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

Solution 1
(a)
 
2 0 0
A= 0 3 0 .
0 0 4

2−λ 0 0  λ=2
|A − λI| = 0 3−λ 0 = (2 − λ)(3 − λ)(4 − λ) = 0 λ=3 .
0 0 4−λ λ=4


λ=2:
 
0 0 0
(A − λI) =  0 1 0 .
0 0 2
    
0 0 0 x 0
 0 1 0  y = 0 
0 0 2 z 0

 0x + 0y + 0z = 0
=⇒ y=0 =⇒ 0 x = 0 =⇒ ∀x ∈ R
2.z = 0



1
take x = 1 =⇒  0  is an eigenvector for λ = 2.
0

1
 λ=3:
 
−1 0 0
(A − λI) =  0 0 0 .
0 0 1
    
−1 0 0 x 0
 0 0 0  y = 0 
0 0 1 z 0

 −1.x = 0
=⇒ 0x + 0y + 0z = 0 =⇒ 0 y = 0 =⇒ ∀y ∈ R
z=0



0
take y = 1 =⇒  1  is an eigenvector for λ = 3.
0
λ=4:
 
−2 0 0
(A − λI) =  0 −1 0  .
0 0 0
    
−2 0 0 x 0
 0 −1 0   y  =  0 
0 0 0 z 0

 −2.x = 0
=⇒ −1.y = 0 =⇒ 0 z = 0 =⇒ ∀z ∈ R
0.x + 0.y + 0.z = 0



0
take z = 1 =⇒  0  is an eigenvector for λ = 4.
1

(b)

2−λ 1 −1
1−λ 1 1 −1
|A − λI| = 0 1−λ 1 = (2 − λ) +2 =0
0 −2 − λ 1−λ 1
2 0 −2 − λ
= (2 − λ)(−2 + λ + λ2 ) + 2(1 + 1 − λ) = −4 + 2λ + 2λ − λ2 + 2λ2 − λ3 + 4 − 2λ
= −λ(λ + 1)(λ − 2) = 0.

 λ=0
eigenvalues λ = −1 .
λ=2


λ=0:
   
2 1 −1 2 1 −1  
2 1 −1
(A − λI) =  0 1 1  −→  0 1 1  −→ (−1 ∗ row 2)
0 1 1
2 0 −2 (−1 ∗ row 1) 0 −1 −1
   
  x 0 
2 0 −2  2.x − 2z = 0 x=z
−→ y = 0  =⇒ .
0 1 1 y+z =0 y = −z
z 0

λ = 0, x = (1, −1, 1)0

2
 λ = −1 :
   
3 1 −1 1 ∗ row 2 3 3 0
(A − λI) =  0 2 1  −→  0 2 1 
2 0 −1 (1 ∗ row 2) 2 2 0
   
  x 0 
1 1 0  x+y =0 x = −y
−→ y = 0  =⇒ .
0 2 1 2y + z = 0 z = −2y
z 0
λ = −1, x = (−1, 1, −2)0 .
λ=2:
     
0 1 −1   x 0
0 1 −1 
(A − λI) =  0 −1 1  −→ y = 0 
1 0 −2
2 0 −4 z 0

y−z =0 y=z
=⇒ .
x − 2z = 0 x = 2z
λ = 2, x = (2, 1, 1)0
(c)  
1 −1 0
A =  −1 2 −1  .
0 −1 1

1−λ −1 0
2−λ −1 −1 0
|A − λI| = −1 2−λ −1 = (1 − λ) − (−1)
−1 1−λ −1 1−λ
0 −1 1−λ
= (1 − λ)(2 − 3λ + λ2 − 1) + 2(−1 + λ − 0) = λ2 − 3λ + 1 − λ3 + 3λ2 − λ − 1 + λ
= −λ3 + 4λ2 − 3λ = −λ(λ − 1)(λ − 3) = 0.

