Math Review for ECON 222Winter Term, 2015
Wenbo Zhu
Queen’s Economic Department
January 13, 2015
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 1 / 37
Outline
1 Exponents
2 Logarithms (Natural logarithms)
3 Growth rates
4 Differentiation
5 Elasticities
6 Examples
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 2 / 37
ExponentsSome graphs
The function: f (x) = ax , a is the “base” and a > 0.
−3 −2 −1 0 1 2 3
05
1015
20
The exponential functions
x
y
●
base = 5base = ebase = 2base = 0.2
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 3 / 37
ExponentsSome basic information about the graph
f (x) = ax has the following properties, regardless the value of a:
the domain of the function is (−∞,∞);
the range of the function is (0,∞);
the function goes through the point (0, 1).
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 4 / 37
ExponentsGeneral Properties of Exponents
an · am = an+m
22 · 23 = 25 = 32(1)
an
am= an−m
23
22= 23−2 = 2
(2)
(an)m = an·m
(22)3 = 22·3 = 64(3)
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 5 / 37
ExponentsQuestion
How about 24 · 42??I first, notice that 2 6= 4, so we cannot apply the equation (1)
above directly ;I however, 4 = 22, so by equation (3), we have
42 = (22)2 = 22·2 = 24;I then by equation (1), 24 · 42 = 24 · 24 = 24+4 = 256.
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 6 / 37
LogarithmsSome graphs
The function: f (x) = loga x , again a is the “base” and a > 0, a 6= 1.
0 2 4 6 8
−4
−3
−2
−1
01
2
The logarithm functions
x
y
●
base = 10base = ebase = 2base = 0.5
*note: in this course, most likely we deal with natural logs, whichmeans the base is “e”.
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 7 / 37
LogarithmsSome basic information about the graph
f (x) = loga x , again regardless the value of a:
the domain of the function is (0,∞);
the range of the function is (−∞,∞);
the function goes through the point (1, 0)
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 8 / 37
LogarithmsThe relation with Exponents: exp ln(a) = a or ln(exp a) = a,∀a > 0
−4 −2 0 2 4
−4
−2
02
4
x
y ●
●
y = e^xy = ln(x)y = x
The exponential and logarithm functions are the inverse of oneanother (i.e. they appear to cancel each other out).
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 9 / 37
LogarithmsUseful Rules for logs
Here are some useful rules for calculation involving logs:
ln(xy) = ln x + ln y (4)
lnx
y= ln x − ln y (5)
ln xp = p ln x (6)
ln 1 = 0 (7)
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 10 / 37
LogarithmsAn example
Please simplify the following expression:
exp[ln(x2)− 2 ln y
]Here is the solution:
exp[ln(x2)− 2 ln y
]= e[ln(x2)−2 ln y]
= e [ln(x2)−ln(y2)]
=e ln(x2)
e ln(y2)
=
(x
y
)2
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 11 / 37
Growth ratesFormulas
Let X and Z be any two variables, not necessarily related by afunction, that are changing over time.
Let ∆XX
and ∆ZZ
represent the growth rates (percentage changes)
I you know that the two-period growth rate of X is Xt+1−Xt
Xt= ∆X
Xt
Rule 1. The growth rate of the product of X and Z equals thegrowth rate of X plus the growth rate of Z .
∆(XZ )
XZ=
∆X
X+
∆Z
Z(8)
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 12 / 37
Growth ratesProof of Rule 1
Proof. Suppose that X increases by ∆X and Z increases by∆Z . Then the absolute increase in the product of X and Z is(X + ∆X )(Z + ∆Z )− XZ , and the growth rate of the productof X and Z is:
∆(XY )
XY=
(Xnew )(Znew )− XZ
XZ
=(X + ∆X )(Z + ∆Z )− XZ
XZ
=XZ − (∆Z )Z + (∆X )X + ∆X∆Z − XZ
XZ
=∆X
X+
∆Z
Z+
∆X∆Z
XZ
The last term can be ignored if both term deviations are small(which they usually are).Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 13 / 37
Growth ratesProof of Rule 1: Graphical
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 14 / 37
Growth ratesRule 2
Rule 2. The growth rate of the ratio of X to Z is the growthrate of X minus the growth rate of Z .
