand, the
supply at a price of Birr 130 is obtained by,
SS: P = 50 + 0.5 q
130 = 50 + 0.5 q
130 – 50 = 0.5 q
0.5 q = 80
q = 160 units
Then, the Excess Supply is attained by:

35
 Excess Supply = Supply – Demand
= 160 units – 70 units
= 90 units.
In general, at selling price of p = 130 the excess supply is equal to 90 units.

c. As we have seen earlier, equilibrium is attained when DD = SS.

That is, 200 – q = 50 + 0.5 q
200 – 50 = 0.5 q + q
150 = 1.5 q
q = 150 ÷ 1.5 = 100 units.
Hence, at equilibrium the quantity demanded will be 100 units. In parallel, by
substituting this value (100 units) in either of the supply or demand functions, we can
obtain the equilibrium price. Let us take the demand function, DD: P = 200 – q
and then substitute 100 in place of q, to obtain
P = 200 – 100
P = 100 Birr.
Therefore, the market equilibrium price is Birr 100.

Dear Student, can you summarize what market equilibrium means?

Remark

As we have observed in above example, if we set a price which is less than the
equilibrium price, for instance, Birr 80 in the above example (case a), it will result in excess
demand. In other words, the quantity consumers want to buy will be higher than what can be
made available by suppliers. Conversely, if we set a price which is greater than the
equilibrium price, for instance Birr 130 in the above example (case b), it will result in excess
supply. That is, there will be less demand for the product to clear the supply on the market. In
sum, the quantity demanded and price of a product are inversely related. That means, as price
increases, the quantity demanded will decrease and may not be vice versa. On other hand, the
selling price and the product supplied are directly related. That means as price increases the

36
quantity supplied will increase too and may not be vice versa (i.e. the opposite may not be
true).

Exercise 1.13

Kalifa Plc. is a national distributor of Dell Computers. The selling price and quantity of
computers distributed are linearly related. Further, the company’s market analyst found out
the following demand and supply functions for a particular year.
Demand (DD): P = 3500 – 2q
Supply (SS): - q = 950 – p
a. Find the excess demand for computers at a price of Birr 1400.
b. Find the excess supply of computers at a price of Birr 2100.
c. Find the market equilibrium quantity.
d. Find the market equilibrium price.
e. Sketch the demand and supply functions.

Unit Summary

Dear student, with confidence, you have already acquired knowledge about the concepts and
the interpretative applications of linear equations, functions, and graphs in business. In this
unit, we have considered the managerial applications of linear algebra and geometry so far. In
so, we have considered that linear equations are mathematical expressions written in the form
of

The graph of such equation on coordinate plane is a straight line. As a result, we understand
that the slope of the line is constant for any given points on the line. The slope of a straight-

37
line m, given two points on the line with coordinates of (x 1, y1) and (x2, y2) is expressed by
the equation

Further, we have considered how to compute the distance between two points on a coordinate
plane. Subsequently, approaches of developing equation of a line are discussed in the present
unit. Above all, we have seen the interpretive applications of linear equations in the second
section of the unit. These are analysis of linear cost-output relations, break-even analysis, and
market supply and demand equilibrium analysis. In the next unit, we will advance with the
study of the matrix algebra and its application in solving business problems and backing
management decisions that further organizational interests.

Self-Check Review Problems I

1. A grocery sells soda to its customers by purchasing from brewery factories. It purchases a
bottle of soda at Birr 2.45 and sells at Birr 3.00. The grocery has a monthly fixed cost of
Birr 1100 for rent, salary and utilities. Variable costs other than cost price of soda are
estimated at Birr 0.15 per soda of sales.
Required:
a. What monthly fixed sales volume lead to breakeven? Interpret the result.
b. How many bottles of soda have to be sold to breakeven? Interpret the result.
c. What should be the monthly breakeven sales volume if monthly fixed costs were
Birr 2350?
d. Plot the breakeven chart for the grocery?

38
2. The management of the company that manufactures surfboards has fixed costs (at zero
output level) of Birr 2000 per day and a total cost of Birr 38000 per day at a daily output
of 200 boards.
Required:
a. Assuming the total cost per day, C (q) is linearly related to the total output per
day, q, write an equation for the cost function.
b. What is the total cost for an output of 12 boards per day?
c. Graph the cost function.
d. Write the new cost equation if the company has fixed cost of Birr 3000 per day
and total cost per day at an output of 200 boards of Birr 51000.

3. A financial analyst is studying the introduction of two new conveyor systems: the basic
and deluxe. The basic system has a variable operating cost of Birr 16 per unit and annual
fixed cost of Birr 104,000. In contrast, the deluxe system has a variable cost of Birr 12.8
and fixed cost of Birr 134,400. The company sells its products for Birr 22 per unit.
Required:
a. Which of the two systems would be more profitable for the firm if sales are
expected to average 35,000 units per year?
b. How many units must the company sell to breakeven if the deluxe system is
selected?
c. At what sales volume level will management be indifferent between the basic and
deluxe systems?
d. Suppose the basic system requires the purchase of additional equipment that is not
reflected in the preceding figures which costs Birr 64,000. How many units must
the company sell to earn a profit of Birr 56,000 if the basic system is selected?

4. The projected profit of a hi-tech recording disks retailer is Birr 200,000 for the current
year based on sale volume of 200,000 units. The company has been selling the disks for
$16 each; variable costs consist of the Birr 10 purchase price and Birr 2 handling cost.
The retailer’s annual costs are Birr 600,000.
Required:
a. Calculate the breakeven point for the current year in units.
b. What will be the company’s profit for the current year if there is a 10% increase in
projected unit sales volume?

39
 c. Management is planning for the coming year when it expects that the unit
purchase price of the disks will increase by 30%. What volume of dollar sales
must the retailer achieve in the coming year to maintain the current year’s profit if
the selling price remains constant at Birr 16?

5. Suppose JYB Grain Company produces home flourmills, which it sells for Birr 150.
Variable costs to produce and sell the mills are Birr 139 and the annual fixed costs total
Birr 84,500. What is the company’s breakeven point? Comment on the optimal strategy
the company should adopt.

6. A supplier will only start to supply T-shirt when a price greater than Birr 15 per unit is
available. The company will only then increase output by 6 units for every Birr 1 increase
in price.
Required:
a. Write the equation of the supply function.
b. Plot the supply function.

7. Hinessa Spare Parts shop has incurred expenses, which are partly fixed and partly
variable with the number of parts ordered. For the order of 100 parts, Hinessa is charged
Birr 280 per order. An order expense is Birr 240 and for 200 parts ordered. Find cost per
order for 175 parts.

8. ALM Company sold 80,000 units earning a profit of Birr 100,000. The total variable cost
(excluding commission expense) is Birr 400,000. Moreover, the company incurred a
commission expense of Birr 40,000 at a 5% rate.
Required:
a. Develop the total cost equation.
b. Find the breakeven revenue and quantity.

9. On average summer day in a large city, the pollution index at 8:00 a.m. is 20 parts per
million, and it increases linearly by 15 parts per million each hour until 3:00 p.m. Let f(x)
be the amount of pollutants in the air x hours after 8:00 a.m.
Required:
a. What is the air pollution index at 1:00 p.m.?

40
 b. Graph the function for 0 ≤ x ≤ 7.

10. Mega figures fixed cost at Birr 92,000 and variable at Birr 2.10 for each book produced.
The book is sold to distributors for Birr 15 each.
Required:
a. How many units must be sold for the publisher to breakeven?
b. The publisher finds that rising prices for the paper increase due variable cost to
Birr 2.70 per book and if Mega continues to sell the books for Birr 15 how many
books must they sell now to make a profit?
c. If Mega wants to start making a profit at the same production level as before the
cost increase, how much should they sell the book now?

References
1. Ann, J. Hughes 1983. Applied Mathematics: For Business, Economics, and the
social Science.
2. Barnett, A. Raymond and Ziegler, R. Michael. 1989 Essentials of College
Mathematics for Business and Economics, Life Science and Social Science. 3rd ed.
3. Bowen, K. Earl, Prichett, D. Gordon, and Saber, C. John 1987. Mathematics with
Applications in Management and Economics. 6 th ed., Richard Irwin Inc., USA.
4. Bradley, Teresa and Patton, Paul December 1999. Essential Mathematics for
Economics and Business. Jon Wiley and Sons.
5. Dexter, J. Booth and John, K. Turner 1996. Business mathematics with Statistics.
6. Orema, M and Agarwal, K. 1988. Quantitative Techniques. Kings Books, Delhi.
7. Ronald J. Hershberger and James J. Reynolds, Mathematics Applications.
8. Uohra, N, 1998. Quantitative Techniques in Management. Tata McGraw Hill,
New Delhi.

41
 UNIT TWO
MATRIX ALGEBRA AND ITS APPLICATIONS

Unit Objectives

After studying this unit, students should able to understand and be acquainted with the
following:

 Be able to know the definition and meaning of a matrix.

 Be able to know what dimension of a matrix is and the main categories of matrices.
 Develop an insight towards basic operations in matrix (transposition, addition,
subtraction and multiplication) and the techniques.
 Develop know-how towards inverse of a matrix and ways of inverting a matrix.
 Develop an insight towards application areas of matrix algebra.
 Be able to handle large linear systems using matrix algebra.

42
  Be able to undertake markov chain analysis with the help of matrix algebra.

In general, the major objective of this unit is to enable students to have an insight and
exposure in matrix algebra manipulation, and thereby enabling them to impart knowledge of
applying the technique in handling real life problems.

Unit Introduction

It is evident that managerial problems are amenable to quantification thereby calling up for
the application of mathematical models. Of the various quantitative techniques, this unit tries
to introduce students of business stream about major topics in matrix algebra. The chapter
deals with basic concepts of matrix algebra, dimension and types of matrices, matrix
operations and techniques, inverse of a matrix and major applications including solving
system of linear equations and markov chain analysis.

In total, this part of the module introduces students of business stream about matrix algebra
principles and ways of applying them in handling real life business problems at individual or
organizational level scientifically.

Dear student! What do you know about matrix algebra? Why we learn matrix?

SECTION ONE: MATRIX CONCEPTS

Section Objectives

Up on completing this section, you will be able to:

 Know the definition and meaning of a matrix.
 Know dimension of a matrix and basic types of matrices.
 Develop an insight towards basic operations in matrix and the techniques.
 Develop know-how towards inverse of a matrix
 Build an insight on matrix algebra principles and concepts.

43
2.1 Why we learn matrix?

There are three major reasons for learning matrix:

1. Matrices are used to handle large linear systems
2. Matrices are used to solve complex linear equations
3. Matrices are an effective means for summarizing voluminous business data.

Definition of a Matrix

A matrix is a rectangular array of numbers, parameters, or variables each of which has a

carefully ordered place within the matrix. The numbers (parameters or variables) are referred
to as elements of the matrix. The numbers in the horizontal like are called rows; the numbers
in a vertical line are called columns. It is customary to enclose the elements of a matrix in
parentheses, brackets, or braces to signify that they must be considered as a whole and not
individually.

A matrix is often denoted by a single letter in bold face type. The first subscript in a matrix
refers to the row and the second subscript refers to the column.

Dear student, can you guess how values in matrix are arranged?

A general matrix of order m x n is written as:

X= x11 x12 x1n

x 21 x22 x2n

Xm1 xm2 xmn (mxn)

44
Matrix X above has m rows and n columns or it is said to be a matrix of order (size) m x n
(read as m by n).

Example:

A= a11 a12 a13

a 21 a22 a 23
a 31 a 32 a33

3x3

Here A is a general matrix composed of 3x3 = 9 elements, arranged in three rows and three
columns. The elements all have double subscripts which give the address or placement of the
element in the matrix; the first subscript identifies the row in which the element appears and
the second identifies the column. For instance, a23 is the element which appears in the second
row and the third column and a32 is the element which appears in the third row and the second
column.

2.2 Dimensions and Types of Matrices

Dimension of a matrix is defined as the number of rows and columns.

Based on their dimension (order), matrices are classified in to the following types:
A. A row matrix: is a matrix that has only one row and can have many columns.

E .g. A= 2 5 7 is a row matrix of order 1x3.

B. A column matrix: is a matrix with one column and can have many rows.
E.g. B = 1
2
6 is a column matrix of dimensions 3x1.

C. A square matrix: is a matrix with equal number of rows and columns.

1 4 3

45
 E.g. C = 6 ; D= 2 6 2 2 5
3 8 ; E= 8 6 9

D. A diagonal matrix: is a square matrix where its all non- diagonal elements are zero.

E.g. x = 2 0 0
0 6 0 is a diagonal matrix of order 3x3.
0 0 11

E. A scalar matrix: a square matrix is called a scalar matrix if all its non- diagonal
elements are zero and all diagonal elements are equal.
6 0 0
E.g. Y = 2 0 Z= 0 6 0
0 2 0 0 6
F. A unit matrix (Identity matrix): is a type of diagonal matrix where its main diagonal
elements are equal to one.

1 0 0
E.g. B = 0 1 0
0 0 1

G. A null matrix (zero matrix): a matrix is called a null matrix if all its elements are zero.

0 0 0
E.g. A= 0 0 0
0 0 0

H. A symmetric matrix: a matrix is said to be symmetric if A = At.

E.g. A = 8 2 1
2 3 4
1 4 5

I. Idempotent matrix: this is a matrix having the property that A2 =A.

46
E.g. If A= ; then AA= A2 =

Dear distance learner, what do you conclude about the relationship of scalar matrix and
diagonal matrix? And about unit matrix and scalar matrix?

Remark:
It is seen above that every scalar matrix is a diagonal matrix; whereas a diagonal
matrix need not be a scalar matrix. Every unit matrix is a scalar matrix; whereas a
scalar matrix need not be a unit matrix.

2.3 Matrix Operations and Properties

1. Matrix equality: two matrices are said to be equal if and only if they have the same
dimension and corresponding elements of each matrix are equal.
3 0 3 -4 3 0
E.g. A= B= C=
1 -4 1 0 1 -4

A ≠ B; A = C; B ≠ C.

2. Transpose of a matrix: If the rows and columns of a matrix are interchanged the new
matrix is known as the transpose of the original matrix. If the original matrix is
denoted by A, the transpose is denoted by or At. Transposition means interchanging
the rows or columns of a given matrix. That is, the rows become columns and the
columns become rows.

E.g B= 3 5 6 9
0 11 13 8
6 8 3 4

47
The transpose of matrix B, denoted by or Bt is given as:
3 0 6
Bt = 5 11 8
6 13 3
9 8 4
The dimension of B is changed from 3x4 to 4x3.

A= 1 3 = 1 0 2
0 4 3 4 8
2 8 (2x3)
(3x2)

Properties of the transpose

The following properties are held for the transpose of a matrix:

 Property 1: (At)t =A
 Property 2: (aA)t = aAt, where (a) is a scalar (at = a)
 Property 3: (A+B)t = At + Bt
 Property 4: (AB)t = BtAt
3. Addison and subtraction of matrices: Two matrices A and B can be added or
subtracted if and only if they have the same order, which is the same number of rows
and columns. That is, the number of columns of matrix A is equal to the number of
columns of matrix B, and the number of rows of matrix A is equal to the number of
rows of matrix B. Two matrices of the same order are said to be conformable for
addition and subtraction. The sum and subtraction of two matrices of the same order
is obtained by adding together or subtracting corresponding elements of the two
matrices.

If A= (aij) and B= (bij), then C = A+B is the matrix having a general element of the form;
Cij = aij + bij. D = A-B → Cij = aij - bij .

48
 Example:
A= 2 0 B= 3 6
-5 6 4 1

Then;
2+3 0+6 5 6

A+B = -5+4 6+1 = -1 7

1 5 10 2
If A= 6 7 B=
8 9 8 6
A+B is not defined, since orders of A and B are not the same.

Properties of matrix addition

a. Commutative law: A+B = B+A

E.g. A = 2 3 B= 4 3 C= 1 5
1 0 2 1 3 6

2+4 3+3 4+2 3+3 6 6

A+B = =B+A= =
1+2 0+1 2+1 1+0 3 1

b. Associative law: (A + B) + C = A + (B + C)

(A+B)+C = 6 6 1 5 7 11
+ =

49
 3 1 3 6 6 7

A+ (B+C) = 2 3 4 3 1 5
+ +
1 0 2 1 3 6

2 3 5 8 7 11
= + =
1 0 5 7 6 7

c. Existence of identity: A+ 0 = 0 + A = A.
Note: The subtraction (difference) of two matrices of the same order is obtained by
subtracting corresponding elements.

Referring to the above matrices given in (a);

2 3 4 3 2-4 3-3 -2 0
A-B= - = =
1 0 2 1 1-2 0-1 -1 -1

4 3 2 3 4-2 3-3 2 0
B-A = - = =
2 1 1 0 2-1 1-0 1 1

A-B ≠ B-A, thus matrix subtraction is not commutative.

-2 0 1 5 -3 -5
(A-B)-C = - =

50
 -1 -1 3 6 -4 -7

2 3 4 3 1 5
A-(B-C) = - -
2 1 3 6
1 0

2 3 3 -2 -1 5
= - =
1 0 -1 -5 2 5

(A-B) –C ≠ A- (B-C) ; matrix subtraction is not associative.

Remark:
 A+B = B+A and (A+B) +C= A+ (B+C) → matrix addition is both commutative and
associative.
 A-B ≠ B-A and (A-B) - C ≠ A- (B-C) → matrix subtraction is neither commutative
nor associative.

4. Matrix Multiplication
Two matrices A and B can be multiplied together to get AB if the number of columns in
A is equal to the number of rows in B.

A B
n x s
mxn

Inner dimension

Outer dimension

 If two matrices have the same inner dimension, then we can get the product of the
matrices. The resulting matrix will have a dimension equal to the outer dimensions of
the two matrices. There are two types of matrix multiplication: multiplication by a
scalar and multiplication by a matrix.

51
i. Scalar multiplication: in this type of multiplication, we multiply the scalar by each
element of the given matrix.
3 4 0
E.g. If B = 1 2 5

3 4 1

3 4 0 15 20 0
(5). B = (5) =
1 2 5 5 10 25

3 4 1 15 20 5

ii. Multiplication by a matrix: multiplication by a matrix can be performed if the

number of columns in the first matrix is equal to the number of rows in the second
matrix. In this type of multiplication, we always multiply each row of the first matrix
by each column of the second matrix and sum the resulting outcome.

E.g. 1 2 2 1 4
A= 3 4 B=
0 1 (3x2) 3 0 5 (2x3)

Then, A x B = (1x2) + (2x3) (1x1) + (2x0) (1x4) + (2x5)

(3x2) + (4x3) (3x1) + (4x0) (3x4) + (4x5)

(0x2) + (1x3) (0x1) + (1x0) (0x4) + (1x5)

8 1 14
=
15 3 32

3 0 5 (3x3)

Dear student, can you show whether matrix multiplication is both communicative and
associative or not?

52
 Properties of matrix multiplication

Property 1: The distributive law is valid in matrix multiplications.

A (B+C) = AB + AC
(B+C)A = BA + CA

Property 2: The associative law is valid in matrix multiplication.

(AB)C = A(BC) = ABC

Property 3: If I is an identity matrix, then;

AI = IA =A

In general, as long as the order of the matrix is maintained, matrix multiplication is

associative, but matrix multiplication is not commutative except for:
a) The multiplication of a matrix with an identity matrix;
i.e. A.I = I. A =A
b) The multiplication of a matrix with its inverse;
i.e., A.A-1 = A-1.A = I

Solved problems
1. Interest at the rates of 0.06, 0.07 and 0.08 is earned on respective investments of
$3000, $2000 and $4000.
a) Express the total amount of interest earned as the product of a row vector by a
column vector.
b) Compute the total interest by matrix multiplication.

Solution:
Given: Let the interest rate matrix be I and investment matrix be B.
a) I = 0.06 0.07 0.08 3000
(1x3) ;
B= 2000

53
 4000 (3x1)

Total interest = (Interest rate matrix) (Investment matrix) = I.B.

3000
I.B = 0.06 0.07 0.08 .
2000

4000

= (0.06x 3000) + (0.07x2000) + (0.08x4000)

Total interest = 640 (1x1)

= $ 640

2. Finfine Furniture Factory (3F) produces three types of executive chairs namely A, B
and C. The following matrix shows the sale of executive chairs in two different cities.
Executive chairs
A B C
C1 400 300 200
Cities
C2 300 200 100 (2x3)

If the cost of each chair (A, B and C) is Birr 1000, 2000 and 3000 respectively, and the
selling price is Birr 2500, 3000 and 4000 respectively;
a) Find the total cost of the factory for the total sale made.
b) Find the total profit of the factory.

Solution:

Given: Let the quantity matrix be q

Let the price matrix be p
Let the unit cost matrix be v;

a) 400 300 200 1500 1000

q= p= V=

54
 3000 2000
300 200 100
4000 3000

Total cost = (unit cost) (Quantity)

= 400 300 200 1000

. 2000
300 200 100
3000

1,600,000

=
1,000,000

Total cost = Birr 1,600,000 + Birr 1,000,000 = Birr 2,600,000

b) Total profit = Total Revenue - Total Cost

Total Revenue = (price) (quantity)

400 300 200 1500

= .
3000
300 200 100
2,300,000 4000
=
1,450,000

Total Revenue = Birr 2,300,000 + Birr 1,450,000 = Birr 3,750,000

Profit = Birr 3,750,000 – Birr 2, 600,000

= Birr 1,150,000

Exercise 2-1
1. Find a and b if a+b a-b 7 3
=
1 2 1 2

2. Classify the following matrices:

55
 a) 1 0 b) c) 0 0 0 d) -2
1 -1 3
0 1 0 0 0 3

0 0 0 5

3. A = 1 2 -3 -2

3 4 and B = 1 -5 ; find A + B.

5 6 4 3

0 2 3 7 6 3
4. If A = and B = ; find the value of 2A + 3B.
2 1 4 1 4 3

5. If A = 8 4 and B = 3 2

3 7 1 5 ;

Find the matrix x such that 2A +4B – 3x = 0.

2 1 0 1 2 -1
6. If A =
1 -1 2 and B = -2 0 1

0 1 3 1 1 2 ;

Find A-B and B-A.

7. Given the matrices:

1 -2
A= 1 3 0
0 3 B=
2 0 -1 ; Determine where possible:
0 4

a) AB
b) BA
c) 2A

8. Verify whether AB = BA for matrices:

A= 2 1 0 1 2 -1
and B =
1 -1 2 -2 0 1

56
 0 1 3 1 1 2

9. Given: 8 1 -2 1 -2 3 4 -3 1

A= -9 9 9 B= 5 6 -4 C= 6 2 -1

6 -3 9 7 -9 8 0 -4 3

Show that; i) A(B+C) = AB + AC ii) (A+B)C = AC + BC.

2
10. Given: A = 7 5 4 9 10
B= C= 6
1 3 2 6 5
7
8 6

Show that matrix multiplication is associative; that is (AB)C = A(BC).

11. Find the transpose of the following matrices:

a) A = 2 b) B = 4 6 8 c) C = 6

d) D = 3 5 7 e) X 1 2 3 4

9 1 2 2 3 4 1

6 8 4 3 4 2 1

4 1 1 2

12. If x = 1 -2 3 y= -1 2 -3

-4 0 6 4 0 -6

1 2 3 -1 -2 -3 ; find x + y.

57
Determinant of a matrix

Definition: the determinant is a single number or scalar and is found only for square
matrices. If the determinant of a matrix is equal to zero, the determinant is said to vanish and
the matrix is termed singular.

1. Let A = a11 (1x1) , then the determinant of A denoted by or det A is a11.

i.e det A= = /a11/

2. Let A = a11 a12
a21 a22 ( 2x2)

= a11 a12
a21 a22 is known as a determinant of order two
and its value is given as: = a11a22 - a12a21.

E.g. A= 6 4 = 6 4 = 6(9)-7(4)=26
7 9 ; 7 9

3. L et A= a11 a12 a13

a21 a22 a23
a31 a32 a33

= a11 a12 a13

a21 a22 a23 is called a third order determinant
a31 a32 a33

a22 a23 a21 a23 a21 a22

= + a11 a32 a33 - a12 a31 a33 +a13 a31 a32

58
 = a11 (a22 a33 - a32 a23) – a12 (a21 a33-a31a23) + a13 (a21a32-a31a22)

E.g. Let A= 1 2 4
0 -1 0
-2 0 3 ; Find .

= 1 2 4 -1 0 0 0 0 -1
0 -1 0 = +1 -2 +4
-2 0 3 0 3 -2 3 -2 0

= 1 (-1x3 – 0x0) -2 (0x3- (-2x0)) + 4 (0x0 – (-2x-1))

= -3 -0 -8
= -11

Note: The value of determinant of 2nd order is equal to the product of the elements along the
principal diagonal minus the product of the off diagonal elements.
The value of determinant of 3rd order is equal to the summation of three products. To derive
the three products:

Let A = a11 a12 a 13

a 21 a22 a 23
a 31 a 32 a 33

i) Take the first element of the first row a 11, and mentally delete the row and column in
which it appears. Then, multiply a11 by the determinant of the remaining elements.

ii) Take the second element of the first row a 12 and mentally delete the row and column in
which it appears. Then, multiply a 12 by -1 times the determinant of the remaining
elements.
iii) Take the third element of the first row a 13, and mentally delete the row and column in
which it appears. Then, multiply a13 by the determinant of the remaining elements.

59
Minors and Cofactors: The element of a matrix remaining after the deletion process from a
sub-determinant of the matrix is called a minor. Thus the minor M ii is the determinant of the
sub-matrix formed by deleting the ith row and jth column of the matrix.

Given : A = a 11 a12 a13

a 21 a22 a23
a 31 a 32 a33

Here, /m11/ is the Minor of a11, /m12 / the minor of a12 and /m13/ the minor of a13.

