ECON 6305 – Learning Module 2

Exponents and Logarithms

• After completing this module, the student will be able to:

Lesson 1:
– Define, differentiate and apply exponential functions
– Solve problems using continuous compounding and
continuous discounting

Lesson 2:
– Define, differentiate and apply logarithmic functions
– Solve problems using logarithms including taking
derivatives of polynomial functions
 Logarithms and natural logs

•  

• In words, y is the power to which one raises b in

order to get x

• We will often use b = e, or natural logs, expressed as

ln
 Logarithm Facts

•  
, for every positive number x

ln(x) + ln(y)
 Derivatives of logarithms

•  
By the chain rule:
 Base Conversion

•  

ln(

Note: assuming b > 1

Graph of ln(x)
 Elasticity

•  

=
 Regression using natural logarithms

•   Regress on

is our estimate of

To find the elasticity of y with respect to dependent variables,

run a ln-ln model.
 Derivative of Exponential Functions (cont.)

• An
  alternative method for computing for
exponential functions; suppose
 Linearizing functions

•  
To linearize exponential functions such as a Cobb-
Douglas production function:
 Example: Optimum Selling Time

•  Can sell wine now for $K or let the value grow

according to , with an interest rate r. When
would we optimally sell the wine?

• Taking the time value of money into account, the

value of the wine at some future time is:

• Take the ln:

 Example: Optimum Selling Time (cont.)

•   the critical value (when the slope = 0)

Find

Self test LM 2.2 Finding Derivatives Using Logarithms