Proof. Let W be the ratio of X to Z , so W = X/Z . ThenX = ZW . By Rule 1, as X equals the product of Z and W , thegrowth rate of X equals the growth rate Z plus the growth rateof W:
∆X
X=
∆Z
Z+
∆W
W∆W
W=
∆X
X− ∆Z
Z
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 15 / 37
Growth rates and logarithms
For small values of x , the following approximation holds :
ln(1 + x) ≈ x
From that property let us show that the growth rate is alsoequal to the difference in logarithms:
Xt+1 − Xt
Xt≈ lnXt+1 − lnXt
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 16 / 37
Growth rates and logarithmsProof
lnXt+1 − lnXt = ln
(Xt+1
Xt
)= ln
(Xt+1 − Xt + Xt
Xt
)= ln
(1 +
Xt+1 − Xt
Xt
)≈ Xt+1 − Xt
Xt
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 17 / 37
DifferentiationSingle-variable Differentiation
Definition:
f ′(x) = limh→0f (x+h)−f (x)
h
There are several ways to denote derivatives
f ′(x) denotes the derivative of f (x) with respect to (wrt) x
f ′x (x , y) denotes the partial derivative of f (x , y) wrt x
you can also denote derivatives with df (x)dx
... and partial derivatives with ∂f (x ,y)∂x
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 18 / 37
DifferentiationRules (with a single function)
Two important derivatives for the course:
f (x) = xa ⇒ f ′(x) = axa−1
f (x) = ln x ⇒ f ′(x) =1
x
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 19 / 37
DifferentiationMore Rules: (with two functions)
Take the derivative wrt each term separately
F (x) = f (x) + g(x) ⇒ F ′(x) = f ′(x) + g ′(x)
F (x) = f (x)− g(x) ⇒ F ′(x) = f ′(x)− g ′(x)
Example:
y = A ⇒ y ′ = 0
y = A + f (x) ⇒ y ′ = f ′(x)
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 20 / 37
DifferentiationMore Rules: (with two functions) Cont’d
Product Rule:
F (x) = f (x)g(x) ⇒ F ′(x) = f ′(x)g(x) + f (x)g ′(x)
Example: y = A · f (x)⇒ y ′ = A · f ′(x)
Quotient Rule:
F (x) =f (x)
g(x)⇒ F ′(x) =
f ′(x) · g(x)− f (x) · g ′(x)
[g(x)]2
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 21 / 37
DifferentiationMore Rules: (with two functions) Cont’d
The Chain Rule: If y is a function of u, and u is a function of x , then
dy
dx=
dy
du
du
dxExample:
y = (ln x)2
dy
dx=
dy
du
du
dx,where y = u2, and u = ln x
= 2 · ln x︸ ︷︷ ︸dy
du
· 1
x︸︷︷︸du
dx
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 22 / 37
DifferentiationMarginal Products with Calculus
Finding the MPK of a Cobb-Douglas production:Y = AKαN1−α
MPK is the change in output for a one unit change in capital(∆Y∆K
when ∆K = 1)
keeping everything else equal.
The MPK is the slope of the tangent line to the productionfunction and is equal to the derivative of the function.
Example: Y = 4K 0.5 Find the MPK when K = 100
MPK =∂Y
∂K= 2K−0.5
=2√100
=2
10=
1
5
Apply the same method to find the marginal product of labour
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 23 / 37
DifferentiationMaximization and Minimization
π(q) = 1000q − cq2, where 1000 > c > 0
to maximize the above objective function, find the partialderivative w.r.t. q and set it equal to zero
π′(q) = 1000− 2cq = 0
q∗ =1000
2c
the procedure for maximization and minimization is the same
a function has been maximized if π′′(q) < 0
why? At the max the slope of the objective function is zero. Anincrease or decrease in q decreases π.