/m11/ = a22 a23

= a22 a33- a32 a23

a32 a33

/m12/ = a21 a23

= a21 a33 – a31a23
a31 a33

/m13/ = a21 a22

= a21 a32 - a31 a22
a31 a32

a11 a12
Given : A =
a 21 a22

/m11/ = / a22/ = a22 ; /m21/ = /a12/ = a12

/m12/ = / a21 / = a21 ; /m22/ = /a11/ = a11

Example:

60
If A = 2 1

0 4 ; then,

The minor of a11 (/m11/), the element in the first row and first column is; /m11/ = /4/ = 4
The minor of a12, /m12/ = 0
The minor of a21, /m21/ =1
The minor of a22, /m22/ = 2

The cofactor (Cij) of the element aij of the matrix A is the minor of a ij multiplied by (-
1)i+j ; so that if i+j is even, the cofactor and the minor are equal, and if i+j is odd, the
cofactor is the negative of the minor.
The adjoint of A is the transpose of the cofactor matrix of A.
Taking the above example, the cofactors are computed as follows:

C11 = cofactor of a11 (the element in the first row and first column)
= /m11/. (-1)1+1
= 4(-1)2 = 4

C12 = /m12/. (-1)1+2

= 0(-1)3 = 0

C21= /m21/. (-1)2+1

= (1). (-1)3= -1

C22 = /m22/. (-1)2+2

= 2(-1)4 = 2

The cofactor matrix denoted by C, is given by:

c11 c12 4 0
C= =
c21 c22 -1 2

Adjoint of (A), which is the transpose of the cofactor matrix (ct ) is given by :

61
 Adjoint (A) = ct = 4 -1

0 2

Given: A = 1 1 1
2 -1 2
1 0 -1

The minor of a11 /m11/ = -1 2

=1
0 -1

The minor of a12 /m12/= 2 2

= -4
1 -1

The minor of a13 / m13/ = 2 -1

1 0 =1

The minor of a 21 / m21/ = 1 1

0 -1 =1

The minor of a22 / m22/ = 1 1

= -2
1 -1

The minor of a23 / m23/ = 1 1

= -1
1 0

The minor of a31 /m31/ =

1 1 =3

-1 2

The minor of a32 /m32/ = 1 1

= 0
2 2

The minor of a33 /m33/ = 1 1

= -3

62
 2 -1

The cofactor matrix is given by:

C = c11 c12 c13 1 4 1

c21 c22 c23 = 1 -2 1
c31 c32 c33 3 0 -3

Adjoint (A) = ct = 1 1 3
4 -2 0
1 1 -3

2.4 Inverse of a Matrix

In scalar algebra, the inverse of a number is that number which, when multiplied by the
original number, gives a product of 1. Hence, the inverse of x is simply 1/x; or in slightly
different notation, x-1. In matrix algebra, the inverse of a matrix is that which, when
multiplied by the original matrix, gives an identity matrix. The inverse of a matrix is denoted
by the superscript “-1”. Hence, AA-1 = A-1A = I.

Note that: A matrix must be square to have an inverse, but not all square matrices have an
inverse. The necessary and sufficient condition for a square matrix to possess its inverse is
that /A/ ≠ 0.

Finding the inverse of a matrix requires the concept of row operations to be performed. The
row operations are the following:
a. Multiply or divide a row by a non- zero constant;

If A = 2 3
6 9 multiply row one (R1) by -2 to get matrix B.

Then, B = -4 -6

63
 6 9

Divide row two (R2) by 3 to get matrix C. Then, matrix

C = 2 3
2 3

b. Add a multiple of one row to another row;

If A = 1 2 multiply R1 by 2 and add to R2 to get matrix x.
3 4

Matrix X = 1 2
5 8

C. Interchanging of rows;

If A = 1 0 Interchange R1 and R2 ( R1 ↔ R2 ) ; to
2 4 get matrix D.

2 4
D= 1 0

N.B: The first row elements in the original matrix become second row elements in the new
matrix and vice versa.

Dear distance learner! Do you know the three most important methods to find inverse of a
matrix?

The most important methods to find inverse of a given matrix include the following:

1. Gauss- Jordan Inversion method

2. The zero-first method
3. The cofactor technique

64
 Dear student! Now let us look at each of the inversion methods one by one.

I. Gauss- Jordan Inversion Method

This method was developed by a mathematician called Gauss and it was named so by
the founder. The Gauss- Jordan inversion method starts by writing the given matrix at
the left and the corresponding identity matrix next to it, at the right. Then, select and
carryout row operations that will convert the given matrix in to an identity matrix and
apply the same operations to the matrix at the right simultaneously. When the left or
the given matrix becomes an identity matrix, the matrix at the right will be the desired
inverse matrix.

i.e. A/I Apply Elementary Row Operation (ERO) I/A-1

Example: Find the inverse of the following matrix using the Gauss- Jordan method.
3 2
A= 1 1

Solution
Steps:
1st: write the given matrix at the left and the corresponding identity matrix at the right;
3 2 1 0
A/I =
1 1 0 1
N.B: corresponding identity matrix for 2x2 matrix is of dimension 2x2.

2nd : Interchange R1 and R2;

3 2 1 0 1 1 0 1
1 1 0 1 3 2 1 0

3rd: Multiply R1 by -3 and add the result to R2;

65
 -3 R1 = -3 -3 0 -3
+
R2 = 3 2 1 0
0 -1 1 -3

The resulting matrix is given by:

1 1 0 1

0 -1 1 -3
4th: Simply add R2 entries to R1 entries;
R2 = 0 -1 1 -3
+
R1 = 1 1 0 1
1 0 1 -2

The resulting matrix is given by:

1 0 1 -2
0 -1 1 -3

5th: Multiply R2 by -1;

(-1) (R2) = 0 1 -1 3

The resulting matrix is given by;

1 0 1 -2

0 1 -1 3

Dear student! Have you noticed that the original matrix is converted in to identity matrix and
the corresponding identity matrix to inverse matrix?

Thus; the inverse matrix A, denoted by A-1 is given as:

A-1 = 1 -2
-1 3
Check! A.A-1 = A-1. A = I

66
 = 3 2 1 -2 1 0
. = 
1 1 -1 3 0 1

Example: Find the inverse of B = 2 2 3

0 1 1
4 0 3
Solution:
1st → write the given matrix at the left and the corresponding identity matrix at the
right.
2 2 3 1 0 0
B/I = 0 1 1 0 1 0
4 0 3 0 0 1
N.B: The corresponding identity matrix for a 3x3 square matrix is of dimension 3x3.
2nd → Divide R1 by 2 (or multiply R1 by ½);
R2/2 = 2/2 2/2 3/2 1/2 0/2 0/2
= 1 1 3/2 ½ 0 0

The resultant matrix is: 1 1 3/2 ½ 0 0

0 1 1 0 1 0
4 0 3 0 0 1

3rd → Multiply R1 by -4 and add to R3 (-4R1 + R3);

-4R1 = -4 -4 -6 -2 0 0
+
R3 = 4 0 3 0 0 1
0 -4 -3 -2 0 1

The resultant matrix is: 1 1 3/2 ½ 0 0

0 1 1 0 1 0
0 -4 -3 -2 0 1

4th → Multiply R2 by -1 and add to R1 (-1R2+R1);

67
 (-1)R2 = 0 -1 -1 0 -1 0
+
R1 = 1 1 3/2 ½ 0 0
1 0 ½ ½ -1 0
The resultant matrix is given by:

1 0 ½ ½ -1 0
0 1 1 0 1 0
0 -4 -3 -2 0 1

5th → Multiply R2 by 4 and add to R3 (4R2 +R3);

4R2 = 0 4 4 0 4 0
+ 0 -4 -3 -2 0 1
R3 0 0 1 -2 4 1

The resultant matrix is given by:

1 0 ½ ½ -1 0
0 1 1 0 1 0
0 0 1 -2 4 1

6th → Multiply R3 by -1/2 and add to R1 (-1/2 R3 + R1);

-1/2 R3 = 0 0 -1/2 1 -2 -1/2

+
R1 = 1 0 ½ ½ -1 0
1 0 0 3/2 -3 -1/2

The resultant matrix is green by:

68
 1 0 0 3/2 -3 -1/2
0 1 1 0 1 0
0 0 1 -2 4 1

7th → Multiply R3 by -1 and add to R2 (-1R3+R2);

(-1) R3 = 0 0 -1 2 -4 -1
+
R2 = 0 1 1 0 1 0
0 1 0 2 -3 -1

The resultant matrix is green by:

1 0 0 3/2 -3 -1/2
0 1 0 2 -3 -1
0 0 1 -2 4 1

Thus; B-1 = 3/2 -3 -1/2

2 -3 -1
-2 4 1

Dear student! Have you understand that the elementary row operations converted the original
matrix (B) in to an identity matrix (I) and the corresponding identity matrix to the desired
inverse (B-1)? Dear student! Reanalyze the above two examples to justify the situation.

Exercise 2-2

1. Find the inverse of the following matrices using the Gauss – Jordan method.

69
 A= 3 3
2 2
2. Write the expanded matrix form of a 2 by 3 general matrix.
3. If matrix p is 1 by 2 and we have py = q, where q is a 1 by 1 matrix:
a. What are the dimensions of matrix y?
b. Write the expanded vector form of the equation.
c. Write the usual algebraic form.

4. Find the inverse of A = 3 4

2 1

The Zero – first method

In using this method, first find zeros in the off-diagonal followed by ones in the main
diagonal.

Example;

If C = 2 3

4 7 ; Find C-1 using zero –first method.

Solution:

1st → Write the augmented matrix; (C/I)

2 3 1 0
4 7 0 1

2nd → To translate the off- diagonal element in the send row and first column (i.e., 4) in to
zero; the elementary row operation is; -2R1 + R2;

70
 -2R1 = -4 -6 -2 0
+
R2 = 4 7 0 1
0 1 -2 1

The resultant matrix is; 2 3 1 0

0 1 -2 1

3rd →To translate the remaining off – diaconal element (i.e., 3) in to zero; the elementary row
operation is; -3R2+ R1;

-3R2 = 0 -3 6 -3
+
R1 = 2 3 1 0
2 0 7 -3

2 0 7 -3
The resultant matrix is;
0 1 -2 1

4th → To translate the main- diagonal entry (i.e., 2) in to one; the elementary row operation is;
R1/2;

R1/2 = 1 0 7/2 -3/2

The final resultant matrix is given by:
1 0 7/2 -3/2

0 1 -2 1

Thus; C-1 = 7/2 -3/2

71
 -2 1

Check: C.C-1 = C-1 = I

2 3 7/2 -3/2 1 0 

4 7 -2 1 0 1

Example: Find the inverse of the following matrix by using the zero – first method.

0 -1 1
D= -1 1 2
1 0 -2
Solution:

1st →Write the augmented matrix;

0 -1 1 1 0 0
-1 1 2 0 1 0
1 0 -2 0 1 0

N.B: the corresponding identity matrix for a 3x3 matrix is of dimension 3x3.

2nd →Interchange R1 and R3;

The resultant matrix is given by; 1 0 -2 0 0 1

-1 1 2 0 1 0
0 -1 1 1 0 0

3rd → Add R1 to R2;

72
 R1 = 1 0 -2 0 0 1
+
R2 = -1 1 2 0 1 0

0 1 0 0 1 1
The resultant matrix is given by:
1 0 -2 0 0 1
0 1 0 0 1 1
0 -1 1 1 0 0

4th → Add R2 to R3;

R2 = 0 1 0 0 1 1
+
R3 = 0 -1 1 1 0 0
0 0 1 1 1 1

The resultant matrix is given by:

1 0 -2 0 0 1
0 1 0 0 1 1
0 0 1 1 1 1

5th →2R3 + R1 ;
2R3 = 0 0 2 2 2 2
+
R1 = 1 0 -2 0 0 1
1 0 0 2 2 3

The resultant matrix is given by: 1 0 0 2 2 3

0 1 0 0 1 1

73
 0 0 1 1 1 1

Thus; D-1 = 2 2 3
0 1 1
1 1 1

Check: D.D-1 = D-1.D = I

0 -1 1 2 2 3 1 0 0

-1 1 2 . 0 1 1 = 0 1 0
1 0 -2 1 1 1 0 0 1

Exercise 2-3

Find the inverse of the following using the zero –first method;

a) 2 1 3
A= 3 1 2
1 2 3

b) 3 2 c) 3 3
C= D=
1 5 4 4

III. The Cofactor Technique

This method involves computation of minors, cofactors and the adjoint matrix in order to find
the inverse of a given matrix.

Formula wise; the inverse of a given matrix A is given by:

A-1 = 1/ (Adj. A)

74
Dear student! Remember the computation of a determinant; minors; cofactors and adjoint of a
matrix in the previous sections of the chapter.

N.B:
- The minor of aij is the determinant of a given matrix; say A with row i and column j
eliminated.
- The cofactor Cij of the element aij of matrix A is the minor of aij multiplied by (-1)i+j .
- The adjoint of A is the transpose of the cofactor matrix of A.

1 -2 3
Example; If A = 2 3 -1
-3 1 2 ; Find its inverse using the above formulae.

Solution:
a11 = 1 and its cofactor c11 = (-1)1+1 3 -1 =7
1 2

a12= -2 and its cofactor c12 = (-1)1+2 2 -1 = -1

-3 2

2 3
a13 = 3 and its cofactor c13 = (-1)1+4 = 11
-3 1

Similarly; C21= 7; C22= 11; C23= 5, C31= -7; C32= 7 and C33=7.
Adjoint of matrix A, Adj. (A) = the transpose of the cofactor matrix (Ct).

Cofactor matrix; c11 c12 c13 7 -1 11

C= c21 c22 c23 = 7 11 5
c31 c32 c33 -7 7 7

7 7 -7
Adj. (A) = Ct = -1 11 7

75
 11 5 7

Determinant of matrix A; det (A) = 1x7 – 2x1 +3x11

= 38
Then, A-1 = (Adj (A))

7 7 -7 7/38 7/38 -7/38

= 1/38 -1 11 7 = -1/38 11/38 7/38
11 5 7 11/38 5/38 7/38

Exercise 2-4

Find the inverse of the following using the cofactor technique;

a)
1 1 1 b)
C= 2 -1 2 x= 1 -1
1 0 -1 1 1

Dear Student! What do you conclude about inverse of matrix?

76
SECTION TWO: MATRIX APPLICATIONS

Section Objectives

Up on completing this section, you will be able to:

 Develop an insight towards application areas of matrix algebra.

 Handle large linear systems using matrix algebra.
 Undertake markov chain analysis with the help of matrix algebra.

2.5 Solving System of Linear Equations

A system of linear equations can be solved by the following three methods using matrix
algebra:

a) Cramer’s rule ( the determinant method)

b) The inverse method
c) The Gauss- Jordan method

Let us see each of the three methods one by one.

77
a) Cramer’s Rule:
This method sometimes called the determinant method; works according to this formula:

Xi = /Ai/; where xi = indicates the variables we want to solve for.

/A/ /A i/ = is the determinant obtained by putting the right-hand side of the
system in place of the column of coefficients of the variable whose solution is
needed; and

/A/ = is the determinant of the system.

Given a system of equations:
i) a11x+a12y = b1 → algebraic form
a21x+a22y = b2

The above system of equations can also be rewritten in expanded matrix form as follows:

a11 a12 x b1
. =
a21 a22 y b2

Matrix of coefficients column vector of column vector of

denoted by A variables (X) constants (B)

Using Cramer’s rule, the solution is given by:

b1 a12 a11 b1
X=
b2 a22 ; and Y= a21 b2

Example; x- y = 1 = 1 -1 x 1 → matrix expression

x+ y = 2 . =

78
 1 1 y 2

Then, x= 1 -1
2 1

= 1 -1
2 1
= 3/2
1 -1
1 1

y= 1 1 1 1
= 1/2
1 2 1 2
1 -1
1 1

ii) Given a system of equations:

a11x+ a12y+ a13z = b1
a21x+ a22y+ a23z = b2
a31 x+a32y+ a33z = b3

Expanded form:
a11 a12 a13 x b1
a21 a22 a23 . y = b2
a31 a32 a33 z b3
A X B

Then; the value of x is given by:

b1 a12 a13 a11 b1 a13
b2 a22 a23 a21 b2 a23
b3 a32 a33 ;y= a31 b3 a33
a11 a12 a13 a11 a12 a13

79
 a21 a22 a21 a22 a23
a31 a32 a33 a31 a32 a33

z= a11 a12 b1
a21 a22 b2
a31 a32 b3
a11 a22 a13
a21 a22 a23
a31 a32 a33

Example; Solve using Cramer’s rule:

2x + y – z = 0
x+y+z=0
y–z=1

Expanded form of the above system is:

2 1 -1 x 0
1 1 1 . y = 0
0 1 -1 z 1
A X B

= +2 1 1 -1 1 1 +(-1) 1 1
1 -1 0 -1 0 1 = -4

Thus; x = 0 1 -1
0 1 1 = 2/-4 = -1/2
1 1 -1

Y= 2 0 -1
1 0 1 = -3/-4 = 3/4
0 1 -1

80
 Z= 2 1 0
1 1 0
0 1 1 = -1/4

b) The Inverse Method:

It is used to find the solution of linear equations when the number of equations is equal to the
number of variables (i.e. for square matrices only).

Consider the following system of linear equations:

a11x1+ a12x2+ a13x3 = b1
a21x1+ a22x2+ a23x3 = b2
a31x1 + a32x2+ a33x3 = b3

These equations can be expanded as:

a11 a12 a13 x1 b1
a21 a22 a23 . x2 = b2
a31 a32 a33 x3 b3
Matrix of coefficient column vector of column vector of
(A) Variables (x) constants (B)

Therefore; AX = B
If we multiply the above equation by A-1, we get (A-1A) (x) = A-1B
IX = A-1B, but A-1A = I; therefore; IX =X
Thus; X = A-1B

81
Because we know matrix B, we need to find A -1, which we know how to obtain. If we find
the inverse, we multiply it by vector B, and the outcome will be the solution. In total, in using
the inverse method to find the solution of linear equations:
1st Find the inverse of the coefficient matrix.
2nd Multiply the inverse with the column vector of constants.

Example:
Solve the following equations using the inverse method.

a) 2x1 + 3x2 = 17
x1 + 2x2 =10

b) x+2y-3Z=11
3x+2y+Z=1
2x+y - 5Z=11

Dear student, please try to solve these examples before going to the solution part.

Solution :

a) 1st Write the expanded form;

2 3 X1 = 17
1 2 X2 10

2nd Find the inverse of the coefficient matrix;

2 3 1 0
1 2 0 1

 Interchange R1 and R2;

1 2 0 1
2 3 1 0

 -2R1 + R2;
-2 R = -2 -4 0 -2

82
 +
R2 = 2 3 1 0
0 -1 1 -2

The resultant matrix is given by:

1 2 0 1
0 -1 1 -2

Multiply R2 by -1;

-1(R2) = 0 1 -1 2
The resultant matrix is given by:

1 0 2 -3
0 1 -1 2

Thus, the inverse of the coefficient matrix is:

2 -3
-1 2
3rd Multiply the inverse by the constant matrix;
X= A-1B

X1 = 2 -3 . 17 = 4
X2 -1 2 10 3

Therefore, X1 = 4 and X2 = 3.

b) 1st  write the expanded form;

1 2 -3 X = 11
3 2 1 Y 1
2 1 -5 Z 11

2nd Find the inverse of the coefficient matrix;

83
1 2 -3 1 0 0
3 2 1 0 1 0
2 1 -5 0 0 1

 -3R1+ R2 ;
-3R1 = -3 -6 9 -3 0 0
+
R2 3 2 1 0 1 0
0 -4 10 -3 1 0

The resultant matrix is given by:

1 2 -3 1 0 0
0 -4 10 -3 1 0
 -2R1+R3 ; 2 1 -5 0 0 1

-2R1= -2 -4 6 -2 0 0
+
R3= 2 1 -5 0 0 1
0 -3 1 -2 0 1

The resultant matrix is given by: 1 2 -3 1 0 0

0 -4 10 -3 1 0
0 -3 1 -2 0 1
 R2/2 + R1;
R2/2 = 0 -2 5 -3/2 ½ 0
+
R1 = 1 2 -3 1 0 0
1 0 2 -½ ½ 0

The resultant matrix is: 1 0 2 -½ ½ 0

0 -4 10 -3 1 0
0 -3 1 -2 0 1

84
 -R2/4;
-R2/4= 0 1 -5/2 ¾ -¼ 0

The resultant matrix is given by: 1 0 2 -½ ½ 0

0 1 -5/2 ¾ -¼ 0
0 -3 1 -2 0 1
3R2+R3;
3R2 = 0 3 -15/2 9/4 -¾ 0
+
R3= 0 -3 1 -2 0 1
0 0 -13/2 ¼ -3/4 1

The resultant matrix is: 1 0 2 -½ ½ 0

0 1 -5/2 ¾ -¼ 0
0 0 -13/2 ¼ -¾ 1

 -2/13R3
1 0 2 -½ ½ 0
0 1 -5/2 ¾ -¼ 0
0 0 1 -1/26 3/26 -2/13

 5/2 R3+R2

5/2 R3 = 0 0 5/2 -5/52 15/52 -10/26

+
R2 = 0 1 -5/2 ¾ -1/4 0
0 1 0 17/26 -1/26 -5/13

The resultant matrix is given by:

1 0 2 -½ ½ 0
0 1 0 17/26 1/26 -5/13
0 0 1 -1/26 3/26 -2/13

85
 -2R3+R1;
-2R3= 0 0 -2 1/13 -3/13 4/13
+
R1= 1 0 2 -½ ½ 0
1 0 0 -11/26 7/26 4/13

The final resultant matrix is given by:

1 0 0 -11/26 7/26 4/13
0 1 0 17/26 1/26 -5/13
0 0 1 -1/26 3/26 -2/13

3rd Multiply the inverse (A-1) with the constants matrix (B); i.e. X=A-1B;
X -11/26 7/26 4/13 11

Y = 17/26 -7/13 -5/13 * 1

Z -1/26 3/26 -2/13 11

x -1

y = 3 So, x = -1, y= 3, and z = -2.

z -2

c) The Gauss-Jordan Method:

This method works through several operations to reduce a given matrix of coefficients of a
system equation in to an identity matrix. It is used to find the solution of linear equations:
i) When the number of equations (m) is equal to the number of variables (n); i.e. m
= n.
ii) When the number of equations (m) is greater than the number of variables (n); i.e.,
m>n.

86
 iii) When the number of equations (m) is less than the number of variables (n); i.e.,
m<n.

It applies the concept of row operations both on the coefficient matrix (A) and
the column vector of constants (B) in order to convert them to an identity
matrix (I) and the solution matrix (S) respectively.

That is, (A/B) row operations (I/S)

i. Number of equations (m) equals number of variables (n)

The intention to convert (A/B) to (I/S) when the number of equations (m) equals the number
of variables (m) will result in:
1. Unique solution if the coefficient matrix has an inverse.
2. An infinite solution if the elements in the last row are all zeros including the
constants’ column.
3. No solution if there is a row that is all zeros except in the constants’ column.
Example-1: Solve the following system of two equations:

2x1 + 3x2 = 5
x1 + x2 = 3

Solution:

Form the augmented matrix A consisting of the coefficients of x 1 and x2 and the column of
the right-hand side of the above system. That is,

(A/B) = 2 3 5
1 1 3

87
As mentioned, we want to reduce the coefficient matrix in to an identity matrix of dimension
2 x 2; this can be done through the following operations:

Multiply the first row by (½), keeping the second row intact, and yields:

1 3/2 5/2
1 1 3

The first element of the first row is (1); accordingly, the first row is the pivotal row to
perform the operations with. We need now to make the first element of the second row (0).
To do so, we keep the first row intact, multiply it by (-1), and add the result to the second
row, which yields:
1 3/2 5/2
0 -½ ½

Now, we need to convert the (-½) in to (1) to create a pivotal row. This can be done by
multiplying the second row by (-2); keeping the first row intact yields:
1 3/2 5/2
0 1 -1

Again, we want to convert the (3/2) in to (0). To do so, we keep the second row intact (the
pivot), multiply it by (-3/2), and add the result to the first row, which yields:

1 0 4
0 1 -1

As can be seen through several operations, we reduce the coefficient matrix in to an identity
matrix of dimension 2x2. The last column of the above matrix is the solution for x 1 and x2,
respectively.

Example -2 :

X+Y = 2

88
 2X+2Y = 4

Solution:

1st → write the expanded form;

1 1 x = 2
2 2 Y 4

A/B  1 1 2
2 2 4

2nd → -2R1 + R2;

-2R1 = -2 -2 -4
+
R2 = 2 2 4
0 0 0

The resultant matrix is given by:

1 1 2
0 0 0 ↔ Infinite solution since the last row entries are all zeros.

Dear Student! Notice that, no row operations can convert matrix A in to an identity matrix.
So, no further operation is required. The bottom row entries (all being zero) indicate the case
of an infinite solution.

Example-3 :
X+Y+Z = 4
5X-Y+7Z = 25
2X-Y+3Z = 8

89
Solution:

1st → Expanded form;

1 1 1 X = 4
5 -1 7 Y 25
2 -1 3 Z 8

1 1 1 4
2nd → = 5 -1 7 25
2 -1 3 8
3rd → Apply row operations to convert →
 -5R1 + R2;
-5R1 = -5 -5 -5 -20
+
R2 = 5 -1 7 25
0 -6 2 5

The resultant matrix is: 1 1 1 4

0 -6 2 5
2 -1 3 8

 -2R1+R3;

-2R1= -2 -2 -2 -8
+
R3 = 2 -1 3 8
0 -3 1 0

The resultant matrix is: 1 1 1 4

0 -6 2 5
0 -3 1 0
 R2/-6;

90
= 1 1 1 4
0 1 -1/3 -5/6
0 -3 1 0

 -R2+ R1;

-R2 = 0 -1 1/3 5/6

+
R1 = 11 1 4
1 0 4/3 29/4

The resultant matrix is: 1 0 4/3 29/4

0 1 -1/3 -5/6
0 -3 1 0

 3R2 + R3:
3R2 = 0 3 -1 -5/2
+
R3 = 0 -3 1 0
0 0 0 -5/2
The resultant matrix is:
1 0 4/3 29/4
0 1 -1/3 -5/6 ↔ No solution
0 0 0 -5/2

Dear student! You have noticed that bottom row entries are all zeros except the constants’
column (which is -5/2) resulting in no solution case.

ii. Number of equations (m) greater than number of variables (n)

The intention to convert → will result either in:

91
 1. An n by n identity matrix above m-n bottom rows that are all zeros, giving the unique
solution.
2. A row that is all zeros except in the constants’ column indicating that there are no
solutions.
3. A matrix in a form different from (1) and (2) indicating an unlimited solution.

Example-1
2x1 -3x2 = 6
x1 +5x2 = 29
3x1 - 4x2 = 11

Solution:

1st → write the expanded form;

2 -3 x1 6
= 1 5 . = 29
3 -4 x2 11

2nd → Apply row operations;

2 -3 6
1 5 29
3 -4 11

 Interchange R1 and R2; 1 5 29

2 -3 6

3 -4 11
2R1+ R2 ;

1 5 29
0 -13 -52
3 -4 11

R2/-13 ;

92
 1 5 29
0 1 4
3 -4 11

 -5R2+ R1;

1 0 9
0 1 4
3 -4 11

-3R1 + R3 ;

1 0 9
0 1 4
0 -4 -16

 4R2+R3 ;

1 0 9
0 1 4 ↔ Unique solution
0 0 0 Thus; x1 = 9, and x2 = 4

Example-2;
2x1+x2 = 30
x1+ 2x2 = 24
4x1+5x2 = 72

Solution:
1st → Expanded form;

2 1 x1 30
1 2 x2 = 24

93
 4 5 x3 72

2nd → Apply row operations;

A/B  2 1 30
1 2 = 24
4 5 72
 Interchange R1 and R2;

1 2 24
2 1 30
4 5 72

 -2R1 + R2;

1 2 24
0 -3 -18
4 5 72

 -4R1 + R3;

1 2 24
0 -3 -18
0 -3 -24

 R2/-3;

1 2 24
0 1 6
0 -3 -24

 -2R2+ R1;
1 0 12
0 1 6
0 -3 -24

94
 3R2 +R3;

1 0 12
0 1 6 ↔ No solution
0 0 -6

iii. Number of equations (m) less than number of variables (n)

The attempt to convert matrix (A/B)  (I/S), when m <n, will result either in:

1. A row which is all zeros except in the constant column, indicating that there are no
solutions.
2. A matrix in a form different from (1), indicating that there are unlimited number of
solutions.
Example;
4x1 + 6x2 - 3x3 = 12
6x1+9x2 - 9/2x3 = 20

Solution:
1st → 4 6 -3 12
6 9 -9/2 20

2nd →R1/4;

1 3/2 -3/4 3
6 9 -9/2 20

3rd → -6R1+R2;

1 3/2 -3/4 3
0 0 0 2 ↔ No solution case!