 λ=0
eigenvalues λ=1 .
λ=3


λ=0:
   
1 −1 0 1 −1 0
(A − λI) =  −1 2 −1  −→  0 1 −1 
(1 ∗ row 1)
0 −1 1 0 −1 1
   
  x 0 
1 −1 0 x−y =0 x=y
−→  y = 0  =⇒ .
0 1 −1 y−z =0 y=z
z 0
λ = 0, x = (1, 1, 1)0 .
λ=3:
   
−2 −1 0 2 1 0
(1 ∗ row 3)
(A − λI) =  −1 −1 −1  −→  1 1 1 
0 −1 −2 0 1 2
 
2 2 2    
1 1 1 1 0 −1
−→  1 1 1  −→ −→
0 1 2 0 1 2
0 1 2
   
  x 0 
1 0 −1  x−z =0 x=z
−→ y  =  0  =⇒ .
0 1 2 y + 2z = 0 y = −2z
z 0

3
 λ = 3, x = (1, −2, 1)0 .
λ=1:
 
0 −1 0    
0 −1 0 0 −1 0
(A − λI) =  −1 1 −1  −→ −→
−1 1 −1 1 ∗ row 1 −1 0 −1
0 −1 0
   
  x 0 
0 −1 0  y = −y = 0 y=0
0  =⇒ .
−1 0 −1 −x − z = 0 x = −z
z 0
λ = 1, x = (−1, 0, 1)0 .

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.

Solution 2
(a) Let us prove this by induction:

i) k=1: Ax = λx by definition, where x is the Eigenvector associated to the Eigenvalue λ.

ii) Let us assume that An x = λn x (i.e. the hypothesis is true for k = n.
iii)
An+1 x = A(An x)
= A(λn x)
= λn Ax
= λn λx
= λn+1 x

(b) We have to prove that A is invertible ⇔ λ = 0 is not an Eigenvalue.

Qn
i) λ = 0 is not an Eigenvalue ⇒ λi 6= 0 ∀i = 1, . . . , n ⇒ i=1 λi 6= 0 ⇒ det(A) 6= 0 ⇒ A is invertible.
Qn
ii) λ = 0 is an Eigenvalue ⇒ i=1 λi = 0 ⇒ det(A) = 0 ⇒ A is not invertible.
(c) We assume that A is invertible. Let λ be an Eigenvalue of A and v its associated Eigenvector. We know
that λ−1 is an Eigenvalue of A−1 . Let us find its associated Eigenvector.

Av = λv ⇔ A−1 Av = A−1 λv ⇐ v = λA−1 v ⇔ λλ−1 v = λA−1 v ⇔ λ−1 v = A−1 v

Therefore, v is also the Eigenvector associated to the Eigenvalue λ−1 .

4
 (d) We have by definition Av = λv. We have to show that S −1 v is an Eigenvector of S −1 AS with the same
Eigenvalue λ.

⇒ S −1 ASS −1 v = S−1Av = S−1λv = λS −1 v

Exercise 3
Let A be a symmetric matrix with
 
2 1 −2
A= 1 2 −2
−2 −2 5
2
(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.
(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.

Solution 3
(a) The characteristic polynomial is given by:

2−λ 1 −2
det (A − λI) = 1 2−λ −2
−2 −2 5−λ
2−λ −2 1 −2 1 −2
= (2 − λ) −1 −2
−2 5−λ −2 5−λ 2−λ −2
= (2 − λ) [(2 − λ) (5 − λ) − 4] − (5 − λ − 4) − 2 (−2 + 4 − 2λ)
= (2 − λ) 6 − 7λ + λ2 − 1 + λ + 4λ − 4

= 12 − 14λ + 2λ2 − 6λ + 7λ2 − λ3 + 5λ − 5

= −λ3 + 9λ2 − 15λ + 7
= (λ − 7) −λ2 + 2λ − 1

= (λ − 1)2 (λ − 7).

(b) Ax = x ⇒ (A − I) x = 0, so each vector x that solves Ax = x is at the same time an eigenvector of A that
corresponds to λ = 1.
Let’s find the eigenvector corresponding to λ = 1:
        
x1 0 2−1 1 −2 x1 0
(A − λI) x2  = 0 ⇔  1 2 − 1 −2  x2  = 0
x3 0 −2 −2 5 − 1 x3 0

5
After a few computations we get
    
1 1 −2 x1 0
0 0 0  x2  = 0 ⇒ x1 + x2 − 2x3 = 0.
0 0 0 x3 0

So, Ax = x reduces to a single scalar equation.

