Exercise Session 3, 9 October 2018

Mathematics for Economics and Finance

Prof: Norman Schürhoff
TAs: Jakub Hajda, Jimmy Lerch

Exercise 1
For the following matrices, find the eigenvalues and also the eigenvectors that correspond to the real eigenvalues:

 
2 0 0
(a)  0 3 0 
0 0 4
 
2 1 −1
(b)  0 1 1 
2 0 −2
 
1 −1 0
(c)  −1 2 −1 
0 −1 1

Exercise 2
Let A be a square matrix.

(a) Let λ be an eigenvalue of A. Prove that λk is an eigenvalue of Ak , k ∈ N.

(b) Show that A is invertible exactly when λ = 0 is not an eigenvalue of A.

(c) Suppose that A is invertible. Is there a relation between the eigenvalues and eigenvectors of A and A−1 ?
(d) Let v be an eigenvector of A associated to the eigenvalue λ. Show that S −1 v is an eigenvector of a matrix
S −1 AS with the same eigenvalue λ.

Exercise 3
Let A be a symmetric matrix with  
2 1 −2
A= 1 2 −2
−2 −2 5
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(a) Show that the characteristic polynomial may be written in the form p (λ) = (λ − 1) (λ − 7).
(b) Show that the vector equation Ax = x reduces to a single scalar equation. Find orthonormal eigenvectors
x, y corresponding to the eigenvalue λ = 1.

(c) Find a normalized eigenvector corresponding to the eigenvalue λ = 7.

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 (d) Find a diagonal matrix D and an orthogonal matrix S such that S −1 AS = D.
(e) Find A−1 and define spectral decomposition.

Exercise 4
(Final Exam 2017) The Swiss alpine town of Zernez is inhabited by 1,200 people. Each citizen makes the weekly
grocery shopping in the only grocery store in town, run by Mr. and Mrs. Zipf. One day when a new fancier chain
store–Micros–opens its doors. The Zipf family does not expect that everybody immediately switches to doing
their shopping in the new cheaper store, but they anticipate that 20% of those shopping at Zipf ’s store each week
switch to Micros in the following week. At the same time, some customers who switched miss the personal service
(and gossip) and they switch back. They expect that 10% of those shopping at Micros each week go back to
Zipf ’s in the following week. The state of the town, as far as grocery shopping is concerned, can be represented
as follows:
 
z(t)
x(t) = ,
m(t)
where z(t) and m(t) are the numbers of families shopping at Zipf ’s store and, respectively, at Micros in week t
after Micros opens. Assume that z(0) = 1, 200 and m(0) = 0.

(a) Find a 2 × 2 matrix A such that x(t + 1) = Ax(t).

(b) Does A satisfy any of the following properties: symmetric, orthogonal, idempotent?
(c) Using only A and x(t), what is the expression for x(t + n), that is, x given n periods in the future?
(d) Compute the eigenvalues and eigenvectors of the matrix A.
(e) How many citizens will shop in each store after t weeks?
Hint: Use matrix decomposition.
(f) The Zipfs expect that they must close down their store when they have less than 500 customers a week.
When does this happen?
(g) What fractions of clients do the Zipfs lose in the long run (that is, when t → ∞)?

Exercise 5
The economy is hit at time 0 by a macroeconomic shock y with the following properties: y0 = 1 and lim yt = 0.
t→∞
This is a unit transitory shock. Further assume that the shock y has the following dynamics:
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yt+1 = − yt + yt−1 for t = 1, 2, ....
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Let the one-period change in the shock be xt ≡ yt+1 − yt . We are interested in characterizing the dynamic
behavior of the shock.

(a) Find the matrix A such that the joint dynamics of xt and yt can be described as follows:
   
xt xt−1
=A .
yt yt−1

xt x0



(b) Now derive an expression for the vector yt as a function of the starting values y0 .

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(c) Determine the eigenvalues of the matrix A and write down the matrix decomposition for A.
(d) Using the decomposed matrix A find an explicit solution for yt subject to the condition lim yt = 0 as a
t→∞
function of time t only.