95
Exercise 2-5

1. Solve the following using the Cramer’s rule;

a. 5x1+3x2 =13 b. x1+x2+3x3 =3 c. 2x1+4x2 = 7

4x2 =11 x1+x3 = 2 4x1+3x2 =1
4x1+2x2+3x3 =5

2. Solve the following using the inverse method;

a. 2x+z = 3 b. 3x1 + 2x2 = 6 c. x1+x2+3x3 = 3
3x+5y+7z = 1 x1+3x2 = 5 x1+x3 = 2
3z = 7 4x1+ 2x2+3x3 =5

3. Solve the following using the Gauss-Jordan method;

a. x1+x2+3x3 =3 b. 2x2 = 4
x1+2x2+x3 =2 x1+3x2 = 5
4x1+2x2+3x3=5

Solving Word Problems

Steps:
1. Represent the unknown quantities by letters.
2. Translate the quantities from the statement of the problem and form an algebraic
expression; then, set up an equation.
3. Solve the equations for the unknowns.
4. Check the findings as per the statement in the problem.

Example-1
A manufacturer produces two products p aid q. Each unit of product p requires in its
production 20 units of raw material A and 10 units of raw material B whereas each unit of
product q requires 30 units of raw material A and 50 units of raw material B. There is a
limited supply of only 1200 units of raw material A and 950 units of raw material B. How

96
many units of P and q can be produced if the manufacturer is to exhaust the supply of raw
materials (to operate at full capacity).

Solution:

Given: Raw materials Type of Products Availability

P q
A 20 30 1200
B 10 50 950

Step-1: Let x and y represent the number of units of product P and q to be produced
respectively at full capacity.

Step 2: Formulate the equations:

Raw material A: 20x+30y =1200  2x+3y =120

Raw material B: 10x+50y = 950  x+5y = 95

Step 3: Solve the equations:

Let us apply the Gaussian method;

Expanded form:

2 3 x = 120
1 5 . y 95

(A/B) (I/S)

2 3 120

1 5 95

97
 Interchange R1and R2;

1 5 95

2 3 120

 -2R1+R2;

1 5 95

0 -7 -70

 R2/-7;

1 5 95

0 1 10

 -5R2+R1;

1 0 45

0 1 10

x = 45 x = 45 units

y 10 y = 10 units

Step -4: Cross- Checking

 20x+30y =1200
20(45)+30(10) =1200
1200 =1200


98
 10x+50y = 950
10(45)+50(10)=950
950 = 950 

Example -2
Attendance records indicated that 1600 people attended a football game and the total
ticket receipt was 2800 birr.
The admission price was 1.50 birr for students and 2.50 birr for others.
Determine the number of students and non-students who attended the game.

Dear student, please try to solve the above example before going to the next solution.

Solution:
Given: Attendants Total
Students Non-students receipt
Admission price ……. 1.50 birr 2.50 birr 2800 birr
Number of People - - 1600

Step -1: Let S and N represent the number of students and non – students who attended
the same respectively.

Step- 2: Develop the equations;

Number of people: S+N = 1600

Receipt : 1.50 S+ 2.50 N = 2800

Step- 3: Apply the Gaussian method;

1 1 . S = 1600
1.5 2.5 N 2800

99
  →
1 1 1600

1.5 2.5 2800

 -1.5 R1 + R2 ;

1 1 1600
0 1 2800

 -R2 + R1 ;

1 0 1200
0 1 400

S = 1200
N 400  Number of students(S) = 1200.
Number of non-students (N) = 400
Total = 1600

Example -3

A mixture containing X – pounds of ingredient A, Y- pounds of ingredient B and Z – pounds

of ingredient C is to be made. The mixture is expected to have a weight of 5 pounds and
contains 1500 units of vitamin and 2500 units of calories. The vitamin and calorie content of
the three ingredients is shown below.

Ingredients Number of pounds Units of Vitamin Units of Calories

Per pound per pound

A X 500 300
B Y 200 600

100
C Z 100 700
Determine how many pounds of each ingredient should be in the 5 pound mixture.

Solution:
Let pounds of ingredient A be X
  B  Y
  C  Z

Equations: x+y+Z = 5 …..Weight of the mixture

5x+2y+Z =15…………… Vitamine
3x+6y+7Z = 25………….. Calories

Solve using matrix algebra;

1 1 1 X = 5 1 1 1 5
5 2 1 . Y 15  5 2 1 15
3 6 7 Z 25 3 6 7 25

 -5R1+R2;

1 1 1 5
0 -3 -4 -10
3 6 7 25

 -3R1+R3;

1 1 1 5
0 -3 -4 -10
0 3 4 10

 R2/-3;

1 1 1 5
0 1 4/3 10/3

101
0 3 4 10
 -3R2+R3;

1 1 1 5
0 1 4/3 10/3
0 0 0 0

 -R2+R1;
1 0 -1/3 5/3
0 1 4/3 10/3  Unlimited solution case!
0 0 0 0

2.6 Markov Chain Analysis

Definition: Markov analysis is the process of determining future occurrences depending on

present occurrences. It is a continuous process by which an outcome at each stage is
determined from the previous outcome by applying a certain fixed proportion.

There are two important data of the model:

a) The set of transition probabilities, and
b) The current or initial state

Based on these inputs, the model makes two predictions:

i. The probability of the system being in any state at any given time (i.e., state
probability).
ii. The long run or steady state or equilibrium probability.

The markov model is based on the transitional probability describing a situation that
changes between two stages. The first occurs at time (t-1), and the second stage takes

102
 place at time (t). In other words, the current probability of a certain state depends on the
probability of the immediate preceding state only.
The markov model has various applications in business and economics. For example, it
can be applied to a model where customers are buying products from two different stores
and where managers are interested in knowing how these customers change stores or
continue buying from the same store over the long run. Also, the markov model can be
applied to a situation where people migrate from region to region between time (t-1) and
(t).

Dear student! What do you know about transition probabilities, stages, states, regular
transition matrix, steady state matrix, absorbing and non- absorbing chains?

States, Stages and Transitional Probabilities

Imagine the following table of probabilities:

State at the end of stage “t”

1 2 3 4……………..n

1 P11 P12 P13 P14…………………..P1n

State at the
2 P21 P22 P23 P24…………………..P2n
end of stage
“t-1” 3 P31 P32 P33 P34…………………..P3n

n Pn1 Pn2 Pn3 Pn4……………...........Pnn

The table reveals some technical concepts. The first concept is the state concept such as state
1, 2, and so forth, which means that the system is in a certain category or condition. For
example; it is sunny today (stage t-1) and will be cloudy to morrow (Stage t). The second
concept is the stage concept. The table shows that there are two stages; stage t-1 and stage t.
This means that if stage t-1 represents yesterday, stage t represents today (or a future day).

103
Similarly, if stage t-1 represents the month of May, stage t indicates the month of June (or a
future month). The third concept is the transition probabilities, P ij. Pij, i =1, 2….n and j =1,
2….n, which represent the probabilities that the system will change from state i to state j
during stage t. For example, P12 reflects the probability that the system will change from
state 1 to state 2 during stage t. Similarly p 23 reflects the probability that the system will
change form state 2 to state 3 during stage t. In fact, this is the reason why the probability
matrix P, where

P11 p12 p13 p14………………..p1n

P= P21 P22 P23 P24………………. P2n
P31 P32 P33 P34………………… P3n

pn1 pn2 pn3 pn4 Pnn

is called the transition matrix.

The transition matrix, which is a stochastic matrix, is a square matrix of dimension nxn with
the following properties:

i. All the elements Pij must be between 0 and 1 (i.e. pij ≥0), and
ii. The sum of each row must equal 1.

The fourth technical concept that the table of probabilities provides is the concept of a
system. In markov analysis, the system consists of all the states along with their transition
probabilities, provides is the concept of a system. In markov analysis, the system consists of
all the states along with their transition probabilities, Pij.

Example:
Assume a weather record showing that it will be sunny to tomorrow with a probability of 70
percent if it is sunny today; otherwise it will be cloudy tomorrow if it is sunny today. Also,
the record shows that the probability that it will be cloudy tomorrow 50 percent of the time
if it is cloudy today; otherwise it will be sunny tomorrow if it is cloudy today. The
task is to formulate the transition probability matrix, taking in to consideration the two
states of sunny and cloudy. The transition probability is shown below. The table

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reveals two stages: today (t-1) and tomorrow (t). The transition probabilities reflect
two states: Cloudy and sunny.
Tomorrow
Sunny Cloudy

Today Sunny 0.70 0.30

Cloudy 0.50 0.50

As can be seen, each entry of the transition matrix is between zero and one, and each entry
can be described as follows.

The probability 0.70 represents the probability that it will be sunny tomorrow if it is sunny
today. The probability of 0.30, which is (1-0.70), reflects the probability that it will be cloudy
tomorrow if it is sunny today. The probability of 0.50 represents the probability that it will be
sunny tomorrow if it is cloudy today. The entry, 0.50, represents the probability that it will be
cloudy tomorrow if it is cloudy today.

Stated differently, these transition probabilities are actually conditional probabilities. If S

represents the event sunny, and C represents the event cloudy, then given that the state cloudy
has occurred today, the probability of being sunny tomorrow (or P(S/C) is equal to 0.70; this
is called a conditional probability. Similarly, P(C/C) is the conditional probability of cloudy
tomorrow given it is cloudy to day, which is equal to 0.50.

The transition (conditional) probabilities can be described by probability trees. Given that it is
sunny today, the probabilities that it will be sunny or cloudy tomorrow are 0.70 and 0.30,
respectively, as shown in the following:
Sunny
0.7

0.30 Cloudy
Sunny
Given the state that it is cloudy today, the probabilities that it will be sunny or cloudy
tomorrow are 0.50 and 0.50 respectively, and this is shown below:

105
 Sunny
0.50

0.50 Cloudy
Cloudy

The transition probabilities for the above problem are shown in the following transition
diagram:
0.30

Sunny
0.70 0.50 Cloudy

0.50

Example:
Assume that a market is shared by two cigarette brands namely Rothmans and Nyala. The
Ethiopian Tobacco Corporation conducted a market survey and has concluded the following
information about the proportion of smokers who stay with the same brand or change brands
in consecutive months.

- Of the smokers who bought Rothmans last month, 80% buy it again and 20 percent change
to Nyala this month.
- Of the smokers who bought Nyala last month, 40% buy it again and 60% change to
Rothmans this month. If for a sample of 1000 smokers, 400 buy Rothmans and 600 buy
Nyala in the first month of observations, what figure can we expect for the second, third and
fourth months?

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 Solution:

This month

Rothmans Nyala
Last month
 Transition
probabilities
Rothmans 0.80
0.20

Nyala
0.4
0.60

Rothmans Nyala
400 600  Current or initial state vector

Remarks:
 The elements in the main-diagonal indicate brand loyalty.
 The elements in the off-diagonal indicate shifting of customers.
 The rows indicate the proportion of those retained and lost by a given brand.
 The column elements indicate the proportion of customers retained and
gained by a given brand.

Let R  represents Rothmans

N  represents Nyala
 The expected figure in the second month:
(Current state) (Transition probabilities)

R N R N R N

= 400 600 R 0.8 0.2 = 680 320

N 0.6 0.4

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 The expected figure in the third month:

= State of second month . Transition probabilities

R N R N R N

= 680 320 R 0.8 0.2 = 736 264

N 0.6 0.4

 The expected figure in the four month:

= Third month state probability = Transition probabilities

R N R N R N

= 736 264 R 0.8 0.2 = 747 253

N 0.6 0.4

Markov Chain Formula:

Vij(n) = Vij(n-1) p Where;

Vij(n) = the state probability at the nth period
Vij(n-1) = the state probability at the (n-1)th period
P = the transition probability

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Taking the above example, if we continue the process; the state probabilities for the
following consecutive months will be:

Month Rothmans Nyala

5…………………………..….749.44 250.56
6………………………… ….749.888 250.112
7……………………………..749.9776 250.0224
8……………………………..749.99552 250. 00448
9……………………………..749.999104 250.0008964
.
. .
. . .
. ≈ 250
2 750
n ≈750

Pre-multiplying P with ( 750 250 ) gives us:

750 250 . 0.8 0.2 = 750 250  Steady state probability

0.6 0.4

Note: Finding the steady state probability using the above pre-multiplication of the rounded
figure is cumbersome and time taking.

In reality, it is very difficult to find the steady state transition matrix by multiplying the P
matrix by itself many times. The alternative approach for finding the steady state matrix is to
do the following:

S = SP

For the steady state matrix (S) of two states only, we have:

109
S1 S2 P11 P12 = S1 S2

P21 P22

For the above example, P= 0.8 0.2 ;

0.6 0.4

Then;
S1 S2 . 0.6 0.4 = S1 S2

0.8 0.2

After performing the required multiplication, we obtain;

-0.2S1+ 0.6 S2 = 0 ……………..e1

0.2 S1+ (-0.6 S2) = 0…………..e2
S1+ S2 =1 …………………..e3 The sum of the rows
in the state vector
equals 1.

This is a system of three equations but two unknowns. As the first two equations are linearly
dependent, one of the equations has to be dropped. Assume, the second equation is dropped,
the system becomes;
-0.2S1 + 0.6 S2 = 0 Solve
S1+S2 =1 simultaneously!

Multiply the second equation by 0.2;

-0.2S1 + 0.6 S2 = 0
Solve simultaneously!
0.2S1 + 0.2S2 = 0.2
0+0.80S2 = 0.2
S2 = 0.20 = 0.25
0.80

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Then, substituting S2 = 0.25 in to any one of the equations,
S1 = 0.75.
Therefore; (S1 S2) = (0.75x100 0.25x100) = (750 250), which is the steady state vector.

Example:

The market for a particular product is shared by three department stores: X, Y and Z. A
market survey has produced the market transition table below which describes the proportion
of customers who buy at the same store again or change stores in consecutive months.

From/To X Y Z
X 0.6 0.2 0.2
Y 0.1 0.6 0.3
Z 0.2 0.6 0.2

Required:
a. Find the share of the market which each store would command at the steady state.
b. If the sample of 4000 people is assumed to be customers of the three stores, calculate
the number of customers who used each store at the steady state.

Solution:

a) Let V1, V2 and V3 represent the steady state vector;

At the steady state: (V1 V2 V3). (P) = (V1 V2 V3)

Then, 0.6 0.2 0.2

(V1 V2 V3) . 0.1 0.6 0.3 = (V1 V2 V3)

0.2 0.6 0.2

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 After matrix multiplication, we obtain the following;

0.6V1+ 0.1V2 + 0. 2V3 = V1  -0.4V1+ 0.1V2 +0.2V3 = 0………..e1

0.2V1+ 0.6V2 + 0.6V3 = V2  0.2V1-0.4V2 +0.6V3 = 0 ………..…e2
0.2V1 + 0.3 V2 + 0.2V3 = V3  0. 2V1+ 0.3V2 - 0.8V3 = 0……….e3
V1+ V2 + V3 =1........................................................................e4

Equate e1and e4

-0.4V1 + 0.1V2 +0.2V3 = 0

X (0.4) V1+V2+V3 =1

- 0.4V1+ 0.1V2 + 0.2V3 = 0

0. 4V1+ 0.4V2 + 0.4V3 = 0
0.5V2 + 0.6V3 = 0.4..................................e5

Equate e2 and e4

0.2V1-0.4V2 +0.6V3 = 0
X (-0.2) V1+ V2 + V3 = 1
0.2V1 -0.4V2 + 0.6V3 = 0
-0.2V1- 0.2V2- 2V3 = -0.2
-0.6V2 + 0.4V3 = -0.2..................................e6

Equate e5and e6
0.5V2 + 0.6V3 = 0.4
X(0.6)

X (0.5)
-0.6V2 + 0.4V3 = -0.2
0.3V2+0.36V3+ = 0.24
-0.3V2 + 0.2V3 = -0.1
0.56V3 = 0.14
V3 = 0.14 = 0.25
0.56

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Substitute V3 = 0.25 in e6;
Then, -0.6 V2 + 0.4V3 = -0.2  -0.6V2 + 0.4 (0.25) = -0.2
-0.6V2 =-0.3
V2 = -0.3 = 0.50
-0.6
Substitute V2 = 0.5 and V3 = 0.25 in e4;
Then; V1 +V2 +V3 =1  V1 +0.50+0.25 =1
V1=1-0.75= 0.25
(V1 V2 V3) = (0.25 0.5 0.25)  Steady state vectors

b) Total number of people = 4000

 Customers of store x at the steady state = 0.25x 4000 = 1000

 Customers of store y at the steady state = 0.5x 4000 = 2000
 Customers of store z at the steady state = 0.25x 4000 = 1000

113
 Exercise 2- 6

1. At a point in time, 1 percent of the population uses a drug and 99 percent do not. In a
year, 1/10 of one percent of non – users become users, but all users remain users.

(a) What will be the percent of users and non- users after one transition?
(b) What is the steady state vector?

2. A division of the ministry of public health has conducted a sample survey on public
attitude towards the use of condom. For the survey, the division concluded that currently only
20 percent of the population uses condom and every month 10 percent of non–users become
users whereas 5 percent of the users discontinue using. Based on this information;

(a) What will be the percentage of users from the total population after just two months?
(b) What will be the proportion of users and non- users at the steady state?

3. A college of business has three departments: Economics; Accountancy and Finance, with
the following transition probabilities:

Economics Accounting Finance

Economics 0.30 0.30 0.40

Accountancy 0.01 0.89 0.10
Finance 0.25 0.20 0.55

If the initial distributions of students are (200 500 600), respectively,

(a) Find the distribution after two years.
(b) Find the long – run probabilities for each department and the long –run distribution of
students.

114
UNIT SUMMARY

Dear distance learner! We have seen about types of matrices, matrix operations, inverse of a
matrix, ways of finding an inverse and applications of matrix algebra. The following gives
the summary of major points.

The equality of matrices is assured by equality of corresponding elements of the same

dimension. Matrix addition and subtraction is defined for matrices of the same dimension but
matrix multiplication is defined by considering the equality of inner dimensions.
As long as the order of the matrix is maintained, matrix multiplication is associative and the
distributive law holds true, but matrix multiplication is not commutative except for: the
multiplication of a matrix with an identity matrix and the multiplication of a matrix with its
inverse.

 Inverse of a matrix is defined only for square matrices.

 Inverse of a matrix is unique.
 If matrix B is the inverse of matrix A, then matrix A is the inverse of matrix B.
 Every square matrix may not have an inverse. If a matrix has no inverse, then it is said
to be singular and if a matrix has an inverse, it is said to be invertible or non- singular.

Matrix algebra is applied in solving system of linear equations and in undertaking markov
chain analysis.

115
SELF-CHECK REVIEW PROBLEMS II

1. A manufacturer makes two types of products: X and Z at each of two different locations
A and B. The materials used to make each of the products are steel, glass and plastic.
Suppose it takes three units of steel, one unit of glass, and two units of plastic to make
one unit of product X; and four units of steel, one – half unit of glass and three units of
plastic to make one unit of product Z. Suppose further that steel, glass and plastic cost
birr 10, 2, and 3 per unit, respectively at location A. At location B, steel, glass, and
plastic cost 9, 3 and 4 per unit, respectively. Using matrix algebra, find the material cost
of making one of each product at each of the two locations.

2. A person wants to mix ‘nech teff’ and ‘sergegna teff’.

‘Nech teff’ costs 2.00 birr per kilogram and ‘sergegna Teff’ costs 1.50 birr per k.g. The
person has 425 birr and wants to mix a total of 250 kilograms of teff. How many
kilograms of each type of teff should the person buy to come up with desired mixture?
(a) Write the problem as a system of linear equations?
(b) Solve it using Gaussian method.

3. A manufacturer produces three products: A, B, and C. Each unit

of products A, B and C requires the following amounts of time in hours in each of
the indicated departments
products
Department A B C

Machining 0.2 0.3 0.5

Assembly 0.4 0.2 0.4
Painting 0.1 0.5 0.2

Suppose that the total time available per week in each department is 105 hours, 116 hours and
83 hours respectively. Determine the number of units of each product to be produced in a
week use up all the available time.
(Use the Gaussian method).

116
4. There are two competing brands of soap in a market. The brands are Saba and Zaap. A
survey was undertaken to determine the extent customers swich-over from one brand to
another every month. The survey identified that every month only 45% of customers of
zaap in the previous month continue to purchase Zaap and 45 % of Saba in the previous
month become customers of Zaap Moreover, it was identified that the two brands have
a constant total customers of 1000 and no one stops purchasing one or the other brand.
At present the number of customers of Saba and Zaap is 400 and 600 persons
respectively.

(a) What will be the number of customers of Saba and Zaap after two transitions?
(b) What share of the market will each brand have in the long run?

5. Chabude manufacturing co. produces three products: A, B, and C. The profits for each
unit sold of A, B, and C are birr1, 2, and 3 respectively. Fixed costs are 17,000 birr per
year and the costs of producing each unit of A, B, and C are birr 4, 5, and 7 respectively.
Next year a total of 11,000 units of all three products is to be produced and sold and a
total profit of 25,000 birr is to be realized. If cost is to be 80,000 birr, how many units
of each of the products should be produced next year? (Use the inverse method).

6. There are two dry cleaning houses in Jimma town. They are Ambassador and Zenith dry
cleaning. The current market share of Ambassador and Zenith is 40% and 60%
respectively. Every quarter 20% of the customers of Ambassador Switch to Zenith and
the remaining 80% remain loyal. Whereas 35% of customers of Zenith switch to
Ambassador and the remaining 65% remain loyal.

a) Construct the transition matrix of the problem.

b) Determine the market shares of Ambassador and Zenith after one quarter and after
two quarters.
c) Determine the steady state market shares.

7. A population of 200,000 customers makes the following purchase during a year 2004.
40,000 purchase brand –x, 70,000 brand-y, and 90,000 purchase neither brand. From a
market study, it is estimated that of those who purchase brand-x, 80% will purchase it
again next year, 15% will purchase brand-y next year , and 5% will purchase neither

117
 brand. Of those who purchase neither brand, 20% will purchase brand-x next year, 15%
will purchase brand-y next year and 65% will purchase neither brand next year.

a) Assume the population grows by 10% in each two year, what is the number of
population who purchase brand-x, brand-y, and neither brand by the year 2006?
b) If the purchasing pattern continues, will the market stabilize? What will stable
distribution be?
8. Ato Elias invests in M, N, and L rated bounds. The average yield is 8%, 6%, and 7% on
bonds M, N and L respectively. Twice as much is invested in L as N bonds. Moreover,
the total annual return for all three types of brands is birr2, 800. How much is invested in
each type bonds if the total investment is :

a) Birr 35, 000

b) Birr 40, 000
9. Find the inverse of the following matrix using Gauss-Jordan method;
2 8 -11

-1 -5 7

1 2 3

10. Find the inverse of the following matrix using the zero-first method;

2 0 3 1
0 3 3 4
5 3 0 1
2 3 4 4

11. Solve the following using the Gauss-Jordan method;

a) 3x1-2x2+4x3 = 15
4x1 – 8/3x2 + 16/3x3 = 20

b) 6x1+5x2 = 20
9x1+15/2 x2 =30
36/5 x1+ 6x2 = 24

118
REFERENCES

1. Barnett Raymond A. and Ziegler Michael R, Essentials of College Mathematics for

business and Economics, life science and social science, 3rd ed., 1989
2. Bowen Earl K et. Al, Mathematics with applications in Business and Economics,
1987
3. Ann j. Hughes, Applied Mathematics: For Business, Economics, and the social
Science, 1983.
4. Ronald E. Larson and Bruce H. Edwards, Finite Mathematics with Calculus, 1991
5. Ronald J. Harshbager and James J. Reynolds, Mathematics Applications.
6. Ronald J. Harshbager and James J. Reynolds, Finite Mathematics, 3rd Ed.
7. Hole Poul G., Finite Mathematics and Calculus with Applications to Business, 1974.
8. Dexter j Booth and John K Turner, Business mathematics with Statistics, 1996, and
other relevant Books are recommended as reference.
9. Teresa Bradley and Paul Patton, “ Essential Mathematics for Economics and
Business’, Jon Wiley and Sons, December 1999.

119
 UNIT THREE
INTRODUCTION TO LINEAR PROGRAMMING

Unit Objectives

By the end of studying this unit, you will be able to:

 Know the technicalities of formulating linear programming problems in both cases of

minimization and maximization.
 Understand the meaning and concepts of linear programming.
 Develop familiarity with the graphical method for solving linear programming
problems.
 Determine the optimal solution for linear programming problems by using the
systematic technique of simplex approach.

Unit Introduction

A large number of decision problems faced by a business manger involve allocation of

resources to various activities with the objective of increasing profits or decreasing costs, or

both. When resources are in excess, no difficulty is experienced. Nevertheless, such cases are

very rare. Practically in all situations, the managements are confronted with the problem of

scarce resources. Normally, there are several activities to perform but limitations of either of

the resources or their use prevent each activity from being performed to the best level. Thus,

the manger has to take a decision as to how best the resources be allocated among the various

activates.

The decision problem becomes complicated when a number of resources are required to be
allocated and there are several activities to perform. Rule of thumb, even of an experienced
manger, in all likelihood, may not produce the right answer in such cases. The decision
problems can be formulated and solved as mathematical programming problems.

120
Section One: Basic Concepts

Section Objectives:

After covering this section, you will be expected to:

- Know the meaning of linear programming.
- Identify the conditions that should be fulfilled to apply linear programming.

Section Overview:

3.1 Defining Linear Programming Model

3.2 Requirements to Apply Linear Programming

3.1 Defining Linear Programming Model

Linear Programming (LP) is a mathematical process that has been developed to help
management in decision-making involving the efficient allocation of scares resources to
achieve a certain objective. Diagrammatically,

Scares To be allocated to:

Resource

Resource
constraints
Objectives Constraints

Non-negativity
Constraints

Optimization

Maximization Minimization
Fig 3.1.1 Linear Programming Model

121
 LP is a method for choosing the best alternative from a set of feasible
alternatives.

3.2 Requirements to Apply Linear Programming

To apply LP, the following conditions must be satisfied. These will be discussed next:
a. There should be an objective that should be clearly identified and measurable in
quantitative terms. Example, maximization of sales, profit, and minimization of costs etc.
b. The activities to be included should be distinctly identifiable and measurable in
quantitative terms.
c. The resources of the system which are to be allocated for the attainment of the goal
should also be identifiable and measurable quantitatively. They must be in limited supply.
These resources should be allocated in a manner that would trade off returns on
investment of the resources for the attainment of the objective.
d. The relationship representing the objective and the resource limitation considerations
represented by the objective function and the constraint equations or inequalities,
respectively, must be linear in nature.
e. There should be a series of feasible alternative courses of actions available to the
decision-maker that is determined by the resource constraints.