The Eigenvalue λ = 1 is a root of the characteristic polynomial of degree 2. This means that under a linear
transformation Ax, there is not only a line corresponding to λ = 1 that does not move, but there is also a
whole hyperplane that is not changed. Any two non-parallel vectors define a hyperplane, hence we should
pick up any two non-parallel vectors to define an eigen-hyperplane. In the question we are asked to choose
0
two orthogonal vectors: xT y = 0. If x = (x1 , x2 , x3 ) is an eigenvector corresponding to the eigenvalue
λ = 1, then
x1 + x2
x1 + x2 − 2x3 = 0 ⇒ x3 = .
2
1+1
Take e.g. x1 = 1, x2 = 1, x3 = 2 = 1. Normalizing vector x gives:
 
1
x 1  
x̂ = =√ 1 .
kxk 3 1

If y = (y1 , y2 , y3 ) is an eigenvector corresponding to the eigenvalue λ = 1:

y1 + y2
y1 + y2 − 2y3 = 0 ⇒ y3 = .
2
We are looking for orthogonal vectors:
x̂0 y = 0.
Thus  
y1  
 y2  = √1 y1 + y2 + y1 + y2 = √3 (y1 + y2 ) = 0
 
√1 √1 √1
3 3 3 2
y1 +y2 3 3
2
y1 + y2 y1 − y1
⇒ y1 = −y2 , y3 = = = 0.
2 2
Hence, vector y of the form:  
y1
y = −y1 
0
is an eigenvector corresponding to the eigenvalue 1 and y is orthogonal to x. Take y1 = 1.
Normalizing vector y results in:
   √1 
1 2
y 1 −1 = − √1  .
ŷ = =√
kyk 1+1 2
0 0

So, we have found two orthonormal vectors corresponding to λ = 1:

   
1 1
1   1  
x̂ = √ 1 , ŷ = √ −1 .
3 1 2 0

These two vectors define a hyperplane that is not changed under linear transformation Ax.

6
(c) Let us find the eigenvectors corresponding to λ = 7:
        
z1 0 2−7 1 −2 z1 0
(A − 7I) z2  = 0 ⇔  1 2 − 7 −2  z2  = 0
z3 0 −2 −2 5 − 7 z3 0
After a few elementary transformations we obtain the following system in reduced form:
  
 z 0
1 1 1  1  

z + z2 + z3 = 0
z2 0 ⇒ 1
0 1 21 z2 + 12 z3 = 0
z3 0
Hence, the solution vectors can be written as
 1 
− 2 z3
z = − 12 z3  .
z3
0
Take, e.g. z3 = 1, then the solution vector is given by z = (−0.5, −0.5, 1) or after normalising ẑ =
 0
− √16 , − √16 , √26 .

(d) Using the spectral theorem for symmetric matrices (matrix A is symmetric) we can write D = S −1 AS,
where D is a diagonal matrix with principal diagonal composed of eigenvalues and matrix S is composed
of the corresponding eigenvectors. In our case:
 1
√1 √1
 1
√1 √1
 
√ √
 
1 0 0
 3 2 6
 3 3 3
S =  √13 − √12 √1 
6 
, D = 0 1 0 , S −1 = S 0 =  √12 − √12 0 .
√1 0 − √2 0 0 7 √1 √1 − √2
3 6 6 6 6

Check that
D = S −1 AS.
 1
√1 √1
√
   √1 √1 √1

2 1 −2
 √13 3
− √12
3
 3 2 6
=  2 0   1 2 −2  √13 − √12 √1 
6 
√1 √1 − √26 −2 −2 5 √1 0 − √26
6 6 3
 1
√1 1 1 √1 1
  
√ √ √ √
 √13 −1
√
3
0 
3
 13 2
− √12
6
√1 
=  2 2   √3 6 
√7 √7 14
−√ √1 0 − √26
6 6 6 3
 
1 0 0
= 0 1 0 .
0 0 7

(e) If A is symmetric then A−1 = SD−1 S 0 :

A−1 = SD−1 S −1
 1 1 √1
√ √
1   √1 √1 √1

0 0
 √13 2
− √12
6
√1 
1  3 3 3
=  3 6  0 1
1 0   √12 − √12 0 

1
√1 0 − √26 0 0 √1 √1 − √26
3 7 6 6
 1
√1 1
 1
√1 √1

√ √ √
 √13 2
− √12
7 6
√1 √1
3 3
− √12
3
0 
=
 
 3 7 6  2 
√1 0 − 7√2 √1 √1 − √26
3 6 6 6
 6
− 17 2

7 7
= − 1 6 2
.
7 7 7
2 2 3
7 7 7

7
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 → ∞)?

Solution 4
(a) Note that the state of the town can be described by the following system of equations:

z(t + 1) = 0.8z(t) + 0.1m(t)

m(t + 1) = 0.2z(t) + 0.9m(t).

