Quantitative Methods for Economics Dr.

Katie Sauer

Chapter 4 Handout Linear functions provide limited representations of real-life situations. Non-linear functions are more versatile. Example: 1. Total Revenue is often a quadratic function. (even if demand is linear) - first increases as Q increases - then decreases as Q increases P = 50 2Q

2. Total Cost is often a cubic function. - increases as Q increases - first at a decreasing rate - then at an increasing rate TC = aQ3 bQ2 + cQ + d

______________________________________________________________________ 4.1 Quadratic Functions Types of solutions of a quadratic equation: 1. Two different real roots 2. Two identical real roots (aka repeated solution) 3. Two imaginary or complex roots The sign of b2 4ac determines the type of solution: b2 4ac > 0 then two real roots (cuts x-axis in 2 places) b2 4ac = 0 then identical real roots (cuts x-axis in 1 place) b2 4ac < 0 then complex roots (cuts x-axis nowhere)

Quantitative Methods for Economics Dr. Katie Sauer

Example: f(x) = x2 + 6x + 5 = 0

Example:

f(x) = x2 + 6x + 9 = 0

Example: f(x) = x2 + 6x + 10 = 0

(PE 4.1 page 152) A. Sketching quadratic functions Steps: 1. find the x roots (solve the quadratic equation) 2. find the y intercept (plug in 0 for all x then solve for y) 3. estimate the turning point (equidistant between x roots) Example: plot y = 2x2 7x 9 over the range -2< x < 6

(PE 4.2 page 158)

Quantitative Methods for Economics Dr. Katie Sauer

B. Economic Examples 1. Non-linear supply and demand functions Example: Ps = Q2 + 6Q + 9 Pd = Q2 10Q + 25

2. Breaking Even Example: Q = 65 5P

Fixed cost = 30

Marginal cost = 2Q

Example: P = 90 Q

TC = Q3

(PE 4.3 page 163)

Quantitative Methods for Economics Dr. Katie Sauer

_____________________________________________________________________ 4.2 Exponential Functions General form: y = ax a is a constant (called the base) x is the index or power e is a natural number with an unending decimal part e = 2.7182818

A. Simplifying Exponential functions Examples: (a) (b) QQ1.5P (c) (d)

(e)

(f)

(PE 4.5 page 176)

Quantitative Methods for Economics Dr. Katie Sauer

B. Solving equations with exponentials Examples: (a)  (b) (c) 

(d) (1+K)0.4 = 2

(e)

(PE 4.6 page 179) C. Applications 1. Unlimited growth models are often used for investment or population modeling. y(t) = aert a, r are constants 2. Limited growth models are often used for consumption modeling. y(t) = M(1- e-rt) M, r are constants 3. Logistic growth models are often used for consumptions or population modeling. y(t) = M / (1 + ae-rMt) a, M, r are constants ______________________________________________________________________ 4.3 Logarithmic Functions Logs are powers. Examples: A logarithm is simply an exponent.

Quantitative Methods for Economics Dr. Katie Sauer

100 = 102 log10 100 = 2

4.92809 = 22.30103 log2 4.92809 = 2.30103

8 = 23 log2 8 = 3

The base of the power becomes the base of the log. The power drops down. (number and base must be real, positive) If you see notation of If you see notation of log(x) ln(x) you can assume it is base 10. you know it is base e.

Write each of the following exponentials in log form: (a) N = apower (b) 10 = 32.0959

(c) 3 = 100.4771

(d) 7.389 = e2

(e) 2x = 10

(f) 2 + 3x = 10

(g) 5(2x) = 20

(h) 2x22x = 15

(i) 3(5)Q = 12

(j) (5)Q+1 = 10

(k) (10)4x+3 = 25

(l) P0.3 = 12

(m) 5K-0.5 = 28

(n) 20.3 = 25L0.9

(o) (K+10)0.8 = 2

Quantitative Methods for Economics Dr. Katie Sauer

Solve the following equations: (a) 31 = 10x (b) 25(10)2t = 208 (c) 38+12e-0.5t = 208

(PE 4.10 page 188) ___________________________________________________________________ 4.3.3 Rules for Logs In order to add logs: In order to subtract logs: logb(M) + logb(N) = logb(M N) logb(M) - logb(N) = logb logb(Mz) logb(N) = z logb (M) = logx(N) logx(b)

To take the log of an exponent: To change the base of the log:

Use the log rules to simplify the following expressions: (a) ln(4) + ln(29) = (c) log(53) = (b) log(90) log(26) = (d) log2(16) = If x is base 10: If x is base e:

(e) logb(25) + logb(70) logb(55) = (f) 4logx(7) 3logx(0.85) + logx(10) = (g) 12logb(12) + 3logx(8.25) 2logb(5) = 4.3.4 Solving equations using log rules If number = (base)power then log(number) = log((base)power) The antilog is also useful.

Quantitative Methods for Economics Dr. Katie Sauer

Ex:

log(x+2) = 2.5

Solve each of the following for x. (a) 20 = 3(1.08)x (b) 20 + (2.4)2x = 32.5

(c) 2ln(x) ln(x+1) = 0

(d) 2x2x+1 = 7

(e) ex+5 = 1.56

(PE 4.11 page 195) ______________________________________________________________________ 4.4 Hyperbolic Demand Suppose demand is given by P = 200 / (Q+1). Find the vertical asymptote: Find the horizontal asymptote: Sketch this demand function.

Suppose that supply is given by P = 5 + 0.5Q.

Solve for equilibrium price and quantity.

(PE 4.13 page 201)