When these stated conditions are satisfied in a given solution, the problem can be expressed
in algebraic form called linear programming problem (LPP), and then solved for optimal
decision. We first illustrate the formulation of linear programming problems and then
consider the method of their solution.

Section Two: Formulation of Linear Programming Model

Section Objectives:

After covering this topic, you will be in a position to:

- Identify the goal of the problem in terms of the objective function.
- Identify the limited resources problem in terms of inequality.

122
 - Translate the problem from verbal form to standard mathematical statements showing
all the objective and available scarce in supply of resource.

Section Overview:

Problem Modeling: the Maximization Case

Problem Modeling: the Minimization Case
Assumptions Underlying Linear Programming
General Statement of Linear Programming Problem

3.3 Problem Modeling: The Maximization Case

Problem Formulation or Modeling is the process of translating the verbal statement

of a problem in to mathematical statements. Formulating model is an art that can only
be measured with practice and experience. Even though every problem has certain
unique features, most problems have common features. Therefore, some general
guidelines for model formulation are helpful. Next, you will have the illustration of some
general guidelines by developing mathematical model for some given problems. Consider the
following example.

Example 3.1

A firm is engaged in producing two products, A and B. Each unit of product A requires two
Kgs of raw material and four labor hours for processing whereas each unit of product B
requires three kg of raw material and three hours of labor of the same type. Every week the
firm has an availability of 60 kgs of raw material and 96 labor hours. One unit of product A
sold yields Birr 40 and one unit of product B sold yields Birr 35 as profit.

Formulate this problem as a linear programming problem to determine as to how many units
of each of the products should be produced per week so that the firm can maximum the profit.
Assume that there is no marketing constraint so that all that is produced can be sold.

123
The objective function: the first major requirement of linear programming problem (LPP) is
that we should be able to identify the goal in terms of the objective function. This function
relates mathematically the variables with which we are dealing in the problem.

For our problem, the goal is the maximization of profit, which would be obtained by
producing (and selling) the products A and B. If we let x 1 and x2 represent the number of units
produced per week of the products A and B respectively, the total profit, Z, would be equal to
40 x1 +35x2 is then, the objective function, relating the profit and the output level of each of
the two items. Notice that the function is a linear one. Further, since the problem calls for a
decision about the optimal values of x1 and x2, these are known as the decision variables.

The constraints: As has been laid, another requirement of linear programming is that the
resources must be in limited supply. The mathematical relationship which is used to explain
this limitation is inequality. The limitation itself is known as a constraint.

Each unit of product A requires 2 kg of raw material while each unit of product B needs 3 kg.
The total consumption would be 2x 2 and 3x2, which cannot be the total the availability of 60
kg every week. We can express this constraint as 2x 1 and 3x2 < 60. Similarly, it is given that a
unit of A requires 4 labor hours for its production and one unit of B requires 3 hours. With an
availability of 96 hours a week, we have 4 x 1 and 3x2 < 96 as the labor hour's constraint. It is
important to note that for each of the constraint, inequality rather than equation has been
used. This is because the profit maximizing output might not use all the resources to the full
leaving some unused, hence the < sign. However, it may be noticed that all the constraints are
also linear in nature.

Non-negativity Condition: Quite obviously, x1 and x2, being the number of units produced,
cannot have negative values. Thus both of them can assume values only greater than or equal
to zero. This is the non-negativity condition, expressed symbolically as x1 > 0 and x2, > 0.
Now we can write the problem in complete form as follows.

Maximize Z = 40 X1 + 35 X2, Profit

Subject to
2X1 + 3X2 < 60 Raw material constraint
4X1 + 3X2 < 96 Labor hours constraint

124
 X1, X2, > 0 Non-negativity restriction

Dear student, mention and discuss components of linear programming problems.

3.4 Problem Modeling: the Minimization Case

Dear student, can you guess the differences between maximization and minimization
problems?

Consider the following example

Example 3.2

The agricultural Research institute has suggested to a farmer to spread out at least 4800 kg of
a special phosphate fertilizer and no less than 7200 kg of a special nitrogen fertilizer to raise
productivity of crops in his fields. There are two resources for obtaining these mixtures A and
B. Both of these are available in bags weighing 100 kg each and they cost Birr 40 and Birr 24
respectively. Mixture A contains phosphate and nitrogen equivalent of 20 kg and 80
respectively, while mixture B contains these ingredients equivalent of 50 kg each.

Write this as a linear programming problem and determine how many bags of each type the
farmer should buy in order to obtain the required fertilizer at minimum cost.

The Objective Function: In the given problem, such a combination of mixtures A and B is
sought to be purchased as would minimize the total cost. If x 1 and x2 are taken to represent the
number of bags of mixtures A and B respectively, the objective function can be expressed as
follows:

Minimize Z = 40x1 + 24 x2 Cost

The constraints: In this problem, there are two constrains, namely, a minimum of 4800 kg of
phosphate and 7200 kg of nitrogen ingredients are required. It is known that each bag of
mixture A contains 20 kg and each bag of mixture B contains 50 kg of phosphate. The
phosphate requirement can be expressed as 20x 1 + 50x2 > 4800. Similarly, with the given

125
information on the contents, the nitrogen requirement would be written as 80 x 1 + 50x2 >
7200.

Non-negativity condition: As before, it lays that the decision variables, representing the
number of bags of mixtures A and B, would be non-negative. Thus x1 > 0 and x2 > 0.

The linear programming problem can now be expressed as follows:

Minimize Z = 40x1 + 24 x2 Cost

Subject to
20x1 + 50x2 > 4800 Phosphate requirement
80x1 + 50x2 > 7200 Nitrogen requirement
x1, x2 > 0 Non negativity restriction

3.5 General Statement of Linear Programming Problem

In general, linear programming problem can be written as

Maximize Z = c1x1 + c2x2 ………+ cn xn Objective Function

Subject to
a11x11 + a22 x2 +………………………..+ ain x n < b1
a21x1 + a22 x2 + ………………………..+ ain x n < b2
am1 x1 + am2 x2 + ............................+ amn < xn bm
x1, x2, ……………………….., xn > 0

Where cj, aij, bi (i = 1, 2, ……..…., m; j = 1,2,……n) are known as constants and

x’s are decision variables
c’s are termed as the profit coefficients
aij’s the technological coefficients
b’s the resource values

126
In shorter form, the problem can be written as:
n

Maximize Z= cj xj

Subject to Z= cij ajjxj < bi

j=1
for i = 1, 2…m
xi > 0
j = 1, 2…………., n

Where the objective is to minimize a function, the problem is,

Minimize Z= cj xj

n
Subject to Z= aij xj> bi

for j =1,2,………n
In matrix notation, a LPP can be expressed as follows:

Maximization Problem Minimization Problem

Maximize Z = cx Minimize Z = cx
Subject to Subject to
ax < b ax > b
x’ > 0 x’ > 0

Where, c = raw matrix containing the coefficients in the objective function,

x = Column matrix containing decision variables,
a = Matrix containing the coefficients in the constraints,
b = Column matrix containing the RHS values of the constraints

Although, generally, the constraints in the maximization problems are of the < type, and the
constraints in the minimization problems are of > type , a given problem might contain a mix
of the constraints, involving the signs <, >, and /or =.

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3.6 Assumptions Underlying Linear Programming

A linear programming model is based on the assumptions of proportionality, additively,

continuity, certainty, and finite choices. These are explained here next.

1. Proportionality: A basic assumption of linear programming is that proportionality exists

in the objective function and the constraint inequalities. For example, if one unit of a
product is assumed to contribute Birr 10 toward profit, then the total contribution would
be equal to 10x1 where x1 is the number of units of the product. For 4 units, it would equal
Birr 40 and for 8 units it would be Birr 80, thus if the output (and sales) is doubled, the
profit would also be doubled. Similarly, if one unit takes 2 hours of labor of a certain
type, 10 units would require 20 hours, 20 units would require 40 hours….and so on. In
effect, then, proportionality means that there are constant returns to scale and there are no
economies of scale.

2. Additively: Another assumption underlying the linear programming model is that in the
objective function and constraint inequalities both, the total of all the activities is given by
the sum total of each activity conducted separately. Thus, the total profit in the objective
function is determined by the sum of the profit contributed by each of the products
separately. Similarly, the total amount of a resource used is equal to the sum of the
resource values used by various activities.

3. Continuity: It is also an assumption of a linear programming model that the decision

variables are continuous. Therefore, combinations of output with fractional values, in the
context of production problems, are possible and obtained frequently. For example, the
best solution to a problem might be to produces 5¾ units of product B per week.
Although in many situations we can have only integer values, but we can deal with the
fractional values, when they appear.

4. Certainty: A further assumption underlying a linear programming model is that the

various parameters, namely, the objective function coefficients, the coefficients of the
inequality/equality constraints and the constraint (resource) values are known with
certainty. Thus, the profit per unit of the product, requirements of materials and labor per

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 unit, availability of materials, labor etc. are given and known in a problem involving
these. The linear programming is obviously deterministic in nature.

5. Finite Choices: A linear programming model also assumes that a limited number of
choices are available to a decision maker and the decision variables do not assume
negative values. Thus, only non-negative levels of activity are considered feasible. This
assumption is indeed a realistic one. For instance, in the production problems, the output
cannot obviously be negative, because a negative production implies that we should be
above to reverse the production process and convert the finished output back in to the raw
materials!

Dear student, would you summarize the assumptions and components of LPPs? Please also
indicate the main differences between maximization and minimization problems.

Section Three: Solution Approaches to LPPs

Section Objectives:

Upon completion of this section, you will be able to:

- Solve Linear Programming Problems with two variables using the graphic approach.
- Solve Linear Programming Problems using the simplex algebra approach.

Section Overview:

3.7 Approaches of Solving LPPs

3.8 Graphical Solution to Linear Programming Problems
3.9 Algebraic Simplex Method

3.7 Approaches of Solving LPPs

Now we shall consider the solution to the linear programming problems. They can be solved
by using graphic method or by applying algebraic method, called the Simplex Method. The

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graphic method is restricted in application – it can only be used when two variables are
involved. Nevertheless, it provides an intuitive grasp of the concepts that are used in the
simplex technique. The simplex method, whereas is the mathematical technique of solving
linear programming problems with two or more variables.

3.8 Graphical Solution to Linear Programming Problems

Topic Objectives:

After studying this topic, you will be capable of:

- Identifying the problem including the decision variables.
- Covert the inequalities in to equations and draw a graph that include all the
constraints.
- Identify the feasible area of the solution that satisfies all constraints.
- Identify the corner points (coordinates) in the feasible region.
- Determine the value of the objective function by using the corner points (coordinates).
- Identify the optimal point and interpret the result to be obtained.

3.8.1 Steps in Graphic Method of Linear Programming Problems

To use the graphic method, the following steps are needed:

i. Identify the problem – determine the decision variables, the objective function,
and the constraints.
ii. Draw a graph including all the constraints and identify the feasible region.
iii. Obtain a point on the feasible region that optimizes the objective function –
optimal solution.
iv. Interpret the results.

Note: Graphical LP is a two-dimensional model.

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3.8.2 The Maximization Problem

This is the case of Maximize Z with inequalities of constraints in < form.

Example 3.3

Consider two models of color TV sets; Model A and B, are produced by a company to
maximize profit. The profit realized is $300 from A and $250 from set B. The limitations are
a. Availability of only 40 hrs of labor each day in the production department,
b. A daily availability of only 45 hrs on machine time, and
c. Ability to sale 12 set of model A.
How many sets of each model will be produced each day so that the total profit will be as
large as possible?

Resources used per unit

Constraints Model A Model B Maximum Available
(x1) (x2) Hours
Labor Hours 2 1 40
Machine Hours 1 3 45
Marketing Hours 1 0 12
Profit $300 $250

Solution
1. Formulation of mathematical model of LPP
Max Z=300X1 +250X2
St:
2X1 +X2< 40
X1 +3X2< 45 LP Model
X1 < 12
X1, X2 >0

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2. Convert constraints inequalities into equalities
2X1 + X2 = 40
X1 + 3X2 = 45
X1 = 12
3. Draw the graph by finding out the x– and y–intercepts
2X1 +X2 = 40 ==> (0, 40) and (20, 0)
X1 +3X2 = 45 ==> (0, 15) and (45, 0)
X1 = 12 ==> (12, 0)
X1 , X2 = 0
2X1 +X2 = 40

X2
X1=0
40 X1=12
X1 +X2 = 45

B
15

Feasible C(12, 11)

Region X2=0
D X1
A 12 20 45

Fig. 3.3.1 Graphical Solution of LPP. (Maximization Problem)

4. Identify the feasible area of the solution which satisfies all constrains. The shaded region
in the above graph satisfies all the constraints and it is called Feasible Region.
5. Identify the corner points in the feasible region. Referring to the above graph, the corner
points are in this case are:
A (0, 0), B (0, 15), C (12, 11) and D (12, 0)

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6. Identify the optimal point.

Corners Coordinates Max Z = 300 X1 +250X2

A (0, 0) $0

B (0, 15) $3750

C (12, 11) $ 6350 (Optimal)

D (12, 0) $3600

7. Interpret the result. Accordingly, the highlighted result in the table above implies that 12
units of Model A and 11 units of Model B TV sets should be produced so that the total
profit will be $6350.

Example 3.4
A manufacturer of Light Weight mountain tents makes two types of tents: REGULAR tent
and SUPER tent. Each REGULAR tent requires one labor-hour from the cutting department
and 3 labor-hours from the assembly department. Each SUPER tent requires 2 labor-hours
from the cutting department and 4 labor-hours from the assembly department. The maximum
labor hours available per week in the cutting department and the assembly department are 32
and 84 respectively. Moreover, the distributor, because of demand, will not take more than 12
SUPER tents per week. The manufacturer sales each REGULAR tents for $160 and costs
$110 per tent to make. Where as SUPER tent ales for $210 per tent and costs $130 per tent to
make.

Required:
a. Formulate the mathematical model of the problem
b. Using the graphic method, determine how many of each tent the company should
manufacture each week so as to maximize its profit?
c. What is this maximum profit assuming that all the tents manufactured in each week
are sold in that week?

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Solution

1. The LP Model:

Labor Hours per Tent Maximum Labor-hours

Department Available per Week
REGULAR (X1) SUPER(X2)
Cutting department 1 2 32
Assembly department 3 4 84
Selling price per tent $160 $210
Cost per tent $110 $130

Profit per tent $50 $80

The distributor will not take more than 12 SUPER tents per week. Thus, the manufacturer
should not produce more than 12 SUPER tents per week.

Dear student, please formulate the mathematical model based on the information in the above
table before going to the solution part.

Let X1 = The No of REGULAR tents produced per week.

X2 = The No of SUPER tents produced per week.

X1 and X2 are called the decision variables.

…… Cutting department constraint

LP Model
…… Assembly department constraint
……. Demand constraint
…… Non-negativity constraints

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2. The Corners and Feasible Solution:

Corners Coordinates Max Z=50 X1 +800X2

A (0, 0) $0
B (0, 12) $960

C (8, 12) $1360

D (20, 6) $1480

E (28, 0) $1400

3. The Interpretation:
The manufacturer should produce and sale 20 REGULAR tents and 6 SUPERS tents to get a
maximum weekly profit of $1480.

Dear student, try to solve the above example by adding 5 to each coefficient and 10 to the
right hand side values of the constraints.

3.8.3 The Minimization Problem

In this case, we deal with Minimize Z with inequalities of constraints in > form

Example 3.4

Suppose that a machine shop has two different types of machines; Machine 1 and Machine 2,
which can be used to make a single product. These machines vary in the amount of product
produced per hr., in the amount of labor used and in the cost of operation. Assume that at
least a certain amount of product must be produced and that we would like to utilize at least
the regular labor force. How much should we utilize on each machine in order to utilize total
costs and still meets the requirement?

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 Resource Used Minimum Required
Items Machine 1 (X1) Machine 2 (X2) Hours

Product produced/hr 20 15 100

Labor/hr 2 3 15
Operation Cost $25 $30

Solution
1. The LP Model:

LP Model

Dear student, can you graph the above constraints? Please try to do so before going to the
solution part.

2. The Graph of Constraint Equations:

20X1 +15X2=100 ==> (0, 20/3) and (5, 0)

2X1 + 3X2=15 ==> (0, 5) and (7.5, 0)
X1 , X2 = 0

X2
X1 =0
A (0, 20/3)

Feasible Region

B (2.5, 3.33)
X2 =0

X1
5 C (7.5, 0)

Fig 3.3.2 Graphical Solution of LPP. (Minimization Problem)

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3. The Corners and Feasible Solution:

Corners Coordinates Min Z= 25 X1 + 30X2

A (0, 20/3) 200
B (2.5, 3.33) 162.5 (Optimal)
C (7.5, 0) 187.5

Since our objective is to minimize cost, the minimum amount (162.5) will be selected.
X1 = 2.5
X2 = 3.33 and
Min Z= 162.5
Note:
- In maximization problems, our point of interest is looking the furthest point from
the origin (Maximum value of Z).
- In minimization problems, our point of interest is looking the point nearest to the
origin (Minimum value of Z).

Exercise 3.1

A company owns two flourmills (A and B) which have different production capacities for
HIGH, MEDIUM and LOW grade flour. This company has entered contract supply flour to a
firm every week with 12, 8, and 24 quintals of HIGH, MEDIUM and LOW grade
respectively. It costs the Co. $1000 and $800 per day to run mill A and mill B respectively.
On a day, mill A produces 6, 2, and 4 quintals of HIGH, MEDIUM and LOW grade flour
respectively. Mill B produces 2, 2 and 12 quintals of HIGH, MEDIUM and LOW grade flour
respectively. How many days per week should each mill be operated in order to meet the
contract order most economically. Solve the problem graphically.

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Exercise 3.2

Use graphical method to solve the following LPP.

1. Max.Z = 7/4X1+3/2X2 2. Max.Z = 3X1+2X2

St: St:
8 X1+5X2 < 320 -2X1+3X2 < 9
4X1+5X2 < 20 X1-5X2 > -20
X1 > 15 X1, X2 > 0
X2> 10
X1, X2 > 0

3. Max.Z=3X1+2X2 4. Max.Z=X1+X2

St: St:
X1-X2 < 1 X1+X2 < 1
X1+X2> 3 -3X1+X2> 3
X1, X2> 0 X1, X2> 0

5. Max.Z=6X1-4X2 6. Max.Z=X1+1/2X2
St: St:
2X1+4X2 < 4 3X1+3X2 < 12
4X1+8X2> 16 5X1 < 10
X1, X2 > 0 X1 + X2 > 8
-X1 + X2 > 4
X1, X2 > 0

138
3.9 Algebraic Simplex Method

Topic Objectives:

After learning this topic, you can:

- Formulate the linear programming model
- Standardize the problem or convert the inequality constraints is to equality by
introducing slack variable and artificial variable
- Obtain the initial simplex tableau that represents the data.
- Construct the initial simplex tableau and test for optimality.
- Calculate the replacement ratio and determine the leaving or outgoing variable.
- Calculate the value of Cj – Zj and precisely and determine the incoming or entering
variables.
- Identify the pivot raw, pivot column, pivot element and calculate the replacement raw.
- Derive the revised tableau for improved solution.
- Determine the optimal solution for the given problem.

The graphical method to solving LPPs provides fundamental concepts for understanding the
LP process. However, the graphical method can handle problems involving only two decision
variables (say X1 and X2). In 19940’s George B.Dantzig developed an algebraic approach
called the Simplex Method, which is an efficient approach to solve applied problems
containing numerous constraints and involving many variables that cannot be solved by the
graphical method. The simplex method is an ITERATIVE or “step by step” method or
repetitive algebraic approach that moves automatically from one basic feasible solution to
another basic feasible solution improving the situation each time until the optimal solution is
reached at. The simplex method starts with a corner that is in the solution space or feasible
region and moves to another corner improving the value of the objective function each time
until optimal solution is reached at the optimal corner.

3.9.1 The Maximization Problems

 Maximize Z with inequalities of constraints in ‘<’ form

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Example 3.5

Solve the problem using the simplex approach

Max. Z = 300x1 +250x2
Subject to:
2x1 + x2 < 40 (Labor)
x1 + 3x2 < 45 (Machine)
x1 < 12 (Marketing)
x1, x2 > 0

Solution

Step 1 Formulate LP Model:

- It is already given in the form of linear programming model.

Step 2 Standardize the problem:

Convert constraint inequality into equality form by introducing a variable called Slack
variable. A slack variable(s) is added to the left hand side of a < constraint to covert the
constraint inequality in to equality. The value of the slack variable shows unused resource. A
slack variable emerges when the LPP is a maximization problem. Slack variables represent
unused resource or idle capacity. Thus, they do not produce any profit and their contribution
to profit is zero. Slack variables are added to the objective function with zero coefficients.

Let that s1, s2, and s3 are unused labor, machine, and marketing hrs respectively.
Max.Z=300X1 +250X2 + 0 S1 +0 S2+ 0 S3
St:
2 X1+X2 +0S1 = 40
X1+3X2 +0S2 = 45 Standard form
X1 + +0S3= 12
X1 , X2, S1, S2, S3 > 0

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Step 3 Obtain the initial simplex tableau:

To represent the data, the simplex method uses a table called the simplex table or the simplex
matrix. In constructing the initial simplex tableau, the search of the optimal solution begins at
the origin indicating that nothing can be produced. Thus, first assumption, No production
implies that x1 =0 and x2=0

==>2 x1+x2 + s1 +0 s2+ 0 s3= 40 ==> x1+3x2 +0 s1 + s2+ 0 s3= 45

2(0) +0 + s1 +0 s2+ 0 s3= 40 0 +3(0) + 0s1 + s2+ 0 s3= 45
s1= 40 – Unused labor hrs. s2= 45 – Unused machine hrs.

==> x1+0s1 +0s2+ s3= 12

0 +0s1 +0 s2+ s3= 12
s3= 12 – Unused Marketing hrs.

Therefore, Max. Z=300x1 +250x2 + 0 s1 +0 s2+ 0 s3

=300(0) +250(0) + 0(40) +0(45) + 0(12)
=0

Remark
In general, whenever there are n variables and m constraints (excluding the non-
negativity), where m is less than n (m < n), n – m variables must be set equal to
zero before the solution can be solved algebraically.
a. Basic variables are variables with non-zero solution values.
Or: Basic variables are variables that are in the basic solution. Basic variables have 0
values in the Cj – Zj row.
b. Non-basic variables are variables with zero solution values.
Or: Non-basic variables are variables that are out of the solution.

==> n = 5 variables (x1, x2, s1, s2, and s3) and m = 3 constraints (Labor,
Machine and Marketing constraints), excluding non-negativity.

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Therefore, n – m = 5 – 3 = 2 variables (x1 and x2) are set equal to zero in the 1 st simplex
tableau. These are non-basic variables. Three Variables (s1, s2, and s3) are basic variables (in
the 1st simplex tableau) because they have non-zero solution values.

Step 4 Construct the initial simplex tableau:

To set up the tableau, we first list horizontally all the variables contained in the problem.
Here, there are five variables: x 1, x2, s1, s2 and s3. Next, the coefficients in the constraint
equations are written listing vertically the coefficients under their respective variables. It may
be noted that each of the slack variables appear only in one equation. Therefore, the
coefficient of each of the slack viable is taken to be zero in all the equations except the one in
which it appears. After putting the coefficients, the constraint values are mentioned on the
right hand side against the rows. Finally, the row titled indicates the coefficients of the
various variables in the objective function, mentioned respectively in the various columns
representing the variables.
variables column

Solution quantity
Real or decision

Initial simplex tableau

Slack variables
Basic or Solution
Profit per unit

variable column

columns

column
column

Cj 300 250 0 0 0 Profit per unit row

X1 X2 S1 S2 S3
SV Q

40 R1=20
0 S1 2 1 1 0 0
R2= 45
S2 45 Constraint
0 1 3 0 1 0 equation rows

0 S3 1 0 0 0 1 12 R3=12 Leaving Row

Zj 0 0 0 0 0 0 Gross Profit row

Cj - Z j 300 250 0 0 0 Net Profit row
/Indicator row/

Entering Column (Pivot Column)

Step 5 Choose the “incoming” or “entering” variables:

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The entering variable is the variable that has the highest positive value in the Cj - Zj row also
called as indicator row. Alternatively, the entering variable is the variable that has the
highest contribution to profit per unit.

a. X1 in our case is the entering variable because it has the highest positive c-z value.
b. The column associated with the entering variable is called key or pivot column ( X1
column in our case )

Step 6 Choose the “leaving “or “outgoing” variable:

In this step, we determine the variable that will leave the solution for X1 (or entering variable)

Remark

 The row with the minimum or lowest positive (non-negative) replacement ratio shows the
variable to leave the solution.

Replacement Ratio (RR) = Solution Quantity (Q)

Corresponding values in pivot column

Note: RR > 0

- The variable leaving the solution is called leaving variable or outgoing variable.
- The row associated with the leaving variable is called key or pivot row (s3 column in our
case)
- The element that lies at the intersection of the pivot column and pivot row is called pivot
element(No 1 in our case)

Step 7 Derive the revised tableau:

For improved solution using the information obtained earlier, another tableau is derived
where in the various elements are obtained as given here.

143
a. Divide each element of the pivot row (including bi) by the pivot element to get the
corresponding values in the new tableau. The row of values so derived is called the
replacement raw.

b. For each row other than the pivot row,

- Divide each element of the pivot row by the pivot element to find new values in the
key or pivot row.
- Perform row operations to make all other entries for the pivot column equal to zero.

2nd simplex tableau

Cj 300 250 0 0 0

X2
SV X1 S1 S2 S3 Q

16
0 S1 0 1 1 0 -2 R’1=16
S2 33
0 0 3 0 1 -1 R’2=11

300 X1 1 0 0 0 1 12 R’3=Undefined
Zj 300 0 0 0 300 3600
Cj - Z j 0 250 0 0 -300

3rd simplex tableau

Cj 300 250 0 0 0

SV X1 X2 S1 S2 S3 Q Elementary
Row Operations
0 S1 0 0 1 -1/3 -5/3 5
R’’1=R’1-R’2
250 X2 0 1 0 1/3 -1/3 11
R’’2=RX2/3
300 1 1 0 0 0 1 12
Z3j
R’’3=R’ 300 250 0 250/3 650/3 6350
Cj - Z j 0 0 0 -250/3 -650/3

Since all the Cj - Zj < 0, optimal solution is reached at and this tableau is the final one.
Therefore, X1=12, X2=11, S1=5 and Max Z=6350

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Example 3.6

A Juice Company has available two kinds of food Juices: Orange Juice and Grape Juice.
The company produces two types of punches: Punch A and Punch B. One bottle of punch A
requires 20 liters of Orange Juice and 5 liters of Grape Juice. 1 Bottle of punch B requires 10
liters of Orange Juice and 15 liters of Grape Juice. From each of bottle of Punch A a profit of
$4 is made and from each bottle of Punch B a profit of $3 is made. Suppose that the company
has 230 liters of Orange Juice and 120 liters of Grape Juice available.