Thus matrix A is given by:  

0.8 0.1
A= .
0.2 0.9

(b) A is not symmetric: A 6= AT .

A is not orthogonal: AAT 6= I.
A is not idempotent: AA 6= A.
(c) We know that x(t + 1) = Ax(t). Consequently, x(t + 2) = Ax(t + 1) = A(A(x(t))) = A2 x(t). As such,
iterating forward gives x(t + n) = An x(t).

(d) First we compute the eigenvalues using the characteristic polynomial: det(A − λI) = 0.
 
0.8 0.1
det = 0 ⇐⇒ (0.8 − λ)(0.9 − λ) − 0.02 = 0 ⇒ λ1 = 1, λ2 = 0.7.
0.2 0.9

8
 Then we look for the corresponding eigenvectors:
      
−0.2 0.1 x1 0 1
λ1 = 1 ⇒ = ⇒ vλ1 = c, c ∈ R.
0.2 −0.1 x2 0 2
      
0.2 0.1 x1 0 1
λ2 = 0.7 ⇒ = ⇒ vλ 2 = c, c ∈ R.
0.2 0.1 x2 0 −1

(e) To answer this question, we compute the spectral decomposition of A: A = CΛC −1 and use the property
that At = CΛt C −1 . We have:
     
1 0 1 1 1 1 1
Λ= , C= , C −1 = .
0 0.7 2 −1 3 2 −1

We know that x(t) = At x(0) = CΛt C −1 (1200, 0)T . Further computations yield:

1 1 + 2(0.7)t 1 − (0.7)t 1 + 2(0.7)t

      
z(t) 1200
= = 400 .
m(t) 3 2 − 2(0.7)t 2 + (0.7)t 0 2 − 2(0.7)t

(f) To answer this question, we have to solve the following inequality for t:

log(0.125) −2.079
400(1 + 2(0.7)t ) < 500 ⇐⇒ (0.7)t < 0.125 ⇐⇒ t < ≈ ≈ 5.8 ⇒ t < 6.
log(0.7) −0.357

(g) When t → ∞, then we have (z(∞), m(∞)) = (400, 800). Therefore the Zipfs lose (1200 − 400)/1200 = 2/3
of their clients.

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:
3
yt+1 = − yt + yt−1 for t = 1, 2, ....
2
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 .

(c) Determine the eigenvalues of the matrix A and write down the Spectral 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.

9
Solution 5
(a)       
yt+1 − yt a11 a12 yt − yt−1 −5/2 −3/2
= =⇒ A =
yt a21 a22 yt−1 1 1

(b) We obtain    
xt x0
= At .
yt y0

(c) The Spectral matrix decomposition of A is of the form A = CΛC −1 . Let us find the eigenvalues:

−5/2 − λ −3/2
|A − λI| = = 0 =⇒ λ1 = 1/2, λ2 = −2.
1 1−λ

So  
1/2 0
Λ= .
0 −2
Corresponding eigenvectors:
      
1 −5/2 − 1/2 −3/2 a 0 −1
λ1 = =⇒ A − λ1 I = = =⇒
2 1 1 − 1/2 b 0 2

     
−5/2 + 2 −3/2 a 0 −3
λ2 = −2 =⇒ A − λ1 I = = =⇒
1 1+2 b 0 1
   
−1 −3 1 3
So, C = and C −1 = 1/5
2 1 −2 −1
Matrix decomposition:
   
−1 −1 −3 1/2 0 1/5 3/5
A = CΛC =
2 1 0 −2 −2/5 −1/5

Hence,      
xt x0 x0
= At = CΛt C −1
yt y0 y0
and
 
2 t 2 6

x0 t 1
yt = 5∗2t − (−2) 5 5∗2t − (−2) 5
y0
   
2 t 2 6 t 1
= − (−2) (y 1 − y0 ) + − (−2) y0 (y0 = 1)
5 ∗ 2t 5 5 ∗ 2t 5
2 t 2 t 1 4
= t
y1 − (−2) y1 + (−2) +
5∗2 5 5 5 ∗ 2t
2 t 1 1
= t
(y1 + 2) − (2y1 − 1) (−2) ( lim yt = 0 ⇒ 2y1 − 1 = 0 ⇒ y1 = )
5∗2 5 t→∞ 2
1
= t
2

(d) So, an explicit solution for yt is

yt = 2−t .

10