a function has been minimized if π′′(q) > 0
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 24 / 37
DifferentiationSimple Constrained Maximization
π(p, q) = pq − cq where c > 0
subject to p(q) = 1000− 4q
substitute the constraint (p(q)) directly into the π(p, q)objective function and set the partial derivative equal to zero
π(q) = (1000− 4q)q − cq
= 1000q − 4q2 − cq
π′(q) = 1000− c − 8q = 0
q∗ =1000− c
8
the procedure for maximization and minimization is the same
a function has been maximized if π′′(q) < 0
a function has been minimized if π′′(q) > 0
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 25 / 37
ElasticitiesDefinitions
The elasticity of Y with respect to N is defined to be thepercentage change in Y , ∆Y /Y , divided by the percentagechange in N , ∆N/N :
ηY ,N = ∆Y /Y∆N/N
Or if we use derivatives:
ηY ,N = NY∂Y∂N
= ∂ lnY∂ lnN
How so? (Hint: exploit the chain rule):
N
Y
∂Y
∂N=
∂ lnY∂Y
∂Y∂ lnN∂N
∂N=∂ lnY
∂ lnN
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 26 / 37
Example 1
Find the first and second order derivative
f (x) = x2
f ′(x) = 2x
f ′′(x) = 2
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 27 / 37
Example 2
Find the first and second order derivative
f (x) = 3x
f ′(x) = 3
f ′′(x) = 0
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 28 / 37
Example 3
Find the first and second order partial derivative
f (x , y) = yx3
f ′x (x , y) = 3yx2
f ′′x (x , y) = 6yx
*note: you can think of f (x , y) is a production function and y beingthe labour input and x being the capital input.
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 29 / 37
Example 4
Find the first and second order derivative
f (x) = ln(x)
f ′(x) =1
x
f ′′(x) =−1
x2
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 30 / 37
Example 5
f (x) = ex
f ′(x) = ex
why?
y = ex
ln(y) = ln ex
ln(y) = x
1
y
dy
dx= 1
dy
dx= y
dy
dx= ex
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 31 / 37
Example 6
Find the first order derivative
f (x) =ex
x2
f ′(x) =exx2 − ex2x
(x2)2
f ′(x) =ex(x2 − 2x)
x4
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 32 / 37
Example 7
Find the first order derivative
f (x) = ln(x5 − 5x3 − 100
)f ′(x) =
5x4 − 15x2
x5 − 5x3 − 100
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 33 / 37
Example 8
f (x , y) = [αxω + βyω]1ω
∂f (x , y)
∂x=
1
ω· [αxω + βyω]
1ω−1 · αωxω−1
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 34 / 37
Back to growth rate rules (Optional)
Rule 3. Suppose that Y is a variable that is a function of twoother variables X and Z . Then ∆Y
Y= ηY ,X
∆XX
+ ηY ,Z∆ZZ
Proof.: informal. The overall effect on Y is approximately equalto the sum of the individual effects on Y of the change in X andthe change in Z .
Rule 4. The growth rate of X raised to the power a, or X a, is atimes the growth rate of X , growth rate of (X a) = a∆X
X
Proof.: Let Y = X a. Using Rule 3, we find the elasticity of Ywith respect to X equals a.
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 35 / 37
Elasticity of substitution (Optional)
elasticity of substitution is the elasticity of the ratio of twoinputs to a production (or utility) function with respect to theratio of their marginal products (or utilities): σyx = η( y
x ),MRSy,x
We know that the marginal rate of substitution between y and x
is: MRSy ,x =F ′y (x ,y)
F ′x (x ,y)
So if, for example, we want to find σK ,N for the followingCobb-Douglas production function: Y = AKαN1−α
MRSK ,N =MPK
MPN=
AαKα−1N1−α
A(1− α)KαN−α
=α
1− αK
N
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 36 / 37
Elasticity of substitution (Optional) Cont’d
Rearrange the above equation, we get
K
N=
(1− αα
)MRSK ,N .
Then we can apply the formula of σyx and get
σK ,N =MRSK ,N
1−αα
MRSK ,N
· 1− αα
= 1.
Wenbo Zhu (QED) Math Review for ECON 222 January 13, 2015 37 / 37