Required:
a. Formulate this problem as a LPP.
b. How many bottles of Punch A and Punch B the company should produce in order to
maximize profit? (Using the simplex method)
c. What is this maximum profit?

Dear student, please try to solve the above example before going to the next step.

Solution
Juice needed for one bottle of
Juice Punch A Punch B Juice Available
___________________________________________________________________________
Orange Juice (lt) 20 10 230
Grape Juice (lt) 5 15 120
Profit bottle $4 $3
___________________________________________________________________________

Let, X1 = the No of bottles of punch A produced.

X2 = the No of bottles of punch B produced.

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1. LPP Model
Max Z=4X1 +3X2
Subject to:
20X1 +10X2 < 230 Orange Constraint
5X1 +15X2 < 120 Grape Constraint
X1, X2 >0 Non-negativity constraint

2. Standard form

Max.Z=4x1 +10x2 + 0 s1 +0 s2
St:
20 x1+3x2 + s1 = 230
Standard form
5x1+15x2 + s2+ = 120
x1 , x2 , s1 , s2, >0
Where, s1 =Unused orange juice
s2 =Unused grape juice

3. Initial simplex tableau

Cj 4 3 0 0
Q/Entering column values=RR
SV X1 X2 S1 S2 Q (see the above note for RR)

0 S1 20 10 1 0 230 R1=11.5

R2=25
0 S2 5 15 0 1 120
Zj 0 0 0 0 0
Cj - Z j 4 3 0 0

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4. 2nd simplex tableau

Cj 4 3 0 0

SV X1 X2 S1 S2 Q RR

4 X1 1 1/2 1/20 0 11.5 23

0 S2 0 25/2 -1/4 1 62.5 5

1/5
Zj 4 2 46
0
Cj - Z j 0 1 -1/5 0

5. Optimal simplex tableau

Cj 4 3 0 0

SV X1 X2 S1 S2 Q

4 X1 1 0 3/50 -1/25 9

3 X2 0 1 -1/50 2/25 5
Zj 4 3 0.18 0.08 51
Cj - Z j 0 0 - 0.18 -0.08

Since all values of Cj – Zj are < 0 it is an optimal solution. Therefore, the units to be
produced and maximum profit are:
X1= 9 bottles of punch A
X2= 5 bottles of punch B
s1 =0
s2 =0
Max Z=$51

Exercise 3.3

147
Solve the following LPPs using the simplex method.
1. Max.Z=3x1 +5x2
Subject to:
x2 < 6
3x1+2x2 < 18
x1, x2 >0

2. Max. Z = 20x1 +10x2

Subject to:
5x1 + 4x2 < 250
2x1 + 5x2 < 150
x1, x2 >0

3.9.2 The Minimization Problem

The solution procedure for the linear programming problems that have the objective function
of the minimization type is similar to the one for the maximization problems, except for some
differences. To illustrate, let us again consider the examples.

Example 3.7

Minimize Z= 40x1 + 24x2 Total cost

Subject to:
20x1+ 50 x2 > 4800 Phosphate Requirement
80 x1+ 50 x2 > 7200 Nitrogen Requirement
X1, x2 > 0

Following the approach already discussed, we first introduce some new variables to convert
inequalities of the system in to equations. The variable required for converting a greater than
type of inequality in to an equation is called surplus variable and it represents the excess of
what is generated (given by the LHS of the inequality) over the requirement (shown by the

148
RHS value bi). With surplus variables, S 1 and S2 respectively for the first and the second
constraints, the augmented problem shall be:

Minimize Z= 40x1+24x2 +0S1 +0S2

Subject to:
20x1+ 50 x2- S1= 4800
80 x1+ 50 x2- S2 =7200
X1, X2, S1 ,S2 > 0

Now, as soon as we proceed to the next step we experience a problem, which is like this. We
know that the simplex method needs an initial solution to get the process started. In this case,
it is easy to visualize that an initial solution does not exist because, if we let x 1 and x2 each
equal to zero, we get S1 = -4800 and S2 = -7200, which is not feasible as it violates the non
negativity restriction. In terms of the simplex tableau, when we write all the information, we
observe that we don not get identity because unlike in case of slack variables, the co-efficient
values of surplus variables S1 and S2 appear as minus one (-1).

To provide an initial solution, we add artificial variables in to the model. Unlike slack or
surplus variables, artificial variables have no tangible relationship with the decision problem.
Their sole purpose is to provide an initial solution to the given problem. When artificial
variables are introduced in our example, it appears as follows,

20x1+ +50-S1+A1= 4800

80 x1+50x2 –S2 + A2 =7200

Before we set up the initial tableau, a few words on the artificial variables follow. The
artificial variables are introduced for the limited purpose of obtaining an initial solution and
are required for the constraints with > type, or the constraints “=” sign. It is not relevant
whether the objective function is of the minimization or the maximization type. Obviously,
since artificial variables do not represent any quantity relating to the decision problem, they
must be driven out of the systems and must not show in the final solution (and if at all they
do, it represents a situation of infeasibility). This can be ensured by assigning an extremely
high cost to them. Generally, a value M is assigned to each artificial variable, where M
represents a number higher than any finite number. For this reason, the method of solving the

149
problems where artificial variable are involved is termed as the Big M Method. When the
problem is of the minimization nature, we assign in the objective function a coefficient of +
M to each of the artificial variables. On the other hand, for the problems with the objective
function of maximization type, each of the artificial variables introduced has a coefficient –
M. For our present example, the objective function would appear as

Minimize Z=40x1+24x2 + 0S1+0S2 + MA1+MA2

It is significant to note that the initial solution obtained using the artificial variables is not a
feasible solution to the given problem. It only gives the starting point and the artificial
variables are driven out in the normal course of applying the simplex algorithm. A solution to
the problem which does not include an artificial variable in the basis represents a feasible
solution to the problem.

The initial simplex tableau giving the initial solution to our problem is given in the following
table.

Simplex Tableau 1: Non optimal solution

Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A1 A2 Qty RR

A1 M 20 50 -1 0 1 0 4800 96
A2 M 80 50 0 -1 0 1 7200 144
Zj 40 24 0 0 M M
Cj - Zj M M 0 0

For the minimization problem, the optimal solution is indicated when the values in the Zj-Cj
row are zero or positive. The presence of the negative Zj- Cj value and the column headed by
this variable is called, as before, the pivot column. The selection of the pivot row (and the
outgoing variable) is done exactly the same way as for the maximization problems- the row
that has the least (non-negative) quotient is our row of interest. Finally, the revised simplex

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tableau is derived in the same way as discussed earlier. We proceed in this manner until
optimal solution is obtained.

In respect of our problem, the initial solution is not optimal. Here the incoming variable is x 2
while A1 is the outgoing variable. The revised tableau is given in the following table. In a
similar way we proceed until the optimal solution is found. The optimal tableau for
minimization problem is a tableau that consists in its C-Z row all zeros and positive values.
(i.e. C-Z values> 0)

Dear student, conduct elementary row operations (ERO) to arrive at optimal solution before
going to the next solution part.
Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A1 A2 Q RR
X2 24 2/5 1 -1/50 0 1/50 0 96 240

A2 M 60* 0 1 -1 -1 1 2400 40
Zj 40 24 0 0 M M 2400

Cj -Zj 152/5- 0 12 -M 12 0
25- M 2M- 25
60M

Simplex Tableau 3 : Non optimal Solution

Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A1 A2 Q RR
X2 24 0 1 -2/75 1/150 2/75 -1/150 80 -3000
x2 40 1 0 1/60* -1/60 -1/60 1/60 40 2400
Zj 40 24 0 0 M M 3520
Cj - Zj 0 0 -2 38 M+ 38 M+ 38
75 75 75
75

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Simplex Tableau 4 : Optimal Solution

Cj 40 24 0 0 M M
Basis X1 X2 S1 S2 A1 A2 Q
X2 24 8/5 1 0 -1/150 0 1/50 144
x2 0 60 0 1 -1 -1 1 2400
Zj 40 24 0 0 M M 3456
Cj - ZJ 8/5 0 0 12/25 M M-12/5

According to the optimal solution, the objective function value is

Z=40x0+24x144+0x2400+0x0xM+0xM=Birr 3456

The value of S1 = 2400 indicates the surplus phosphate ingredient obtained by buying the
least cost mix.

Exercise 3.4

Find the optimal solution using simplex method.

1. Min Z=10x1 +5x2

Subject to:
2x1 + 5x2 > 150
3x1+ x2 > 120
x1, x2 > 0

2. Min Z=4x1 +5x2

Subject to:
x1 + 2x2 > 80
3x1+ x2 > 75
x1, x2 > 0
3. Min Z=7x1 +9x2
Subject to:
3x1 + 6x2 > 36
8x1+ 4x2 > 64
x1, x2 > 0

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Note: To get an initial feasible solution

Types of constraint Presence of variables in the initial solution mix

1. < (Slack) Yes
2. > *(Surplus) No
*(Artificial) Yes
3. = (Artificial) Yes

Unit Summary LP: SIMPLEX METHOD

1. The standard form of LP problem should have the following characteristics:

- All the constraints should be expressed as equations by slack or surplus and/or
artificial variables
- The right hand side of each constraint should be made non-negative; if it is not, this
should be done by multiplying both sides of the resulting constraint by -1.
 Example:
 2X1+3X2-4X3+X3<-50, we multiply both sides by negative
- Three types of additional variables, namely
a. Slack Variable(S)
b. Surplus variable (-S), and
c. Artificial variables (A)
are added in the given LP problem to convert it into standard form for two reasons:
- To convert an inequality to have a standard form of an LP model, and
- To get an initial feasible solution represented by the columns of an identity matrix.

The summary of the extra variables needed to add in the given LP problem to convert it into
standard form is given below:

Types of Extra variables to be added Coefficient of extra variables Presence of variables

constraint in the objective function in the initial solution

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 MaxZ mix
MinZ
< Add only slack variable 0 Yes
0
Subtract surplus variable 0 No
> and 0
Add artificial variable -M Yes
+M
= Add artificial variable -M Yes
+M

2. Test of optimality
- If all Cj - Zj < 0, then the basic feasible solution is optimal (Maximization
case).
- If all Cj - Zj > 0, then the basic feasible solution is optimal (Minimization
case).

3. Variable to enter the basis

- A variable that has the most positive value in the Cj - Zj row (Maximization case)
- A variable that has the highest negative value in the Cj - Zj row (Minimization case)
N:B-‘Highest negative’ values in this case refers to the negative value which is far
from zero on the number line! (E.g. -5,-10 you should take -10 as entering value)

4. Variable to leave the basis

- The row with the non-negative and minimum replacement ratio (For both
maximization and minimization cases
i.e: RR > 0

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Self-Check Review Problems III

I. Use graphical method to solve the following LPP.

1. Max.Z=15X1-10X2 2. Max.Z = 2X1+X2

St: St:
4X1+6X2 < 360 X1+2X2 < 10
3X1+0X2< 180 X1 +X2 < 6
0X1+5X2< 280 X1 - X2 < 2
X1, X2 > 0 X1 -2X2 < 1
X1, X2 >0

3. Max.Z=10X1+15X2 4. Min.Z=3X1+2X2
St: St:
2X1+X2 < 26 5X1+X2 > 10
2X1+4X2< 56 X1 +X2 > 6
-X1+X2< 5 X1 + 4 X2 > 12
X1, X2 > 0 X1, X2 >0

5. Min.Z=-X1+2X2 6. Min.Z=20X1+10X2
St: St:
-X1+3X2 < 26 X1 + 2X2 <40
X1 +X2 < 6 3X1 + 4 X2 > 30
X1-X2< 2 4X1+ 3X2> 60
X1, X2 > 0 X1, X2 >0

7. A manufacturer produces two different models; X and Y, of the same product .The raw
materials r1 and r2 are required for production. At least 18 Kg of r1 and 12 Kg of r2 must
be used daily. Almost at most 34 hours of labor are to be utilized .2Kg of r1 are needed
for each model X and 1Kg of r1 for each model Y. For each model of X and Y, 1Kg of r2
is required. It takes 3 hours to manufacture a model X and 2 hours to manufacture a
model Y. The profit realized is $50 per unit from model X and $30 per unit from model
Y. How many units of each model should be produced to maximize the profit?

155
8. A manufacturing firm produces two machine parts P1 and P2 using milling and grinding
machines. The different machining times required for each part, the machining times
available on different machines and the profit on each machine part are as given below:

___________________________________________________________________________
Manufacturing Time Maximum Time
Required (min) Available per Week (min)
Machine P1 P2
___________________________________________________________________________

Lathe 10 5 25,000
Milling Machine 4 10 2000
Grinding Machine 1 1.5 450
Profit per unit ($) $50 $100
___________________________________________________________________________

Determine the number of pieces of P1 and P2 to be manufactured per week to maximize

profit.

9. A person requires 10, 12 and 12 units of chemicals A, B and C respectively for his
garden. A liquid product contains 5, 2 and 1 units of A, B and C respectively per jar. A
dry product contains 1, 2 and 4 units of A, B and C per carton. If the liquid product sells
for $3 per jar and the dry product sells $2 per carton, how many of each should be
purchased in order to minimize cost and meet the requirement?

II. Use the simplex algorithm to solve the following LPP.

1. Solve the following LPP by the simplex algorithm

Min Z=6x1 +8x2
Subject to:
x1+ 2x2 > 80
3x1+ x2 > 75
x1, x2 >0

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 a. What are the values of the basic variables at each iteration?
b. Which are the non-basic variables at each iteration?

2. At the 3rd iteration of a particular LP maximization problem, the following tableau is

established:

Cj

SV X1 X2 X3 S1 S2 S3 Q

5 X3 0 1 1 -2 0 0 5

6 X1 1 -3 0 0 0 1 12
0 S2 0 2 0 1 1 -1 10
Zj 6 -13 5 5 0 21 97
Cj - Z j 0 16 0 -5 0 -21

What special condition exists as you improves the profit and move to the next iteration?
Proceed to solve the problem for optimal solution.
3. Covert the following constraints and objective function into the standard form for use in
the simplex method
Min Z=4x1 +x2
Subject to:
3x1 + x2 = 3
4x1 + 3x2 > 6
x1 + 2x2 < 3
x1, x2 >0

4. Solve the following LPP using simplex method

Max Z=9x1 +7x2
Subject to:
2x1+ x2 < 40
x1 + 3x2 < 30
x1, x2 >0

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5. Solve the following LPP to show that it has alterative optimal solutions.
a. Max Z=6x1 +3x2
Subject to:
2x1+ x2 < 8
3 x1+ 3x2 < 18
x2 < 3
x1, x2 >0

c. Min Z=2x1 +8x2

Subject to:
5x1+ x2 > 10
2x1+ 2x2 > 14
x1+ 4x2 > 14
x1, x2 >0

6. Solve the following LPP to show that it has unbounded solution.

a. Max Z = -2x1 +3x2
Subject to:
x1 <5
2 x1 - 3x2 < 6
x1, x2 >0

b. Max Z=3x1 +6x2

Subject to:
3x1+ 4x2 > 12
-2x1 + x2 < 4
x1, x2 >0
7. Solve the following LPP to show that it has no feasible solution.
a. MaxZ=-2x1 +3x2
Subject to:
x1 - x2 > 4
x1+ x2 < 6
x1 <2
x1, x2 > 0

158
b. Max Z = 3x1 +3x2
Subject to:
2x1+ x2 < 2
3x1 + 4x2 > 12
x1, x2 >0

159
REFERENCES

1. Anderson, D.R and others 2003. An introduction to Management science

Quantitative approaches ot Decision Making, Melissa Acuna, USA.

2. Orema, M and Agarwal, K,1988, Quantitative Techniques kings Books, Delhi.

3. Stwenson, W. Introduction to Management Science.

4. Taha, H, 1999. Operations Research: An Introduction. Prentice Hall, New Delhi.

5. Buffa, E and Sarin, R, 1994. Modern Production/Operations management. John

Wiley and sons, Singapore.

6. Bowen, E and Pritchett, 6, 1987. Mathematics with applications in Management

and economics, Richard Irwin inc, USA.

7. Uohra, N, 1998. Quantitative Techniques in Management. Tata Mc Graw Hill,

New Delh !

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 UNIT FOUR
EXPONENTIAL AND LOGARITHMIC FUNCTIONS

Unit Objectives

After studding this unit, students should able to understand and be acquainted with the
following:

 Be able to know the definition and meaning of exponents.

 Be able to know the basic rules of exponents.
 Develop an insight towards basic operations in exponential and logarithmic functions.
 Develop know-how towards logarithms and antilogarithms.
 Develop an insight towards application areas of exponential and logarithmic
functions.
 Be able to handle problems in mathematics of finance using exponential and
logarithmic concepts.

In general, the major objective of this unit is to enable students to have an insight and
exposure towards exponential and logarithmic functions, and thereby enabling them to impart
knowledge of applying the techniques in handling real life problems, especially in
mathematics of finance.

Unit Introduction

It is evident that managerial problems are amenable to mathematical models. Of the various
functions, this unit tries to introduce students of business stream about major topics in
exponential and logarithmic functions. The unit deals with basic concepts of exponential and

161
logarithmic functions, basic rules of exponents, basic rules of logarithms, types of logarithms,
antilogarithms and applications areas of these functions in the business arena.

In total, this part of the module introduces students of business stream about basic concepts in
exponential and logarithmic functions for further application in mathematics of finance.

Dear student! What do you know about exponents and logarithms?

4.1 Basic concepts

Definition of exponential functions: The function f(x) = ax where a>0, a≠1 is called an
exponential function for each different constant a called the base.

4.2 Basic Rules of Exponents:

1. Any number to the power of zero is 1; a0 = 1.

E.g. 20 = 1; (8000)0 = 1, etc.

2. When multiplying two powers of the same base, always add exponents.

ax . ay = ax+y
E.g. 22 . 24 = 22+4 = 26
3. When dividing ax by ay, simply subtract exponents.

i.e. ax/ay = ax-y

E.g. 34/32 = 34-2 = 32
4. The quantity ax to the power of y is equal to axy;

i.e. (ax)y = axy

5. The base ab to the power x is equal to ax times bx;

i.e. (ab)x = ax . bx
6. The base a/b to the power x is equal to ax/bx;

i.e. (a/b)x = ax/bx

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 7. A base to the power –x is equivalent to one over that base to the power x;

i.e. a-x = 1/ax, e.g. 3-2 = 1/32 = 1/9.

Definition of logarithmic functions: For a>0 and a≠1; y = logax which is equivalent to ay =
x, defines a logarithmic function.

A logarithm is simply an exponent that is written in a special way.

For example, we know that the following exponential equation is true:

32 = 9

In this case, the base is 3 and the exponent is 2. We can write this equation in logarithm
form (with identical meaning) as follows:

log39 = 2

We say this as "the logarithm of 9 to the base 3 is 2". What we have effectively done is to
move the exponent down on to the main line. This was done historically to make
multiplications and divisions easier, but logarithms are still very handy in mathematics.

There are two basic types of logarithms:

i. Common logarithms: are logarithms to the base ten. They are identified by
log10x = log x.

ii. Natural logarithms: are logarithms to the base ℮. They are identified by: log℮x
= ℓn x.

4.3 Basic Rules of logarithms:

1. Loga1 = 0; a0 = 1

2. Logaa = 1; a1 = a

3. Logamn = logam + logan → product rule of logarithms.

4. Loga(m/n) = logam – logan → quotient rule of logarithms.

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 5. Logamp = plogam → power rule of logarithms.

6. Logca = (logba)/(logbc)

Dear student, can you summarize and give your own example of basic rules of
logarithms.

Antilogarithms:
It is the inverse of a logarithm and indicates the exponential function.
I.e. logax = y → antilogay = x↔ ay = x.

4.4 Applications:

I. The growth of a population:

Formula: P = P0 . 2(t/d) ; where, P = population at time t

P0 = population at time t=0
d = doubling time
t = number of years
Example: if country x has a population of 23,000,000 people and a doubling time
of 19 years, and if the growth continues at the same rate, find the population in:
a) 10 years

b) 30 years

Compute the answer to the next million.

Solution:
Given: P0 = 23 million, d = 19 years
a) t = 10 years; P10 = P0 . 2(t/d)

P10 = (23,000,000)(210/19)
P10 = 33 million
b) t = 30 years; P30 = (23,000,000)(230/19)

P30 = 69 million
II. To calculate the growth of money at a compound interest:

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 Formula: A = p(1 + r/m)n; where,
A = maturity value
P = principal
r = nominal rate
m = compounding periods within a year
n = total number of compounding periods

Exercise 4-1:

1. Write in logarithm form: 8 = 23

2. Write in exponential form: log10 1000 = 3

3. Find b if

4. Evaluate y = 9x if x = 0.5
5. Express 82 = 64 in logarithmic form.
6. Express log 11 121 = 2 in exponential form.

7. Determine the unknown: log 10 0.01 = x

8. Determine the unknown: log b (1/4) = -1/2

Exercise 4-2:
Find the simplified form or values of the following questions.
1. 8-1
2. (-10)-5
3. (2x + 7)-4
4. 7x-8
5. Find the value of x if x = 25
6. Find the value of y if y = 36/33
7. What is the value of 811/2?

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 8. What is the value of x if x is given by 42/43?
Exercise 4-3:

1. Expand log 7x as the sum of 2 logarithms.

2. Using your calculator, show that log (20/5) = log 20 − log 5.

3. Express as a multiple of logarithms: log x5.

4. Find the value of the following:

b. log6 6

c. log10 10

d. logx x

e. loga a

5. Find the value of the following:

a) log7 1 b) log10 1 c) loge1 d) logx 1

Remark: Dear distance learner! The major aim of this unit is to remind you about exponential
and logarithmic functions for applying them in the next unit of the module (that is
mathematics of finance). Thus, further dealings of these functions are left for the next unit.

166
UNIT SUMMARY
Summary of the major formulas covered in this unit include the following.
f(x) = ax where a>0, a≠1

For a>0 and a≠1; y = log ax

Antilogay = x↔ ay = x

P = P0 . 2(t/d)

A = p(1 + r/m)n

SELF-CHECK REVIEW PROBLEMS IV

1. Express as a sum, difference, or multiple of logarithms:

2. Express 2 loge 2 + 3 loge n as the logarithm of a single quantity.

3. Determine the exact value of:

4. Solve for y in terms of x: log2x + log2y = 1

5. Solve 5x = 0.3

6. Solve the equation 3x = 12.7.

7. Solve 3 log(2x − 1) = 1

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8. Find the a) compound amount, and b) the compound interest for the given investment and
rate: $15000 for 14 years at an annual rate of 5% compounded monthly using exponential
function.

UNIT FIVE
MATHEMATICS OF FINANCE

Unit Objectives

After a thorough study of this chapter, you will able to:

 Understand the concept of time – value of money.
 Identify the concept and computation of simple interest.
 Compute compound interest.
 Know the concept and business application of annuities.

Unit Introduction

Mathematics of finance is concerned with the analysis of time-value of money. The

fundamental premise behind such analysis is the concept that entails the value of money
changes overtime. Putting it in simple terms, the value of one birr today is not the same after
a year. Suppose, if you deposit Birr 1000 at a bank for some period, you will find the sum
grows to a higher sum at the time of withdrawal. The rational behind is that the banks
reinvest the deposits received at some other profitable ventures and hence, it is using
depositors’ money. As a result, it pays interest on depositors’ money as compensation. Thus,
in one way or another as value of money changes overtime we find a difference between the
present and future value of money. In sum, the difference arises because a rational being is
assumed to invest/use money available on productive activity that result in a higher future
sum and, the difference between the present and future value of money is referred to as time-
value of money.

168
Mathematics of finance has an important implication in organizations as transactions and
business dealings are mostly pecuniary. Such matters as lending and borrowing money for
various purposes, leasing materials, accumulating funds for future use, sell of bonds are some
of the cases that involves the concept of time value of money, Likewise, finance mathematics
is equally important in our personal affairs. For example, we might be interested in owning a
house, in financing our educational fees, having a car, having enough retirement funds etc.
All these cases and others involve financial matter. Cognizant of this fact, we proceed to the
study of mathematics of finance in this unit. In doing so, the unit is organized in to three main
sections. The first section advances to our study of simple interest and discounts. We further
explore about compound interest and annuities in the second and third sections respectively.

Dear student, do you have any concept of interest? Please try to define what interest is?

Section One: Simple Interest and Discounts

Section Objectives:

After you study this section, you are expected to understand:

- How to compute simple interest
- Ordinary and exact simple interest
- Simple discounts
- Promissory notes and bank discounts

Section Overview:

5.1 Basic Concepts

5.2 Simple Interest and Its Computation
5.3 Ordinary and Exact Interest
5.4 Solving the Principal (P), Interest Rate (i) and Time
5.5 Simple Discount: Present Value
5.6 Promissory Notes and Bank Discount

5.1 Basic Concepts

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In business, we usually pay some money for using services and goods. Such payments go by
various names. For instance, the money we pay for hiring a taxi is known as fair. The amount
we pay for education is called tuition fee. Likewise, the cost we pay for electric consumption
commonly called electric charge. Back to our case, we also incur cost in using money for a
certain period. This cost is referred to as interest. Thus, interest is the payment made for use
of the principal (money) or a fee, which is paid for having the use of money. The amount of
money that is borrowed or lent or invested or money available at hand at the beginning is
called the principal and denoted by P. Interest is usually paid in proportion to the principal
and the period of time over which the money is used. The percent of the principal that is
charged for the use of the principal for a unit of time is called the rate of interest (interest
rate, i). The length of time for which the principal is borrowed, lent or invested is called the
time or term of the loan and commonly how symbolized by n. The future or maturity value,
which is also denoted by F, is the sum of the principal and all the interest earned.

 Based on computation of the respective interest, there are two types of interests.

These are,
i. Simple interest: it is the return on a principal amount for one time period.
ii. Compound interest: it is the return on a principal amount for two or more time period,
assuming that the interest for each time period is added to the principal amount at the
end of each period and earns interest on all subsequent periods.

5.2 The Simple Interest

Interest that is paid solely on the amount of the principal P is called simple interest. Simple
interest is usually associated with loans or investments that are short term in nature. In
addition, it is always computed based on the original principal.

The Simple Interest Formula:

The computation of simple interest is based on the following formula.
I = pin
Where, I = Simple interest (in dollars or birr)

170
 P = Principal (in dollar, or birr) and it is the amount
i = Rate of interest per period (the annual simple interest rate)
n = Number of years or fraction of one year

In computing simple interest, any stated time period such as months, weeks or days should be
expressed in terms of years. Accordingly, if the time period is given in terms of,
i. Months, then
n= Number of months
12
ii. Weeks, then
n= Number of Weeks
52
iii. Days, then
a. Exact interest
n= Number of days
365
b. Ordinary simple interest
n= Number of days
360
Maturity value (future value) represents the accumulated amount or value at the end of the
time periods given. Thus,
Future value (F) = Principal (P) + Interest (I)

Example 5.1

A credit union has issued a 3 year loan of Birr 5000. Simple interest is charged at a rate of
10% per year. The principal plus interest is to be repaid at the end of the third year.
a. Compute the interest for the 3-year period.
b. What amount will be repaid at the end of the third year?

Solution
Given values in the problem
3 – Years loan = Principal = Birr 5000
Interest rate = i = 10% = 0.1
Number of years (n) = 3 years
a. I = p i n

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 I = 5000 x 0.1 x 3
I = Birr 1500
b. The amount to be repaid at the end of the third year is the maturity (future) value of
the specified money (Birr 5000). Accordingly, F = P + I
F = 5000 + 1500
F = Birr 6500

Or, using alternative approach,

F=P+I
Then, substitute I = P i n in the expression to obtain
F = P + Pin
F = P (1 + in)
Consequently, using this formula we can obtain
F = 5000 (1+ (0.1x3)
F = 5000 x 1.3
F = Birr 1500

Example 5.2

A person “lends” Birr 10,000 to a corporation by purchasing a bond from the corporation.
Simple interest is computed quarterly (four times a year) at a rate of 2% per quarter, and a
check for the interest is mailed each quarter to all bondholders. The bonds expire at the end of
5 years, and the final check includes the original principal plus interest earned during the last
quarter. Compute the interest earned each quarter and the total interest, which will be earned
over the five-year life of the bonds.

Dear student, please try to solve the problem before going to the solution part.

Solution
Given values in the problem, P = Birr 10,000 i = 2% per quarter n = 5 years

Required:
Interest per quarter and interest over the five-year periods
Interest per quarter (one quarter) = Pin

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 = 10000 x 0.2 x 1
= Birr 200
There, at each quarter the interest earned on Birr 10,000 is Birr 200.

Interest over the five year period = pin

In the case, n represents all quarters with in 5 years. That is,
n = Number of years x 4
= 5x4 = 20
Then, Interest (I) = Pin
= 10000 x 0.02 x 20 = Birr 4000

Remark

The interest rate of 2% is given as at a quarterly rate. Hence, in computation of the

interest we shall not change it in to annual rate. As long as the interest rate is
provided in the desired time interval, we shall not make adjustment on the rate given
as well as the period. Yet, if conversion from one time interval to another is
demanded, we have to be consistent. For example, in the above example the i = 2% is for a
quarter. The yearly rate will be 2x4 = 8%. By using this annual rate, we can compute the total
interest as follows.
I = Pin
= 10000 x0.08 x 5 = Birr 4000

Exercise 5.1

1. Suppose, a small handicraft enterprise has requested a two year loan of Birr 6500
from the commercial Bank of Ethiopia. If the bank approves the loan at an annual
interest rate of 7.5%,
b. What is the simple interest on the loan?
c. What is the maturity value of the loan?
2. If the above loan (exercise 5.1) is offered at a rate of 21% and is due in 3 months,
what is the maturity value of the loan?

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5.1.2 Solution for P, i and n

Dear students, in the computation of simple interest we might be required to find out the
value of the principal, interest rate and the time period in some cases. Such computation for
P, i and n is simply made by driving the formula for the unknown values from the formula we
have used for simple interest.

Example 5.3

1. How long must one leave Birr 300 invested in order to learn Birr 28 interest at 3% per
year?
2. At what rate will Birr 150 produce interest of Birr 20.25 in 4.5 years?
3. What principal is required to produce interest of Birr 38.50 in two year at 3.5 % per year?

Solution
1. The question involves determining the time period which is enough to earn an interest of
Birr 28 on Birr 300.
The given values in the problem are P = Birr 300 I = Birr 28 i = 3% and n = ?
I = Pin, now solve for n in this formula.
n= I = 28 = 28 = 4 years
Pi 300 x 0.30 9
2. Given values in the problem
P=Birr 150
i=Birr 20.25
n=4.5 years
The required value is the rate of interest.
I = pin, Solve for i
i=I = 20.25 = 20.25 = 0.03 or 3%
Pn 150x4.5 675
3. Given values in the problem
I = Birr 38.50
n =2 years
I = 3.5% per year
Required: Principal (P)

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We can find out the value of P In the same manner with the above examples a follows.
I = pin, solve for P

P = Birr 550
Thus, Birr 550 is required to produce interest of Birr 38.5 in 2 years at 3.5% rate.

Exercise 5.2

Dear student, to check whether you have understood the above example try to work out the
following problems.
1. If you are to receive a total of Birr 1000 in 3 months from an investment which pays
simple interest, what is the principle you have invested?
2. How many months will of take at 8% simple interest for Birr 2000 to grow in to Birr
2400?
3. Find the interest rate if one borrows Birr 450 for one year and 8 months given
accumulated interact of Birr 30.

5.4 Ordinary and Exact Interest

In computing simple interest, the number of years or time, n, can be measured in days. In
such case, there are two ways of computing the interest.
i. The Exact Method: if a year is considered as 365 days, the interest is called exact
simple interest. If the exact method is used to calculate interest, then the time is
n = number of days / 365
ii. The Ordinary Method (Banker’s Rule): if a year is considered as 360 days, the interest
is called ordinary simple interest. The time n, is calculated as
n = number of days/ 360

Example 5.4

Find the interest on Birr 1460 for 72 days at 10% interest using,

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 a. The exact method
b. The ordinary method
Solution
Given a) P=1460 b) P=1460
P = Birr 1460 n=72/365 n= 72/360
n = 72 days i= 0.1 i=0.1
i = 10% = 0.1 I=Pin =1460*72/365*0.1=28.8 I=Pin= 1460*72/365*0.1=29.2

5.5 Simple Discount: Present Value

The principal that must be invested at a given rate for a given time in order to produce a
definite amount or accumulated value is called present value. The present value is analogous
to a principal P. It involves discounting the maturity or future value of a sum of money to a
present time. Hence, the simple present value formula is derived from the future value (F)
formula as follows.

Future Value = Principal + Interest

F=P+I but I = Pin
Thus, F = P + Pin
F = P (1+ in)

Then from this, solve for P.

PF
1  in

If P is found by the above formula, we say that F has been discounted. The difference
between F and P is called the simple discount and is the same as the simple interest on P.

Example 5.5

1. 90 days after borrowing money a person repaid exactly Birr 870.19. How much
money was borrowed if the payment includes principal and arch nary simple interest
at 9 ½ %?

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 2. What is the present value of Birr 645 due in 2 ½ years if the interest rate is 3%? What
is the simple discount?

Solution
1. Given values in the problem,
n in ordinary method = Number of days / 360
= 90 /360
n = 0.25
F = the amount repaid = Birr 870.19
i = 9 ½% = 9.5% = 0.095

Required:
The amount borrowed which is the same as simple present value, P.

= 870.19 / (1+ (0.095 x 0.25))

P = 870.19 ÷ 1.024
P = Birr 849.795
2. Given values in the problem,
F = Birr 645
n = 2.5 years
i = 3% = 0.03
P = F/ 1+ in
P = 645/ 1+ (0.03 x 2.5)
P = 645/1.075
P = Birr 600

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Exercise 5.4

Solve for the missing quantities.

Question Present Simple Future Rate (i) Time

Value (P) discount (I) value (F) (n)
1 Birr 400 Birr 18 ? ? ½ years
2 Birr 600 Birr 60 ? 4% ?
3 ? Birr 126 Birr 1026 ? 3½ years
4 Birr 474.81 ? Birr 481,93 ? ¼ years
5 Birr 2510.14 ? Birr 2566.62 4 ½% ?

5.6 Promissory Notes and Bank Discount

Definitions

A promissory note is a promise to pay a certain sum of money on a specified date. It is also
considered as a written contract containing an unconditional promise by the debtor called the
maker of the note to pay a certain sum of money to the creditor called the payee of the note,
under terms clearly specified in the contract. Promissory note is unconditional in a sense that
it gives the maker of the note an exclusive right either to sell, borrow, or discount it against
the value of the note.

A bank discount is the amount of money received or collected after discounting a note before
its due date. It is not unusual when borrowing money from a bank that one is required to pay
a charge based on the total amount that is to be repaid (maturity value), instead of the
principal used. If the maturity value is used in determining the charge for use of money, we
say that the promissory note (or simply the note) is discounted. Consequently, a charge of

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loan computed in this manner is called ‘Bank Discount’ and it is always computed based on
the maturity value. Bank discount is the amount that is charged on maturity value.

Hence, the amount of money payable to the debtor or the amount that the borrower receives
is called ‘Proceed.’ The amount that the borrower is going to pay to the creditor (lender) is
called ‘maturity value.’ To further our understanding of this concept, let’s develop
mathematical expressions (formula) for computation of the variables at stake.
Proceed = Maturity Value – Bank Discount

Symbolically,
P = F – D , and D = Fdt
Where, P = Proceed
F = Maturity value
D = Bank discount
d = Rate of discount
t = Time of discount

Now we can further elaborate the above formula for proceed. To begin with,
P = F – D, but D = Fdt
Therefore, P = F – Fdt = F (1 – d t)

In sum, proceeds can be calculated by

P = F (1 – d t)

For example, if Birr 1000 is borrowed at 12% for 6 months, the borrower receives the
proceeds, P, and pays back F = Birr 1000. The proceeds will be Birr 1000 minus the
interest on Birr 1000. This will be:
P = 1000 – (1000 x 0.12 x 6/12) = Birr 940
Or, P = 1000 (1 – (0.12 x 6/12)
P = Birr 940

Remark

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 i. Proceeds are an amount received now for payment in the future. Therefore,
they are analogous to present value. Yet, proceeds are not equal to present
value because the proceeds from a futures obligation to pay are always less
than the present value of that obligation if, of course, the same rate of
interest is used in both adulations.
ii. Proceeds should be completed when the interest rate is stated by the
qualifier word as discount rate or a bank discount or interest deducted–in–
advance, and present value should be computed where the interest is given
without such qualifiers, discount.
iii. The computation of simple interest and bank discount is the same except in
the former case principal and in the later case the maturity values are used
for between trimmings the amount discount.

Having the idea of promissory notes and bank discounts, we may now progress to consider
some illustrative problems.

Example 5.6

1. Find the bank discount and proceeds on a note whose maturity value is Birr 480 which is
discounted at 4% ninety days before it is due.
2. A borrower signed a note promising to pay a bank Birr 5000 ten months from now.
a. How much will the borrower receive if the discount rate is 6%?
b. How much would the borrower have to repay in order to receive Birr 5000 now?

Dear student, please try to solve the above problem before going to the next part.

Solution
1. Given values in the problem
F = Birr 480
d = 4% = 0.04
t = 90 days or 3 months = 3/12 = 90/360 = 0.25
D = ? and P = ?
To find the value of the bank discount, we use the formula D = Fdt. Accordingly,

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 D = 480 x 0.04 x 3/12
D = Birr 4.8 is the amount of bank discount.

In the same manner, the proceed can be obtained as follows.

P = F–D or P = F (1 – d t)
P = 480 – 4.8 or P = 480 (1 – (0.04 x 0.25)
P = Birr 475.2 or P = 480(0.99) = Birr 475.2
2. Given values:
F = Birr 5000
t = 10 months = 10/12 year = 0.83 year
a. d = 6% = 0.06
Proceeds = P =?
P = F(1 – dt)
= 5000 (1 – (0.06 x 10/12)
= 5000(1 – 0.05)
P = 5000 (0.95)
P = Birr 4750 is the amount that the borrower receive now.

b. Given d = 0.04 or 4%
t = 10 months or 10/12 = 0.83 years
P = Birr 5000
F = ?
Now to find the value of F, simply we need to solve for F in the formula P = F(1- dt).

Thus, F = P ÷ (1 – d t)
F = 5000 = 5000 / 09668
1 – (0.04 x 0.83)
F = Birr 5171.7

Exercise 5.5

1. A person signs a note promising to pay a bank Birr 1500 eight months from now and
receives Birr 1350. Find the discount rate.

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2. Find the bank discount and proceeds on a 120-day note for Birr 720 bearing 5% interest if
discounted at 4% 90 days before it is due.

Section Two: Compound Interest

Section Objectives:

Upon completion of this section, you will be able to:

- Identify procedures of computing compound interest.
- Determine the compound amount of a sum of money and discounting of the same.

Section Overview:

o The Compound Interest and Its Formula

o Present Value of a Compound Amount

5.7 The Compound Interest and Its Formula

As it has been highlighted earlier, compound interest involves the case where interest earned
during the earlier periods also earns interest during the later period. If, instead of being paid
when due, the interest as investment is added to the principal and the sum is used as new
principal, we say that compound interest is being used. Under this procedure, the interest for
each period is added to the principal for purpose of computing interest for the next period.
The sum to which the principal and interest on it grow during the period is called the maturity
or accumulated value of the principal. The difference between the compound amount and the
principal is called compound interest. The sum that is invested is called the present value or
the principal. The time interval between the date on which the principal was invested and the
date on which it is repaid is called the term of the investment (loan).

If an amount of money, P, earns interest compounded at a rate of I percent per period it will
grow after n periods to the compound amount F, and it is computed by the formula:

Compound amount formula: Fn = P (1 + i) n

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 Where, P = Principal
i = Interest rate per compounding periods
n = Number of compounding periods (number of periods in
which the principal earn interest)
F = Compound amount

A period, for this purpose, can be any unit of time. If interest is compounded annually, a year
is the appropriate compounding or conversion or interest period. If it is compounded
monthly, a month is the appropriate period. It is important to know that the number of
compounding period/s within a year is/are used in order to find the interest rate per
compounding periods and it is denoted by i in the above formula. Consequently, when the
interest rate is stated as annual interest rate and is compounded more than once a year, the
interest rate per compounding period is computed by the formula:
i = j / m, where j is annual quoted or nominal interest rate
m number of conversation periods per year or the
compounding periods per year
n = m x t, where t is the number of years

Example 5.7

Assume that we have deposited Birr 6000 at commercial Bank of Ethiopia which pays
interest of 6% per year compounded yearly. Assume that we want to determine the amount of
money we will have on deposit (our account) at the end of 2 years (the first and second year)
if all interest is left in the savings account.

Solution
Give values in the problem, P = Birr 6000, j = 6% = 0.06, t = 2 years
m = compounded annually = i.e. only once
n=mxt =1x2 = 2
i = j / m = 0.06 / 1 = 0.06
Then, the required value is the maturity or future value
F = P(1 + i )n
= 6000 (1 + 0.006)2
= Birr 6000 (1.06)2

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 = Birr 6741.6

Exercise 5.8

An individual accumulated Birr 30,000 ten years before his retirement in order to buy a house
after he is retried. If the person invests this money at 12% compounded monthly, how much
will be the balance immediately after his retirement?

Solution
Given values, P = Birr 30,000, t = 10 years, i = 12% = 0.12
m = compounded monthly = 12
i = j / m = 0.12 / 12 = 0.01
n = m x t = 12 x 10 = 120 and what is required is the Future Value F.
Then, F = P (1 + i) n
= 30,000 (1.01)120
= 30,000 (1.01)120
F = Birr 99,011.61

Having the understanding of how compound interest works and computation of future value,
in subsequent example, we will consider how to determine the number of periods it will take
for P birr deposited now at i percent to grow to an amount of F birr.

Example 5.9

A newly married couple has Birr 15000 to the purchase a house. For the type of house they
are interested in buying they estimate a birr 20,000 down payment will be necessary. How
long will the money have to be inserted at 10 % compounded quarterly to grow to Birr
20,000?

Solution
Given the values, P = Birr 15000, F = Birr 20,000
m = quarterly = 4 times a year

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 j = 10% = 0.1
i = j÷ m = 0.1 ÷ 4 = 0.025
a. We are required to determine the period within which Birr 15000 could grow to Birr
20,000. In accordance, given the formula F = p (1 + i) n we solve out for n.
20,000 = 15,000 (1 + 0.1)n
20,000 = 15000 (1.025)n , then divide both sides by 15,000.
20,000 ÷ 15,000 = 1.025n
1.33 = 1.025n
Now, we shall apply the rule of logarithm we considered in the preceding chapter. Hence, we
can take the logarithm of both sides.
log 1.33 = log 1.025n

Then, applying the rule of common logarithm (logarithm in base 10 = log 10), we will find
that
log 1,025n = n log 1.025

Thus, log 1.33 = n log 1.025

Using the logarithm table or scientific calculators, we obtain

Since we have considered the interest rate per quarter, the resulting period will be in terms of
quarters. However, if we use the annual interest rate of 10% the resulting answer will be in
terms of years.

Students, in the example above we have seen how to compute the time ‘n’ for a given sum of
money to grow to some specified amount at a specified interest rate. Further, let us consider a
problem that involves computation of unknown interest rate.

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Example 5.10

Find the semi-annual interest rate at which Birr 1760 will accumulate to Birr 3800 in 26
years.

Solution
Given values in the problem are, P = Birr 1760 , F = Birr 3800 , t = 26
years
m = number of conversion periods in a year = twice (semi-annual)
n = m x t = 2 x 26 = 52 semi-annuals
i =? (We are required to compute the semi-annual interest rate)

First, we have the compound amount formula Fn = p (1 + i) n . Then,

3800 = 1760 (1 + i) 52
Now, let us divide both sides by 1760 to obtain
3800 ÷ 1760 = (1 + i) 52
2.16 = (1+i)52
At this point, we shall apply the logarithmic function rule. Hence, taking common logarithm
of both sides, we obtain.
log 2.16 = log(1 + i) 52
log 2.16 = 52 log (1 + i)
In further approach, let us divide both sides by 52 to obtain
log 2.16 ÷ 52 = log (1 + i)
0.334454 ÷ 52 = log (1 + i)
0.006432 = log (1 + i)

To obtain (1 + i), we must convert the given expression to exponential function form or take
the antilogarithm of both sides. The first approach is simpler and involves few steps than the
later method. Thus, as we have seen in the fourth chapter, we know that:
log a x = y is equal to ay = x .

Accordingly, we obtain

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 10 0.0064432 = 1 + i
1.0149 = 1 + i
i = 0.0149 ≈ 1.5% .
The rate of interest per conversion period (semi annual rate) is 1.5%. In the same way, the
annual nominal rate j will be 3%, which can be obtained by multiplying i by the number of
conversion periods per year.

Having considered the above examples, now you can further check your understanding by
working out the following exercises.

Exercise 5.6

1. If Birr 6500 is invested at 8 ½ % compound

a. Annually b. Semi annually
c. Quarterly d. Monthly,
what is the amount after 7 years?

2. At what interest rate compounded quarterly will a sum of money double in 4 years?

3. How long will it take for Birr 4750 to accumulate to Birr 7500 at 5 1/3% compounded
semi-annually?

4. If, in 11 years, Birr 1200 accumulates to Birr 1482, what is the compound interest rate
provided it is converted annually?

5.8 Present Value of a Compound Amount

As we have considered in the simple interest case and as extended in the compound amount
as well, future (maturity) value is the value of the present sum of money at some future date
(time). Conversely, present value (or simply principal) is the current birr or dollar value
equivalent of the future amount. It is the sum of money that is invested initially and that is
expected to grow to some amount in the future at a specified rate. If we put the present and
future (maturity) values on a continuum as shown below, we can observe that they are inverse

187
to one another. And, future value is always greater than the present value or the principal
since it adds/earns interest over specified time-period.

0 1 2 3 . . . n
Present Value (P) Future Value
(Compound Amount)

n
Future value is obtained by compounding technique and the expression (1 + i) is called
compound factor. On the other hand, present value is obtained by discounting techniques and
-n
the expression (1 + i) is referred to as the compound discount factor. The formula for
present value of compound amount is simply derived from compound amount formula by
solving for P.

Examples 5.11

1. What is the present value of

a. Birr 5000 in 3 years at 12% compounded annually?
b. Birr 8000 in 10 years at 10% compounded quarterly?

2. Suppose that a person can invest money in a saving account at a rate of 6% per year
compounded quarterly. Assume that the person wishes to deposit a lump sum at the
beginning of the year and have that some grow to Birr 20,000 over the next 10 years.
How much money should be deposited at the beginning of the year?

3. A young man has recently received an inheritance of birr 200,000. He wants to make a
portion of his inheritance and invest it for his late years. His goal is to accumulate Birr
300,000 in 15 years. How much of the inheritance should be invested if the money will
earn 8% per year compounded semi-annually? How much interest will be earned over the
15 years?

Solution

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1. (a) Given the values, Fn = F3 = Birr 5000, t = 3 years m = 1 (compounded
annually)
n= txm =3x1=3
j = 12 % = 0.12
i = j / m = 0.12/1 = 0.12 and we are required to find Present Value P.
Thus, P = Fn (1 + i) -n
= 5000 (1 + 0.12)-3
= 5000 (1.12-3)
= 5000 (0.7118)
P = Birr 3559

(b) Fn = F40= Birr 8000, t = 10 years , m = quarterly = 4

n = t x m = 10 x 4 = 40 , i = 10% = 0.1 , i = j / m = 0.1 / 4 = 0.025
p = ? but P = Fn (1 + i)-n
= 8000 (1 + 0.025)-40 = 8000 (1.025) -40
P = Birr 2979.5

2. Given the values, i = 6% = 0.06 , m = quarter = 4 times a year

i = j ÷ m = 0.06 ÷ 4 = 0.015
F = Birr 20,000 shall be accumulated
t = 10 years
n = m x t = 10 x 4 = 40 interest periods
P = how much should be deposited now?
P = Fn(1 + i)-n
= 20,000 (1+0.015)-40 = 20,000(1.015-40)
P = Birr 11,025.25

3. Inheritance = Birr 200,000

Fn = Birr 300,000 (the person's goal of deposit) , t = 15 years , j = 8% = 0.08
m = semi-annual = 2 times a year
i = j ÷ m = 0.08 ÷ 2 = 0.04
n = t x m = 15 x 2 = 30 interest periods/semi-annuals
P = how much of the inheritance should be invested now? P = Fn(1 + i)-n
I = Amount of interest?

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 = 300,000 (1+0.04)-30 = 300,000(1.04)-30 = 300,000(0.3083)
= Birr 92,490

The present value of Birr 300,000 after 15 years at 4% semi-annual interest rate is equal to
Birr 92,490. Therefore, from the total inheritances received Birr 92,490 needs to be deposited
now.
Amount of compound interest = Future Value – Preset Value = 300,000 – 92,490
Amount of compound interest = Birr 207,510

Dear student, now it is the time for you to practice and solve out the following problems.

Exercise 5.7

1. If money is worth 14% compounded semi-annually, would it be better to discharge a debt

by paying Birr 500 now or Birr 600 eighteen months from now?

2. A house is for sale at Birr 12,000 cash or Birr 6000 cash with additional payment of Birr
3000 at the end of one year and Birr 3100 at the end of three years. If interest is at 5%
compounded annually, which is the better price for the buyer and by how much?

3. The quoted price of an item is Birr 500 cash and Birr 500 at the end of each year for two
years. If money is worth 5% compounded annually, find the equivalent cash price.

Section Three: Annuities

Section Objectives:

After going through this section, you will able to:

- Define and explain annuity and its types.
- Identify and compute maturity value of an ordinary annuity.
- Develop the comprehension of sinking funds payments.
- Develop acquaintance of the mathematical application of present value and mortgage
payments.

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Section Overview:

o Introductory Concepts
o Sum of Ordinary Annuity: Maturity Value
o Ordinary Annuities: Sinking Fund Payments
o Present Value of Ordinary Annuity
o Mortgage Payments and Amortization

5.9 Introductory Concepts

Annuity refers to a sequence or series of equal periodic payments, deposits, withdrawals, or

receipts made at equal intervals for a specified number of periods. For instance, regular
deposits to a saving account, monthly expenditures for car rent, insurance, house rent
expenses, and periodic payments to a person from a retirement plan fund are some of
particular examples of annuity.

Payments of any type are considered as annuities if all of the following conditions are
present:
i. The periodic payments are equal in amount
ii. The time between payments is constant such as a year, half a year, a quarter of a
year, a month etc.
iii. The interest rate per period remains constant.
iv. The interest is compounded at the end of every time.

Annuities are classified according to the time the payment is made. Accordingly, we have
two basic types of annuities.
i. Ordinary annuity: is a series of equal periodic payment is made at the end of each
interval or period. In this case, the last payment does not earn interest.
ii. Annuity due: is a type of annuity for which a payment is made of the beginning of
each interval or period.

It is only for ordinary annuity that we have a formula to compute the present as well as future
values. Yet, for annuity due case, we may drive it from the ordinary annuity formula. To

191
proceed, let us first consider some important terminologies that we are going to use in dealing
with annuities.
i. Payment interval or period: it is the time between successive payments of an
annuity.
ii. Term of annuity: it is the period or time interval between the beginning of the first
payment period and the end of the last one.
iii. Conversion or interest period: it is the interval between consecutive
conversions of interest.
iv. Periodic payment/rent: it is the amount paid at the end or the beginning or each
payment period.
v. Simple annuity: is the one in which the payment period and the conversion periods
coincides each other.

Following the above basic overview about annuities, we shall progress to deal with practical
business problems, which relate with determining the maturity and present values of annuities
with specific application cases.

5.10 Sum of Ordinary Annuity: Maturity Value

Maturity value of ordinary annuity is the sum of all payments made and all the interest earned
therefrom. It is an accumulated value of a series of equal payments at some point of time in
the future. Suppose you started to deposit Birr 1000 in to a saving account at the end of every
year for four years. How much will be in the account immediately after the last deposit if
interest is 10% compounded annually?

In attempting this problem, we should understand that the phrase at the end of every year
implies an ordinary annuity case. Likewise, we are required to find out the accumulated
money immediately after the last deposit which also indicate the type of annuity. Further, the
term of the annuity is four years with annual interest rate of 10%. Thus, we can show the
pattern of deposits diagrammatically as follows.

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 The Present The Future
0 1st 2nd 3rd 4th
1000 1000 1000 1000

Birr 1000
Birr 1100
Birr 1210
Birr 1331
Total Future Value = Birr 4641
The first payment earns interest for the remaining 3 periods. Therefore, the compound
amount of it at the end of the term of annuity is given by,
F = P (1 + i) n = 1000 (1 + 0.1)3 = Birr 1331
In the same manner, the second payment earns interest for two periods (years). So,
F= 1000 (1+0.1)2 = 1210
The 3rd payment earns interest for only one period. So,
F=1000(1+0.1)1 = 1100
No interest for the fourth payment since it is made at the end of the term. Thus, its value is
1000 itself. In total, the maturity value amounts to Birr 4641.

This approach of computing future value of ordinary annuity is complex and may be tiresome
in case the term is somewhat longer. Thus, in simple approach we can use the following
formula for sum of ordinary annuity (Future Value).

Where, n = the number of payment periods

i = interest rate per period
R = payment per period
Fn = future value of the Annuity or sum of the annuity after n periods

Now, let us consider the above example. That is,

R = Birr 1000

193
 i = 0.1 and n=4

Future Value = Birr 4641

Example 5.12

1. A person plans to deposit 1000 birr in a savings account at the end of this year and an
equal sum at the end of each following year. If interest is expected to be earned at the rate
of 6% per year compound semi-annually, to what sum will the deposit (investment) grow
at the time of the fourth deposit?

2. A 12-year-old student wants to begin saving for college. She plans to deposit Birr 50 in a
saving account at the end of each quarter for the next 6 years. Interest is earned at a rate
of 6% per year compounded quarterly. What should be her account balance 6 years from
now? How much interest will she earn?

Solution
1. The known values in the problem are,
R = 1000, j = 6% = 0.06 , m = semi-annual = twice a year
i = 0.06 ÷ 2 = 0.03
n=4

F4 = ? F4 = R

= 1000

= 1000
= 1000 x 4. 183627
F = Birr 4183.63

2. R = Birr 50
t = 6 years

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 m = quarterly = 4 times a year
n = t x m = 6 x 4 = 24 quarters
j = 6% = 0.06
i = j ÷ m = 0.06 ÷ 4 = 0.015

F 24 = 50

= 50
F24 = Birr 1431.68

Interest = Maturity Value - Sum of Deposits

= Maturity value - (24 (50))
= F24 -1200 = 1431.68 - 1200
= Birr 231.68

Exercise 5.8

1. Find the accumulated value of an ordinary annuity of Birr 65 per period for 23 periods if
money is worth 4% per period

2. If birr 500 is deposited each quarter in to in account paying 12% compounded quarterly,
a. How much is the value of deposit at the end of the 3 years?
b. How much is the value of interest for the 3 year?
c. How much interest is earned /paid at the end of the second year?

5.11 Ordinary Annuities: Sinking Fund Payments

A sinking fund is a fund into which periodic payments or deposits are made at regular
interval to accumulate a specified amount (sum) of money in the future to meet financial
goals and/or obligations. The equal periodic payment to be made constitute an ordinary
annuity and our interest is to determine the equal periodic payments that should be made to

195
meet future obligations. Accordingly, we will be given the Future Amount, F, in n period and
our interest is to determine the periodic payment, R. Then we can drive the formula for R as
follows.

Multiply both sides by

That is,

Then,

is the sinking found formula.

Where, R = Periodic payment amount of an annuity

i = Interest per period which is given by j ÷ m
j = Annual nominal interest rate
m = Number of conversion periods per year
n = Number of annuity payment or deposits (also, the number of compounding
periods)
F = Future value of ordinary annuity

In general, a sinking fund can be established for expanding business, buying a new building,
vehicles, settling mortgage payment, financing educational expenses etc.

Example 5.13

196
1. A corporation wants to establish a sinking fund beginning at the end of this year. Annual
deposits will be made at the end of this year and for the following 9 years. If deposits earn
interest at the rate of 8% per year compounded annually, how much money must be
deposited each year in order to have 12 million Birr at the time of the tenth deposit? How
much interest will be earned?

2. Assume in the previous example that the corporation is going to make quarterly deposits
and that interest is earned at the rate of 8% per year compounded quarterly. How much
money should be deposited each quarter? How much less will the company have to
deposit over the 10-year period as compared with annual deposits and annual
compounding.

3. A firm wishes to establish a sinking found for the purpose of expanding the production
facilities at one of its plants. The company needs to accumulate 500,000 birr over the next
five years that earn interest at 6% compounded semi-annually.
a. How much should the firm contribute to the found at the end of each semi-annual
period in order to achieve the goal?
b. Calculate the compound interest.
c. Prepare the fund accumulation schedule.

Solution
1. Future level of deposit desired = Fn = Birr 12 million
Term of the annuity = t = 10 years
Conversion periods = m = annual = 1
n = t x m = 10 x 1 = 10 annuals
j = 0.08
i = j÷m = 0.08 ÷ 1= 0.08
R = the amount to be deposited each year to have 12 million at the end of the 10th year = ?
Then to obtain the value of R, we shall use the formula for sinking fund.

 i 
R  Fn  
 (1  i )  1 
n

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 R = Birr 828,353.86

On the other hand, the amount of interest, I, is obtained by computing the difference between
the maturity value (Fn = 12,000,000) and the sum of all periodic payments made. Thus,
I = Fn - R (10)
= 12,000,000 – 823,353.86 (10)
= 12,000,000 – 8,283,538.6
= Birr 3,716,461.4

2. This is the continuation of the previous example. Thus,

Fn = Birr 12,000,000
t = 10 years
m = Quarterly = 4 times a year
n = m x t = 4 x 10 = 40
j = 8% = 0.08
i = j ÷ m = 0.08 ÷ 4 = 0.02
R = Periodic payment at adjusted conversation or interest period?

 i 
R  Fn  
 (1  i )  1
n

= 12,000,000 (0.016555747)

R = Birr 198,668.94

In further computation to determine the difference in amount of deposit by changing

the length of the conversion period, we see that as compared with the first case of
annual conversion period, in the quarterly conversation scheme, the corporation will
deposit R (10) minus R (40) less over the term of the annuity.

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 Thus, R (10) – R (40)
= Birr 828,353.86 (10) – 198,668.96 (40)
= 8,283,538.6 – 7,946,758.4
= Birr 336,780.2

3. Future financial goal of the firm = Fn = Birr 500.00

t = term of the annuity = 5 years
j = annual interest rate
m = Conversion period = Semi-annually = 2 times a year
i = j ÷ m = 0.06 ÷ 2 = 0.03
n = t x m = 5 x 2 = 10 semi-annuals

a. R=?

= 500,000 (0.08723050506)
R = Birr 43,615.25

b. Compound Interest = Fn – (n x R)
= Fn - (R (10)
= 5000,000 - 43615.25(10)
= 500,000 - 436,152.5
Interest = Birr 63,847.5

c. Fund Amortization Schedule

Perio Balance Interest (Beginning Periodic Ending Balance (Beg.
d (Beginning) Bal. x 0.03) Payment Bal.+ Interest + R)

1st 0 0 43615.25 43615.25

2nd 43,615.25 1308.46 43615.25 88,538.95
3rd 88,538.95 2656.17 43615.25 134,810.37
4th 134,810.37 4044. 31 43615.25 182,469.93
5th 182,469.93 5474.01 43615.25 231,559.93

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6th 231,559.28 6946.78 43615.25 282,121.31
7th 282,121.31 8463.64 43615.25 334,121.31
8th 334,121.31 10,026.01 43615.25 387,841.46
9th 387,841.46 11,635.24 43615.25 443,091.95
10th 443,091.95 13,292.76 43615.25 500,000

Now, you may practice the following exercise.

Exercise 5.9

1. Mr. Robert has a saving goal of birr 35,000 which he would like to reach 8 years
from now. During the first four years, he is financially able to deposit Birr 150 each
month in to the saving accounts. What must his monthly deposit over the last 5 years if he
is to reach the goal? The account pays 12% interest compounded monthly.

2. A machine cost a company Birr 100,000 and its effective life is estimated to be 20
years. If the scrap (salvage) value is expected to realize Birr 5000 only, find the sum to be
invested every year at 6% per annum for 20 years to replace the machine which is
expected to cost the company 25% more over its present cost? Assume that the sale of the
scrap would be utilized for meeting the cost of the machine.

5.12 Present Value of Ordinary Annuity

The present value of annuity is an amount of money today, which is equivalent to a series of
equal payments in the future. It is the value at the beginning of the term of the annuity. The
present value of annuity calculation arise when we wish to determine what lump sum must be
deposited in an account now if this sum and the interest it earns will provide equal periodic
payment over a defined period of time, with the last payment making the balance in account
zero.

Present value of ordinary annuity is given by the formula:

200
Where, R= Periodic amount of an annuity
i = Interest per period which is given by j ÷ m
j = Annual nominal interest rate
m = Interest/ conversion periods per year
n = Number of annuity payments / deposits (also, the number of compounding
periods)
P = Present value of ordinary annuity

Dear students, lets consider the following examples to make our understanding of
business and financial application of present value of ordinary annuity clear.

Example 5.14

A person recently won a state lottery. The term of the lottery is that the winner will receive
annual payments of birr 18,000 at the end of this year and each of the following 4 years. If
the winner could invest money today at the rate of 6% per year compounded annually, what
is the present value of the five payments?

Solution
R = Annual payments of Birr 18,000
Term of the annuity = t = this year and the following 4 years = 5 years
i = 6% = 0.06 (since the conversion period per year is annual)
n=5
Present value of payments = P = ?

P = Birr 75,822.55

Example 5.15

201
A woman would like to borrow money from local microfinance institution which charges
interest at 4% compounded quarterly. If the woman is able to pay Birr 100 at the end of each
quarter for one year,
a. How much should she receive from the institution at the time of borrowing?
b. How much interest will the woman be charged?
c. Prepare the debt repayment schedule (Amortization schedule).

Dear student, please solve the above example before reading the solution part.

Solution
Interest charge rate = j = 4% = 0.04
Periodic payment by the woman = Birr 100
Term of the annuity (debt) = t = 1 year
Conversion period per year = quarterly = m = 4
Number of periods = n = t x m = 1 x 4 = 4 periods
Interest rate per conversion periods = j ÷ m = 0.04 ÷ 4 = 0.01

a. How much to receive now? That is, the present value of the annuities, p.

= 100 (3.902)
Present Value = Birr (390.2)

Given the woman’s potential to pay Birr 100 at the end of each quarter for one year, she can
borrow Birr 390.2 at the beginning.

b. Interest charge = Total amount paid – Present value

= (R x n) – P
= (100 x 4) 390.2 = 400 – 390.2
= Birr 9.8

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c. The debt repayment schedule is a table that shows a periodic status of payments that
gradually make the debt account balance zero. This table is also called amortization
schedule. Now let us proceed with preparing the schedule.

Period Beginning Interest (I) Periodic Payment Ending Balance

Balance (Debt) (Debt x 0.01) (Debt + I – R)
1st Birr 390.2 Birr 3.902 Birr 100 Birr 294.102
2nd Birr 294.102 Birr 2.941 Birr 100 Birr 197.043
3rd Birr 197.043 Birr 1.97043 Birr 100 Birr 99.013
4th Birr 99.013 Birr 0.99013 Birr 100 Birr 0

As you observe in the above amortization schedule, in ordinary annuity periodic payment the
last balance becomes zero.

Exercise 5.10

A sum of money invested now at 11% compounded semi-annually is to provide payments of

Birr 1600 ever six months for 6 years, the first payment is due 6 months from now.
a. How much should be invested now?
b. How much interest will the investment earn?
c. Prepare the investments periodic payment schedule?

5.13 Mortgage Payments and Amortization

Dear student, would you define mortgage and amortization?

Another main area of application of annuities in to real world business situations in general
and financial management practices in particular is mortgage amortization or payment.
Mortgage payment is an arrangement where by regular payments are made in order to settle
an initial sum of money borrowed from any source of finance. Such payments are made until
the outstanding debt gets down to zero. An individual or a firm, for instance, may borrow a

203
given sum of money from a bank to construct a building or undertake something else. Then
the borrower (debtor) may repay the loan by effecting (making) a monthly payment to the
lender (creditor) with the last payment settling the debt totally.

In mortgage payment, initial sum of money borrowed and regular payments made to settle the
respective debt relate to the idea of present value of an ordinary annuity. Along this line, the
expression for mortgage payment computation is derived from the present value of ordinary
annuity formula. Our intention in this case is to determine the periodic payments to be made
in order to settle the debt over a specified time – period.

Hence, we know that

1  (1  i )  n 
P  R 
 i 

Now, we progress to isolate R on one side. It involves solving for R in the above present
value of ordinary annuity formula. Hence, multiply both sides by the interest rate i to
obtain:
P i = R [1 – (1 + i) –n]

–n
Further, we divide both sides by [1 – (1 + i) ] and the result will be the mathematical
expression or formula for computing mortgage periodic payments as follows.

Where, R = Periodic amount of an annuity

i = Interest per conversion period which is given by j ÷ m
j = Annual nominal interest rate
m = Interest or conversion periods per year
n = the number of annuity payments/deposits (number of compounding
periods)
P = Present value of an ordinary annuity

Example 5.16

204
1. Emmanuel purchased a house for Birr 115,000. He made a 20% down payment with the
remaining balance amortized in 30 years mortgage at annual interest rate of 11%
compounded monthly.
a. Find the monthly mortgage payment?
b. Compute the total interest.

2. Assume you borrowed Birr 11,500 from a bank to finance construction of a swimming
pool and agreed to repay the loan in 60 monthly equal installments. If the interest is 1.5%
per month on the unpaid balance,
a. How much is the monthly payment?
b. How much interest will be paid over the term of the loan?

Solution
1. Total cost of purchase = Birr 115,000
Amount paid at the beginning (Amount of down payment) = 20% of the total cost
= 0.2 x 115,000 = Birr 23,000
Amount Unpaid or Mortgage or Outstanding Debt = 115,000 – 23,000
= Birr 92,000
t = 30 years
j = 11% = 0.11 , m = 12 , i = 0.11 ÷ 12 = 0.00916
n = t x m = 30 x 12 = 360 months

a. The periodic payment R = ?

 i 
R  P n 
1  (1  i ) 

= 92,000 (0.009523233)
R = Birr 876.14

b. Total Interest = (R x n) – P

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 = 876.14 x 360 – 92,000
= Birr 223,409.49

Over the 30 years period Emmanuel is going to pay a total interest of Birr 223,409.49,
which is well more than double of the initial amount of loan. Nonetheless, the high
interest can be justified by the fact that value of a real estate is usually tend to increase
overtime. Therefore, by the end of the term of the loan the value of the real estate (house)
could be well higher than its purchase cost in addition to owning a house to live in for the
30 years and more.

2. Amount borrowed = Birr 11,500 = P

n = 60 months
i = 1.5% = 0.015
The interest rate is already given as monthly rate and it is equal to the interval of
compounding and payment periods. Thus, we are not required to divide it by the number
of conversion periods.

a. Monthly Installment Payment R =?

 i 
R  P n 
1  (1  i ) 

R = Birr 292.02 per month

b. Total interest paid (I) = (R x n) – P

I = (292.02 x 60) – 11,500
I = Birr 6021.405

Exercise 5.11

206
Isayas purchased a new house for Birr 100,000. At the time of purchase, he made a down
payment of Birr 30,000. Determine the monthly mortgage payment and the total interest paid
if the loan is to be repaid over 20 years and interest is to be computed at 10.5% compounded
monthly.

Unit Summary

Dear student, hopefully you are well acquainted with the overall theme of time-value of
money. As you recall, in this unit we have considered simple interest and discounts with their
respective computations. We have also seen the concept and applications of compound
interest in assessing the time – value of money. An attempt is also made to study about
annuities, which involves a series of equal payments, or deposits that are made at equal
interval of periods at a given rate of interest. In proceeding, we have considered the
computation and applications of maturity value of ordinary annuities, sinking fund payment
schemes, the present value of ordinary annuities, and mortgage payments shames. For the
sake of refreshment, the following are some of important formula that deal with mathematics
of finance.
 Simple Interest
= Pin
 Future Value Of A Simple Interest
= P (1 + i n)
 Compound Amount
= P (1 + i) n
 Present Value Of A Compound Amount

207
 = F (1 + i) -n
 Maturity Value Of Ordinary Annuity (Fn)

 (1  i) n - 1
Fn  R  
 i 

 Sinking Fund Payment Formula

 i 
R  Fn  
 (1  i )  1
n

 Present Value Of Ordinary Annuity

1  (1  i )  n 
P  R 
 i 

 Mortgage Payments and Amortization

 i 
R  P n 
1  (1  i ) 

Self-Check Review Problems V

1. A person signs a note promising to pay a bank Birr 3500 in three years. If the person
receives Birr 3100 when he signs the note, what is the bank’s discount rate?

2. Solve the following problems.

a. An employees’ Credit Union Fund pays interest at 12 % compounded monthly.
How much an employee who invests Birr 1850 now has 3 years from now?
b. Find the rate of interest compounded quarterly at which Birr 2000 will grow to
Birr 5000 in 9 years?

208
 c. How many years will it take for a sum of money to double at 6 % compounded
semi-annually?
d. Find the present value of Birr 6500 payable 12 years from now with interest at
9.5% compounded annually?

3. At what rate of interest compounded semi-annually will payments of Birr 3500 per every
six months for 12 years discharge a current debt of Birr 35,000?

4. How many monthly payments will it take to amortize a debt of Birr 150,000 with
payments of Birr 1800 per month at an interest rate of 14% compounded monthly? What
is the total amount paid?

5. Solomon is planning to join Jimma University in the year 2010 for a postgraduate study.
He will be required to pay Birr 8000 as a tuition fee upon joining the university, that is,
on November 2010. To accumulate this amount he has two combined alternative sources.
The first is his father has promised to give him Birr 4000 right by November 2010. The
second alternative is deposit to be made by him starting from November 2008 for the
remaining balance. Assume that the interest earning on the deposit is 8% compounded
quarterly.
a. Calculate the amount to be deposited by Solomon in November 2010.
b. Suppose that the interest rate on his father’s money is 10% compounded semi-
annually. How much must his father deposit in November 2008 to fulfill the
promised amount?
c. Compute the total interest amount to be earned from his own deposit and his
father’s money.

6. Ayisha wants to accumulate a total of Birr 150,000 after making 10 equal yearly deposits
in to her saving account at Awash Bank at the end of each year. The bank offers all
depositors 4% annual rate on saving accounts. Interest is compounded annually.
a. How much is the amount of each periodic deposit to be made by Ayisha?
b. How much interest is earned by the end of the deposit period?
c. How much is the amount of interest earned at the end of the 6th period?

209
7. John has purchased a house for Birr 220,000. He agreed with Jimma Municipality to pay
the loan by down payment and amortization. Accordingly, he had a sinking fund of Birr
6000 that was made at the end of each quarter for six years in an account that pays 14%
compounded quarterly before the purchase of the house. This amount is used as a down
payment. The remaining balance has to be amortized over 10 years by monthly equal
installments. If the interest charged on the loan is 12% compounded monthly;
b. What is the amount of the down payment?
c. What is the amortized total amount?
d. What is the amount of periodic installment?
e. Calculate the interest on the deposit and on repayment of the loan.

8. FBE buys a duplicating machine for Birr 80,000 and wants to finance the total purchase
price by making equal semi-annual payments within 8 years. Interest is charged at the rate
of 12% compounded semi-annually until the debt gets down to zero.
a. How much is the amount of each mortgage payment?
b. Calculate the total amount paid over the loan period to the seller.
c. How much interest is paid by the purchaser?

9. Sam has an opportunity to invest in an income account at 12% compounded daily. The
amount invested plus interest comes back to Sam in the form of a check at the end of each
month for 8 years. How much should Sam invest if he wants the monthly income check to
be Birr 1000?

10. During a three-year period when his business was prospering, Gosa was able to deposit
Birr 1500 at the end of each month in an account earning 13% compounded monthly. The
business slackened, and Gosa could not continue the deposits. Moreover, the interest rate
on his accumulated deposits fell to 7% compounded quarterly and remained at this level
for 10 years, at which time he decided to exhaust the account by withdrawing equal
amounts at the end of every 6 months for 5 years. The interest rate remained at 7% but it
is compounded quarterly over the time of withdrawals. How much did Gosa withdraw
every 6 months?

210
References

1. Ann, J. Hughes 1983. Applied Mathematics: For Business, Economics, and the social
Science.
2. Barnett, A. Raymond and Ziegler, R. Michael. Essentials of College Mathematics for
Business and Economics, Life Science and Social Science. 3rd ed., 1989.
3. Bowen, K. Earl, Prichett, D. Gordon, and Saber, C. John 1987. Mathematics with
Applications in Management and Economics. 6 th ed., Richard Irwin Inc., USA.
4. Bradley, Teresa and Patton, Paul December 1999. Essential Mathematics for
Economics and Business. Jon Wiley and Sons.
5. Dexter, J. Booth and John, K. Turner 1996. Business mathematics with Statistics.
6. Orema, M and Agarwal, K. 1988. Quantitative Techniques. Kings Books, Delhi.
7. Ronald J. Hershberger and James J. Reynolds, Mathematics Applications.
8. Uohra, N, 1998. Quantitative Techniques in Management. Tata McGraw Hill, New
Delhi.

211
 UNIT SIX
CALCULUS

Unit Objectives

After completing this unit, students expected to be acquainted with basic concepts in
differential calculus which include:

 Limit of a function
 Concept of continuity
 Rules of derivatives
 First and second derivative tests
 Rules of definite and indefinite integration
 Ways of undertaking marginal analysis
 Ways of finding total functions
 Area problems

To sum up; the major objective of this unit is to introduce and enable students of business
stream to be able to handle complex problems using advanced quantitative tools like
differentiation and integration. Here, it is expected that students will be able to undertake
marginal analysis using the concept of differential calculus for better decisions than relying

212
on intuitive judgment. Besides; they are supposed to know techniques of finding total
functions from the marginal functions using concept of integration for refined analysis.

Unit Introduction

It is a dried fact that the application of concepts of calculus in the business arena specially; in
marginal analysis and optimization problems is paramount. In this part of the module, basic
concepts in calculus to be seen include: concept of limit and continuity, derivatives, definite
and indefinite integration, and their major application areas in business; typically, marginal
analysis, optimization problems and area functions. In total, rules of limits and continuity,
rules of differentiation and integration as well as their interpretative applications in the
business stream are inculcated.

SECTION ONE: BASIC CONCEPTS OF DIFFERENTIAL CALCULUS

Section Objectives

Up on completing this section, you will be able to:

 What limit of a function is and basic limit theorems
 Concept of continuity
 Rules of derivatives
 First and second derivative tests

6.1 Differential Calculus

Dear student, please discuss what calculus and differential calculus means.

It is one aspect of calculus that measures the rate of change in one variables as another
variable changes. It broadens the idea of slope.

A function: if for every value of a variable x, there corresponds exactly one and only one
value of the variable y, we call y is a function of x, written as:

213
 Y = f(x).

Limits:

Definition : the limit of f(x) as x c is ℓ which is written as ; (x) = ℓ, if

and only if the functional value f(x) is close to the single real number ℓ, whenever x is
close to but not equal to c ( on either side of c).

Example-1:
For the function f(x) =x2 + 2, find the limit of f(x) as x approaches 1.

Solution:

X 0.8 0.9 0.99 0.999 1 1.0001 1.001 1.01 1.1

f(x)=x2+2 264 2.81 2.9801 2.998 3.0002 3.002 3.021 3.21
ℓ- = 3 ℓ+ = 3

f(x) = 3

Example-2:
For the function f(x) = /x/, find;
X

a. f(x) b. f(x)

Solution:

X 1.9 1.99 1.999 2 2.001 2.001 2.01

f(x)=/x/ 1 1 1 1 1 1
x
ℓ- = 1 ℓ+ = 1

Thus; f(x) = 1

b.

214
 X -0.999 -0.99 -0.9 0 0.0001 0.001 0.01 0.1
f(x)=// -1 -1 -1 1 1 1 1
x
ℓ- = -1 ℓ+ = 1

ℓ-≠ ℓ+ → So, f(x) doesn’t exist.

Exercise 6-1

1. Find the limit of the function f(x) = 2+1 as x approaches:

a) 2
b) 1
c) 0

2. Find the limit of the function f(x) = 2x2+1 as x approaches:

a) 0
b) 1
c) 3

3. Find the limit of the function f(x) = 1/(x2+1) as x approaches:

a) 0
b) 2

Limit Theorems:

1. If k is any constant , k=k

E.g. 10 = 10

215
 c=c

2. kf(x) = k f(x)

E.g. 3x2 = 3( x2) = 3(a2) = 3a2

3. (f(x) +g(x)] = f(x) + g(x)

E.g. (x2-2+3) = x2 – 2 x+ 3

= a2-2a +3

4. [f(x).g(X) ] = ( f(x) ] ( g(x) ]

E.g. (x+3)(X-2) = [ (x+3) ] [ (x-2)

= [5] [0]
=0

5. [f(x)n] =[ f(x)n]

E.g. (x-1)5 = [ (x-1)]5 =25 = 32

6. If f(x) = L and g(x) = m, then;

a, If m0, then [f(x)/g(x) ] = L/m

b. If m = 0 and L  0, the [f(x)/g(x)] = doesn’t exist

c. If m = 0 and L = 0, then f(x) and g(X) have a common factor and the limit can be
evaluated after employing the process of cancellation.

Continuity of a Function

Definition: a function f is continuous at the point x = c if:

1. f(x) → exists

2. f(c) is defined

3. f(x) = f(c)

216
 Example
Using the definition of continuity, discuss the continuity of the function f(x) = x2-4
x-2
at c =1 and c = 2

Solution:

At c =1, f(x)

X 0.9 0.99 0.999 1 1.0001 1.001 1.01 1.1

f(x) = x2-4 2.9 2.99 2.999 3.0001 3.001 3.01 3.1
x-2
ℓ- = 3 ℓ+ = 3

f(x) =3 f(x) exists

f(1) =12-4 = 3 → f(c) is defined

1-2

f(x) = 3 = f(1)

Therefore; f(x) = x2-4 is continues at c =1

x-2

At c = 2
X 1.9 1.99 1.999 2 2.0001 2.001 2.01 2.1
F(x 3.9 3.99 3.999 4.0001 4.001 4.01 4.1
)
ℓ- = 4 ℓ+ = 4

f(x) = 4 It exists

f(2) =22-4 = 4-4 = 0= ¢

217
 2-2 0 0

f(x)  f(c) →4¢

Therefore; f(x) is not continuous at c = 2.

Derivatives
Dear student, would you explain what derivatives means?

Definition: for y = f(x) we define the derivative of f at x, denoted by f′′(x) to be;

f′(x) = lim f(x) = lim f(x+x)- f(x)

x 0 x x 0 x

Example-1
Find f′(x) for f(x) = 2x +4

f(x) = lim f(x+ x) –f(x)

x 0 x

1st → find f(x) =

f(x) = f(x+x)-f(x)
= [2(x+x) +4] – (2+4)]
= 2+2x+4-2x-4
f(x) = 2x

2nd find the limit: f′(x) = lim f(x)

x 0 x

= lim 2x
x 0 X

f′(x) = 2

218
 Example-2
For the function f(x) = 4x-x2 find f′(x)
f′(x)= lim f(x+x) – f(x)
x 0 x

1st → find f(x) = 4(x+x)-(x+x)2- (4x-x2)

x x
= 4x+4x-x2 – 2xx -x2-4x+x2
x
= x (4-2x-x)
x
= 4-2x-x

2nd → find the limit of the resulting function

f′(x) = lim f(x) = lim 4-2x-x
x 0 x x 0
f′(x) = 4-2x

Rules of differentiation
Dear student, please point out some rules of differentiation.

1. A constant function rule;

If f(x) = c then f′(x) = 0
E.g. If f(x) = 5 then f′(x) = 0

2. The power rule;

The derivative of the power function is the power times the function raised the power
minus one.

If f(x) = axn, then f′(x) = anxn-1

E.g. If f(x) = x5, then f′(x) = 5x5-1 = 5x4
If f(x) =3x3, f′(x) =33x3-1 = 9x2

3. The sum and difference rule;

The derivative o f the sum or difference of two functions is the
derivative of the first function plus or minus the derivative of the second function.

219
 If f(x) = u(x) + v(x), then f′(x) =u′(x) + v′ (x)
E.g. f(x) = 3x+8 , f′(x) =3+0= 3
f(x) = 4x-x2 ; f′(x) = 4-2x

4. The product rule ;

The derivative of the product of two functions is the first function times the derivative of
the second function plus the second function times the derivative of the first.

If f(x) = u(x). (v(x)) then;

f′(x) =u(x). v′(x) + v(x) .u′(x)
E.g. f(x) = 3x2 (4x-1), the f′(x) =
3x2(4) + (4x-1) (6x)
= 12x2 +24x2-6x
= 36x2-6x

5. The quotient rule;

The derivative of the division of two functions is the denominator times the derivative of the
numerator minus the numerator times the derivative of the denominator over the denominator
square.

If f(x) = u(x), then;

V(x)
f′(x) = v(x) .u′(x) – u(x). v′(x)
[V(x)] 2

Example

If f(x) = x2/2x-1

f′(x) = (2x-1)(2x) –(x2)(2)

(2x-1)2
= 4x2-2x-2x2
4x2-4x+1
= 2x2-2x

220
 (2x-1)2

The Use of First and Second Derivative Rules for Local Extrema

The First Derivative Test

The nature of a function with respect to its first derivative gives us three important
properties

1. If f′(x) > 0(is positive) on the interval (a, b), then f(x) increases and graph of f rises as
we move from left to right over the interval.
2. If f′(x) < 0 (negative) on an interval (a, b), then f(x) decreases and the graph of f falls
as we move from left to right over the interval.
3. If f′(x) = 0, then we get the slope of a line tangent to a curve at a point. And this point
where the first derivative is zero is known as the critical point and gives us:
i. either a maximum ( local maximum and/or global maximum )
ii. a minimum (local minimum and/or global minimum )
iii. neither maximum nor minimum of a function
Example; f(x) = x2 → f′(x) = 2x
y
→ f(x) =x2

a b c x

 If x is negative (a, b) → f′(x) < 0 = the function f(x) is decreasing from left to
right.
 if x>0, (b, c) = f′(x) >0, f(x) is increasing from left to right
 f′(x) = 0, 2x = 0 x = 0; At this point the function is at its minimum point.

221
Local extreme:
A local maximum or minimum point p is a point where f(x) takes on a maximum or
minimum value for all points in the immediate vicinity of p.

d
b f f(x)

e g

a c

 points a , b, d, e f, and g are local extrema

I.e. a, e, and g→ local minima
b, d, and f, local maxima
c = global minima (the lowest from all points)
There is no global maximum (because the function is increasing).

If f(x) has a critical point at x = p, then;

a) If p is an interval point and f′(x) < 0 to the left of p and f′(x) >0 to the right of p, then f(x)
has a local minimum at x = p.
b) If p is an interval point and f′(x) >0 to the left of p and f′(x) <0 to the right of p, then f(x)
has local maximum at x=p.

222
Example
Given f(x) = x2 – 16x +12, [6, 10]; Find the local extrema.

1st → find the critical values

f′(x) = 2x - 16 = 0→ 2x =16
x =16 = 8
2
Interval value of f′(x) = 2x-16
[6, 10] -4→ to the left p; f′(x) <0
4 →to the right p; f′(x) >0

So at x = 8 the function attains a local minimum.

Global Extrema:
It is largest or the smallest value of the function f(x) over all the values of x.
If f(x) has a critical point at x = c then;
a) f(x) attains an absolute maximum at x = c if and only if
f(c) > f(x) for all values of x in the domain of f(x).
b) f(x) attains an absolute minimum at x = c if and only if f(c ) ≤ f(x) for all x in the domain
of f(x).

Steps in Finding Absolute Maximum and Minimum

1. Check the continuity of the function in its domain or over the interval [a, b].
2. Find the critical values in the interval.
3. Evaluate f at the end points and at the critical values found in step 2.
4. The absolute maximum f(x) on [a, b] is the largest of the values found in step 3.
5. The global minimum f(x) on the closed interval [a, b] is the smallest of the values found in
step 3.

Example

223
Find the absolute maximum and absolute minimum values of f(x) = x 3-12x on the
interval [-5, 5].

Solution:

Step-1: The function is continuous for all values of x.

Step-2: Find the critical values
f′(x) = 3x2-12 = 0
3x2 = 12
x2 = 4
x = ±√4 = ± 2
Step-3: Evaluate the critical values and the end points over the interval
[-5, 5].
x f(x)

-5 ---------------- -65 global minimum

-2 ----------------- 16
2 ---------------- -16
5 ------------------65 global maximum

Second Derivative Test

Second derivative is the derivative of the derivative. For y = f(x), the second derivative of f is
given by f(x) = Dxf′(x) = d2y
dx2

In using the second derivative test for local extrema follow the following steps.
1. Find the first derivative of x, set it equal to zero and solve for the candidate values of
x.
2. Find the second derivative of x, and evaluate it as follows.
i. If f ″(x) < 0 a local maximum occurs at x.
ii. If f ″ (x) >0 a local minimum occurs at x.
iii. If f ″ (x) = 0, the test fails to determine what happens at x. In this case use the first
derivative test.

224
Example
Find the local maxima and minima of each function.
A. f(x) = 2x2-8x+6
B. f(x) = 2x3-3x2-12x-5
C. f(x) = x4+5

Solution:
A. f(x)= 2x2-8x+6
f′(x) = 4x-8
4x-8 = 0
4x= 8
x= 8 = 2
4
x = 2 = critical point
f ″(x) = 4 >0
Therefore; At x=2, the function attains a local minimum.
f min = f(2)= 2(22) -8(2)+6
= 8 -16+6= -2 → the minimum value.
B. f(x) = 2x3-3x2-12x-5
f′(x) = 6x2-6x-12
x2-x-2=0
(x-2) (x+1) = 0
x =2 or x= -1
f ″(x)= 12x-6
At x =2, f ″(x) = (12(2)-6) =18>0 → the function attains local minimum at x= -1.
C. f(x) = x4+5
f′(x) = 4x3 = 0
x3 = 0 ↔ x = 0.
f ″(x) =12x2
At x = 0; f ″(x) =12(02) = 0 ↔ the test fails to identify what happened at the critical value.

225
 Apply the 1st derivative test ;
Test points test value of f′(x) = 4x3
-1 -4 ↔ f′(x) < 0 local minimum is attained
1 4 ↔ f′(x) >0
At x = 0, local minimum is attained.

Exercise 6-2
1. Given f(x) = 4+10x-x2, [3, 8] find the local extrema.
2. Find the absolute maximum and minimum value of
f(x) = x3+3x2 -9x-7 in the interval [-6, 4].

Application of Differential Calculus to Marginal Analysis

The word marginal refers to rate o f change→ that is a derivative.

Let x be the number of units of a product produced
Total cost function → C(x)
Total revenue function→ R(x)
Total profit function→ P(x) = R(x) –C(x)
Marginal cost function → C′(x)
 Marginal cost is the rate of change in total cost per unit change in production at an
output level of x-units.
 Marginal revenue function→ R′(x)
 Marginal profit function→ P′(x) = R′(x) - C′(x)
 Average cost→ č(x) = C(x)
x
 Marginal average cost→ č′ (x)
 Average revenue → Ř(x) = R(x)
x
 Marginal average revenue→ Ř′(x

226
  Average profit → Pˉ (x) =P(x)
x
 Marginal average profit → Pˉ′(x)

Example-1
A company manufactures and sells x transistor radios per week. Its weekly cost and demand
equations are:
C(x) = 5000 +2x
P = 10 – x find
1000
a) Production level that maximizes revenue and the maximum revenue.
b) The production level that maximizes profit and the maximum profit.
c) The MR and MC at the profit maximizing output level.
d) The average cost per unit if 1000 radios are produced.
e) The marginal average cost at a production level of 1000 radios and interpret the
result.

Solution:

a) R(x) = P.X = (10-x) (x)

1000

R(x) 10x- x2
1000

R(x) = 10 –x =0
5000

10= x → x = 5000 units

500

R′(x) = -1/5000; R′(x) <0 x= 5000 units is the revenue maximizing output level.

Maximum revenue is at x = 5000 units

R(x) = 10x – x2
1000

R(5000) =10(5000)- (5000)2

1000

227
 = Birr 25000
b) P(x) = R(x) – C(x)
[10x- x2 ]- [5000+2x]
1000

= 10x –x2 - 5000-2x

1000
P(x) = 8x-x2 - 5000
1000
P′(x) 8-2x = 8-x
1000 500
8-x= 0
500
8= x
500
x = 4000 units
P″(x) = -1 P″(x)<0 x = 4000 units is the profit maximizing output level
500

At x = 4000 units P(x) = 8x-x2 - 5000

1000
= 8(4000) - (4000)2-5000
1000
= Birr 11,000
c) C′(x) = 2 production cost increases by birr 2 at each level of out put
R′(x) = 10- 2x = 10-x
1000 500
At x = 4000 units

R′(x) = 10 -4000 = 10-8 =2 birr

500
At each level of output TR increases by birr 2
At the profit maximization; MR = MC, i.e. 2 Birr
d) x =1000 radios;
 Average cost č(x) = C(x)
x
= 5000 +2x
x
At x = 1000 radios; č(x) = 5000 +2(1000)
1000
= 7 Birr
e) Marginal average cost = č′(x)
MAC = - 5000

228
 x2
č′(x) = - 5000 = -0.005 Birr
(1000)2

Interpretation: At a production level of 1000 units a unit increase in production will decrease
average cost by approximately 0.5 cents or by 0.005 Birr.

Example-2
A certain manufacturing company has the following information;

Average total cost is given by the equation:

č(q) = 0.5q -500+ 5000 and,
q
The demand function is:
P = 2500-0.5q

A. Find the firm’s:

i. Total profit function
ii. Marginal cost function
iii. Marginal average cost function

B. Find the quantity level that:

i. maximizes total revenue
ii. Maximizes total profit
iii. Minimizes total cost

C. Find the firm’s:

i. Maximum revenue
ii. Maximum profit

D. Find the price level that leads to maximum:

i. Revenue
ii. Profit

229
SECTION TWO: BASIC CONCEPTS OF INTEGRAL CALCULUS

Section Objectives

Up on completing this section, you will be able to:

 Rules of definite and indefinite integration

 Ways of undertaking marginal analysis
 Ways of finding total functions
 Handling area problems using definite integration

6.2 Integral Calculus

Dear student, so far we have seen differential calculus. In this section, however, we will see
integral calculus. Can you guess what it is taking about?

There are two types of integrals:

a) Indefinite integral
b) Definite Integral

6.2.1 Indefinite Integral

Definition: Given F(x) which is the anti-derivative of f(x), the indefinite integral of f(x) is
defined to be:

f(x) dx = F(x) +C,

Where;
 = the integral symbol

230
f(x) = the integrand (the function to be integrated)
F(x) = the integral (the outcome of integration)
C = the constant of integration
dx = indicates the variable to be integrated
Example-1
f(x) =x3 ; c = 0
f′(x) = 3x2

f(x)dx = (3x2)dx = 3(x2+1) = 3x3= x3

2+1 3
F(x) = x3 + 4, and C = 4
F′(x) =3x2
f(x)dx = 3x2+1 = 3x3 = x3+c ; C = 4
2+1 3 = x3+4

Example-2
Find the equation of the curve that passes through [2, 6], if the slope of the curve at any point
x is given by 3x2.

Solution:

f(x) = 3x2
f(x)dx = F(x) + C
f(x)dx = (3x2)dx = 3x2+1
2+1
= 3x3+ C = x3+C
3
F(x) = x3+C
6 = (2)3+C
6 = 8+C
C = -2
Therefore; F(x) = x3-2

231
The rules of integration

1. A constant function rule;

If f(x) = k
f(x)dx = (k)dx = kx0+1 + C = kx+C
0+1

E.g. If f(x) = 5
f(x) dx = (5)dx = 5x0+1 + C = 5x+C
0+1

2. The power rule;

If f(x) = xn
f(x) dx = (xn)dx = xn+1 + C
n+1

E.g. If f(x) = x5;

f(x)dx = (x5)dx = x5+1 + C = x6 + C
5+1 6

3. A constant times a function rule;

If f(x) = axn
(x)dx = (axn)dx = a(xn)dx = a(xn+1) + C
n+1

E.g. If f(x) = 3x3

f(x)dx = (3x3)dx = 3(x3)dx = 3(x3+1)+ C
3+1
= 3/4x4+C

4. The sum and difference rule;

232
If f(x) =g(x) ± h(x)
f(x)dx = [g(x) ± h(x)]
=g(x)dx ± (h(x)dx
E.g. If f(x) = 5x+9
f(x)dx = (5x+9)dx = (5x)dx+ (9)dx

= 5x1+1 + 9x0+1
1+1 0+1
= 5/2 x2 + 9x + C

5. The product rule;

If f(x) = (ax+b)n
f(x)dx = (ax+b)n = (ax+b)n+1 + C
a(n+1)

E.g. If f(x) =(x+2)2= f(x)dx = (x+2)2dx

= (x+2)2+1 + C = (x+2)3+ C
(2+1) 3

6. The quotient rule;

If f(x) = g(x) + h(x)
k(x)

f(x)dx = (g(x)dx + (h(x))dx

k(x) k(x)

E.g. If f(x) = 8+x3

x2
f(x)dx =(8 )dx + (x3)dx
x2 x2
(8x )dx + (x)dx
-2

= 8x-2+1 = x1+1 + C
-2+1 1+1
-1 2
= 8x +x + C
-1 2

233
= -8x-1 +1/2x2 + C
= -8/x+x2 + C
2

Indefinite integral for finding total functions

Example-1
The function describing the marginal cost of producing a product is given by f(x) = x+100,
where x is the number of units produced, determine the total cost function if the total cost of
producing 100 units is birr 40 000.
Solution:
C(x) = f(x)dx= f(x) = x+100
(x+100)dx = x1+1 +100x0+1 + C
1+1 0+1
2
x + 100x+ C
2
2
C(x) =1/2x + 100 x +c (fixed cost)
40,000 = ½(100)2+100(100) + C
40,000 = 5000+ 10,000+ C
40,000 = 15000+ C
40,000 -15000 = C
C = 25000 Birr
Therefore; C(x) = ½x2+100x+25,000
Example-2
The marginal revenue function for a company’s product is given by f(x) = 50,000-x,
where x is the number of units produced. Develop the total revenue function if revenue is
zero when no units are produced and sold.
Solution:
Marginal revenue → R′(x) = 50,000-x
R(x) = 0 when x = 0 → (0, 0) → (x, f(x))
R(x) = f(x)dx = (50,000 –x)dx
R(x) = 50,000x –x1+1+ C
1+1
= 50,000x- x2 + C
2

0 = 50,000(0) -1/2(0)2+ C

234
 0 = 0+ C → C = 0

Therefore, R(x) = 50,000x -1/2x2

Definite integral

Definition: If f(x) is a continuous function on the interval [a, b], the definite integral of f(x)

is defined as f (x)dx = F(b) –F(a)

Where F(x) = the anti-derivative for f(x)

F(b) = the upper limit
F(a) = the lower limit
F′(x) = f(x)

A definite integral has a single numerical value associated with it and can be obtained
through the indefinite integral by using the following steps.

Step-1: get the indefinite integral of the function

Step-2: substitute the value x = a in the indefinite integral
Step-3: substitute x = b in the indefinite integral
Step-4: subtract the numerical value obtained in Step 2 from step 3 and the result gives the
definite integral value of the function between the limits x = a x = b.

Example
If marginal revenue is given by:
F(q) = 200-6q , what extra total revenue is obtained by increasing sales (q) from 15 to 20?

Solution:

Extra revenue = f(q)dq = (200-6q)dq

= 200q – 6q1+1 + C
1+1

= [200(20) -3(20)2+ C] - [200(15) -3(15)2+C]

= 2800+C- 2325 – C

235
= Birr475

Area Problems

 Area between a curve and the x- axis

 The area between two curves

Example-1
Compute the area below the graph of f(x) =x 2; above the x axis and bounded on the sides by x
= 1 and x= 3 as shown in the following figure.

y f(x) =x2

1 3 x

Solution:

A= f(x)dx = f(x2)dx = x2+1 + C

2+1

= x3
3

= 1/3 (33)-1/3(13) = 9-1/3 =26/3

A= 26/3 square units

236
Example-2
Sketch the function f(x) = 10x-x 2 and find the area bounded by the function and the x-
axis.

Solution:

Step-1; find the x and y intercepts

X-intercept→ (set f(x) = 0)
f(x) =10x-x2 = 0
0= x(10-x)
X= 0 or x =10
y –intercept (set x = 0)
f(x) = 10x-x2
f(x) = 10(0) –(02)
f(x) = 0

Step-2; find the critical values

f′(x) = 10-2x = 0
10 = 2x→ x = 5
f″(x) = -2→ x = 5 is a local maximum
At x = 5; f(x) = 10x-x2
= 10(5)-52
f(x) = 50-25=25
(5, 25) = coordinate for local maxima

237
 Step-3; plot the graph

f(x)

x
0 5 10

f(x) =10x-x2

A= 010 f(x)dx= 010 (10x-x2)dx

= 10x1+1 – x2+1 +C
1+1 2+1

= 5x2-1/3x3 10

0
= [5(102) – 1/3 (103)] -[(5(02)-2/3(03)]

= 500 -1000- 0
3
= 500 square units
3

Exercise 6-3

The function describing the marginal profit from producing and selling a product is f(x) = -
6x+750, where x is the number of units produced and sold. Total profit is birr 25000 when
100 units are produced and sold. Develop the total profit function.

UNIT SUMMARY

238
Summary of the major formulas for application of concept of calculus in marginal analysis
and optimization problems include the following.
- Marginal cost is the rate of change in total cost per unit change in production at an
output level of x-units.
- Marginal revenue function→ R′(x)
- Marginal profit function→ P′(x) = R′(x) - C′(x)
- Average cost→ č(x) = C(x)
x
- Marginal average cost→ č′ (x)
- Average revenue → Ř(x) = R(x)
x
- Marginal average revenue→ Ř′(x
- Average profit → Pˉ (x) =P(x)
x
- Marginal average profit → Pˉ′(x)

f(x) dx = F(x) +C

f (x)dx = F(b) –F(a)

Self-Check Review Problems VI

1. Suppose the total cost of producing x – electric guitars is given by the function:
C(x) = 1000 +100x-x2/4, find;

239
 A. The marginal cost at a production level of x- units.
B. The marginal cost at a production level of 50 units and interpret the result.
C. The actual cost of producing the 51st unit.

2. The marginal cost curve for a product is; f(q) = 100 -4q+q 2;what is the total cost of
increasing from q = 20 to q =30?

3. Find the area bounded by the function f(x) = 15- 2x-x2 and g(x) =9-x.

REFERNCES

1. Barnett Raymond A. and Ziegler Michael R, Essentials of College Mathematics for

business and Economics, life science and social science, 3rd ed., 1989

240
 2. Bowen Earl K et. Al, Mathematics with applications in Business and Economics,
1987
3. Ann j. Hughes, Applied Mathematics: For Business, Economics, and the social
Science, 1983.
4. Ronald E. Larson and Bruce H. Edwards, Finite Mathematics with Calculus, 1991
5. Ronald J. Harshbager and James J. Reynolds, Mathematics Applications.
6. Ronald J. Harshbager and James J. Reynolds, Finite Mathematics, 3rd Ed.
7. Hole Poul G., Finite Mathematics and Calculus with Applications to Business, 1974.
8. Dexter j Booth and John K Turner, Business mathematics with Statistics, 1996, and
other relevant Books are recommended as reference.
9. Teresa Bradley and Paul Patton, “ Essential Mathematics for Economics and
Business’, Jon Wiley and Sons, December 1999.

ANSWER KEY TO EXERCISES

UNIT – ONE
Exercise 1.1

241
 y = 65x + 150

Exercise 1.2
(6/4, 0) and (0, 6)

Exercise 1.3
a. V. S = 5 and H. S = 8
b. V. S = 4 and H. S = 16
c. V. S = 6 and H. S = 0
d. V. S = 0 and H. S = 6

Exercise 1.4
a. 6.33
b. 15
c. 5.099
d. 13.153

Exercise 1.5
a. y = 2x + 2500
b. It implies that every additional book printed and bound adds Birr 2 to the total cost.
c. b = 2500 is the fixed cost for machinery set up and a cost that is incurred evenif no
book is printed and bound.

Exercise 1.6
y = 3x + 10

Exercise 1.7
y = 3x + 50

Exercise 1.8
a. Birr 10,000
b. Birr 10,500
c. Birr 10
d. Birr 10

242
Exercise 1.9
a. y = 1.75q + 35,000
R = 2.7q
b. 36,842 units
c. Birr 810,000

Exercise 1.10
a. 13
b. 10.2%
c. 11.3%

Exercise 1.11
a. y = 0.55x + 23,400
b. $ 52,000
c. $10,500

Exercise 1.12
By $ 1500

Exercise 1.13
a. 600 units
b. 450 units
c. 850 units
d. Birr 1800

UNIT – TWO

Exercise 2.1
1. a = 5, and b = 2
2. a) Identity matrix, b) Row matrix , c) Zero matrix d) Column matrix

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3. A + B: -1 0
4 -1
9 9

4. 2A + 3B: 21 22 15
7 14 17

5. X= (1/3) 28 16
10 34

6. 1 -1 1 3 3 -1
A-B= 3 -1 1 A+B= -1 -1 3
-1 0 1 1 2 5

7. a) AB = -3 3 2 b) BA = 1 -7
6 0 -3 1 -8
9 3 -4

c) 2A = 2 -4
0 6
2 8

8. AB ≠ BA
37 -6 5
i. A (B + C) = AB + AC = 117 0 -18
60 -171 138

ii. (A + B) C = AC + BC = 30 -33 13
74 22 -11
-20 -131 76

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9. (AB) C = A (BC) = 1299
357
1506

10.
a) At = 2 4 5 b) Bt = 4 c) Ct = 6
6
8

d) Dt = 3 9 6 e) Xt = 1 2 3 4
5 1 8 2 3 4 1
7 2 4 3 4 2 1
4 1 1 2

0 0 0
12. X + Y = 0 0 0
0 0 0

Exercise 2.2
1. Matrix A has no inverse
2.
a11 a12 a13
a21 a22 a23

3. a) 2 by 1 b) x1
a11 a12 = b1 c) a11x1 + a12x2 = b1
x2

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4. A-1 = -3/20 4/5
3/10 -3/5

Exercise 2.3

a) A-1 = -1/6 ½ -1/6

-7/6 ½ 5/6
5/6 -1/2 -1/6

b) C-1 = 5/13 -2/13 c) D is not invertible

-1/3 3/13

Exercise 2.4

a) C-1 = 1/6 1/6 ½ b) x-1 = ½ ½

2/3 -1/3 0 -½ ½
1/6 1/6 -1/2

Exercise 2.5
1. a) x1= 19/20; and x2=11/4 b) x1= 1; x2= -1; and x3=1
c) x1= -17/10; and x2=13/5
2. a) x= 2/6; y= -49/15; and z=7/3 b) x1= 24/21; x2= 9/7
c) x1= 1; x2= -1; and x3=1
3. a) x1= 7/13; x2= 5/13; and x3=9/13 b) x1= -1; x2= 2

Exercise 2.6

1. a) U N b) U N
0.01099 0.98901 1 0

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2. a) ≈ 33% b) U N
0.67 0.33

3. a) E A F b) Long-run probabilities = E A F
186 713 401 .10 .67 .23

b) Long-run distributions= E A F
130 871 299

UNIT – THREE
Exercise 3.1
X1 =1
X2=3 and
Min Z= $3400

Exercise 3.2
a. No feasible solution
b. Unbounded solution
c. Unbounded solution
d. Unbounded solution
e. Infeasible solution
f. Infeasible solution

Exercise 3.3
1. x1=2, x2 =6, s1 =0 , s2=0 and MaxZ=$36
2. x1=50, x2 =0, s1 =0 , s2=50 and MaxZ=$1,000

Exercise 3.4
1. x1=450/13, x2 =210/13 and Min Z=$540

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 2. x1=14, x2 =33 and Min Z=$221
3. x1=20/3, x2 =8/3 and Min Z=212/3

UNIT – FOUR

Exercise 4.1
1. log28 = 3
2. 1000 = 103
3. b=3
4. y=3
5. log864 = 2
6. 112 = 121
7. x = -2
8. b = 16

Exercise 4.2
1. 1/8
2. -0.00001
3. 1/(2x + 7)4
4. 7/x8
5. x = 32
6. y = 27
7. 9
8. 1/4

Exercise 4-3:
1. log 7x = log 7 + log x
2. log 4 = log 20 − log 5 = 0.60206
3. log x5 = 5 log x
4. a) 1 b) 1 c) 1 d) 1
5. a) 0 b) 0 c) 0 d) 0

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 UNIT – FIVE
Exercise 5.1
1. a) Birr 975 b) Birr 7475
2. Birr 6841.25

Exercise 5.2
1. Birr 990
2. 2.5 years or 30 months
3. 4%

Exercise 5.3
Exact simple interest = Birr 8938.36
Ordinary simple interest = Birr 9062.50
The Ordinary simple interest provides Birr 124.14 higher amount than the exact one.

Exercise 5.4
a. F = Birr 418, i = 3%
b. F = Birr 660, n = 2.5 years
c. P = Birr 900, i = 4%
d. I = Birr 7.12, i = 6%
e. I = Birr 56.48, n = 0.5 years

Exercise 5.5
1. d = 15%
2. P = Birr 712.80, D = Birr 7.20

Exercise 5.6
1. a) Birr 11,505.925 b) Birr 11,640.68 c) Birr 11,711.47 d) Birr 11,760.01
3. n = 8.67 years or 17.34 semi-annuals

Exercise 5.7
1. One can save Birr 12.5 by discharging the debt paying Birr 600 after 18 months.

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 2. The buyer will save Birr 464.96 if she pays Birr 6000 cash now with additional
payments specified.
3. Birr 142.9 .71

Exercise 5.8
1. Birr 2380.2
2. a) Birr 7096.02 b) Birr 1096.02 c) Birr 446.17

Exercise 5.9
1. Birr 421. 68
2. Birr 3262. 15

Exercise 5.10
a) Birr 13,789.63 b) Birr 5410.37

Exercise 5.11
Mortgage payment = Birr 698. 87
Total interest = Birr 97, 728.8

UNIT – SIX
Exercise 6.1
1. a) 5 b) 3 c) Doesn’t exist
2. a) 1 b) 3 c) 19
3. a) 1 b) 1/5

Exercise 6.2
1. Critical point is at x = 5, local maxima is 29.
2. The global minimum is -61 and global maximum is 69.

Exercise 6.3
P(x) = -3x2 + 750x – 20,000

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