March 7, 2017

Calculus for
Economics, Commerce
& Management

INDER K. RANA
Department of Mathematics
Indian Institute of Technology Bombay
Powai, Mumbai 400076, India
email: [email protected]
Contents

Chapter 1. Sets and functions 1

§1.1. Sets 1
§1.2. Relations and functions 3
§1.3. Operations of functions 11
§1.4. Elasticity of linear functions 20
§1.5. Non linear functions 26
§1.6. Polynomial functions 30

Chapter 2. Sequences and series 35

§2.1. Introduction 35
§2.2. Application of sequences 44

Chapter 3. Limit of a function 53

§3.1. Introduction 53
§3.2. Computing limits 54
§3.3. Continuous functions 55
§3.4. Special properties of continuous functions 61

Chapter 4. Differentiation 65
§4.1. Introduction 65
§4.2. Marginal of a function 68

Chapter 5. Optimization 71
§5.1. Local Maxima/minima and optimization 71
§5.2. Marginal propensities 73
§5.3. Elasticity for general functions 77
§5.4. Applications of derivative 78
§5.5. Convexity and Concavity 81

vii
viii Contents

Solutions 83
1.1: Sets 83
1.2: Relations and functions 85
1.3: Linear functions 87
1.4: Elasticity of linear functions 95
1.5: Quadratic Functions 96
2.1: Sequences 99
2.2: Exponential and logarithmic function 100
3.1: Limits of functions 102
4.1: Derivative and its applications 105
4.2 Optimization 108
Answers 113
 Chapter 1

Sets and functions

1.1. Sets
1.1.1 Definition:
A Set is a collection of well defined ’distinct’objects. There are two ways a
set can be described: by enlisting all the objects in the collection. For example
the collection of the numbers 1, 2, 3 will be written as
{1, 2, 3}.
Or sometimes, the above set can also be described as the set of numbers which
are bigger than or equal to 1 and less than or equal to 3. This is written as
{n — n is a number , 1 ≤ n ≤ 3}.
Another example:
{n — n is a positive integer }
.
= {1, 2, 3, ..}.
Sets are normally denoted by capital letters: A,B,C,....

1.1.2 Some important sets:

• R: The set of all real numbers.
• N: The set of all natural numbers.
• Z: The set of all integers.
• Q: The set of all rational numbers.
• RQ: The set of all irrational numbers.
1.1.3 Operations on sets:
(1) Subsets.
(2) Union of sets.
(3) Intersection of sets.

1
2 1. Sets and functions

(4) Complement of sets.

(5) Disjoint sets.
(6) Power set.
1.1.4 Special sets:
φ - Empty set.

1.1.5 Cross product of sets:

Ordered pairs sets - R2 R3 .

1.1.6 Examples(why precision is necessary):

Suppose we want to analyze the consumption of electricity by household
customers in a particular city. To formulate the problem we need the data to
answer these:
(i) What constitutes a household?
(ii) What is the method of measuring consumption?
1.1.7 Examples of sets:
• All students in this class.
• All students whose birth month is April.
• All salaried persons in a city whose income is above 50 lakh per month.
• All married working couples in a city whose income is above 50 lakh
per month.
• All income tax payers in a city.
• Set of all firms in a city with annual turnover is above 25 lakh.
• Set of goods a consumer can afford to buy, usually called the budget
set of the consumer.
• Set of goods or services a consumer is physically capable of consuming
usually called the consumption set of the consumer.

Exercise 1: Sets
(1.1) Mark the following statements as True/False :

(1) For a set X, if x ∈ X then {x} ∈ X..

(2) {1, 2, 3} = {3, 2, 1}.
(3) The set{1, 2, 3} has six possible subsets.
(4) For every set X, X ∈ X.
(5) For every set X, X ⊆ X.
(6) If A ⊆ B, then A ∪ B = B.
(7) If A ⊆ B, then A ∩ B = B.
(8) For sets A and B, (A ∩ B) ⊆ A, but A ∩ B 6⊆ B.
(9) For every set X, there exists a relation R ⊆ X × X such that (x1 , x2 ) ∈ R
need not imply (x2 , x1 ) ∈ R.
(10) If R1 , R2 are relations on a set X, then R1 ∪ R2 is also a relation on X.
 1.2. Relations and functions 3

(1.2) Let
A = Set of all banks in Mumbai, (1.1)
B = Set of all nationalised banks in Mumbai, (1.2)
C = Set of all private banks in Mumbai. (1.3)
What do the following sets express:
A ∪ B, A ∩ B, B ∪ C, B ∩ C, A ∪ B ∪ C, A ∩ B ∩ C.
(1.3) Prove the following statements:
(i) A ∪ (B ∪ C) = (A ∪ B) ∪ C.
(ii) A ∩ (B ∪ C) = (A ∩ B) ∪ (A ∩ C).
(iii) A ∪ (B ∩ C) = (A ∪ B) ∩ (A ∪ C).
(1.4) Let A = {2, 4, 6}, B = {7, 2, 6}, C = {1, 2, 3}. Verify the following:
(i) A − C = A − (A ∩ C) = (A ∪ C) − C.
(ii) (A − B) − C = A − (B ∪ C).
(iii) A − (B − C) = (A − B) ∪ (A ∪ C).
(1.5) Let C denote a consumer’s consumption set:
C = {(x1 , x2 )|x1 ≥ 0, x2 ≥ 0}.
If M is the income of the consumer, then his budget set is given by
B = {(x1 , x2 ) | P1 x1 + P2 x2 ≤ M },
where P1 , P2 > 0 are the prices of x1 , x2 quantities of goods. What does the
sets B ∪ C and B ∩ C represent.

1.2. Relations and functions

Every phenomenon can be described by relationships between various variables
eg.price, quantity,income,spending,savings,exchange rate, cost of production, tax
rate, and so on. Let us look at examples.

1.2.1 Example On a stock exchange number of shares of a particular company

being bought and sold by various traders gives a relation between the number
of shares traded and the trader. This gives a pair (n, x) where n is the number
of shares traded by a trader x. Note this is an element of the set
N × X.
This motivates our next definition.

1.2.2 Definition:
Let X and Y be sets. We say R is a relation of X and Y if R ⊆ X × Y. For
(x, y) ∈ R, we say x is related to y.

1.2.3 Example:
(i) For every X and Y, X × Y itself is a relation.
 
(n, X)| n ≥ 10
(ii) R = ⊆ N × X.
x ∈ X.
When X is a set of traders, is a relation.
4 1. Sets and functions

(iii) R1 = (x, y) ∈ R2 | x = y


R2 = (x, y) ∈ R2 | x2 = y
R3 = (x, y) ∈ R2 | x2 + y 2 = 1

Next is a special type of relations.

1.2.4 Definition: Let X, Y be sets and R ⊆ X × Y be a relation. We say R is

a function, if
(x, y1 )(x, y2 ) ∈ R ⇒ y1 = y2 ,
i.e., ∀x ∈ X, it is related at most to one element of Y. In this case, we say R is
a function from X to Y.

1.2.5 Examples:
(i) Consider the relation
Z × X,
where X is a given set of traders. Then this need not be a function.
For example, two different traders x1 , x2 may buy the same number of
shares.So this will not be a function.
(ii) Consider the relation
X × Z,
This is a function, for every trader who would have bought/sold a
particular number of shares by the end of this day.
(iii) Consider
⊂ 2
R1 R , R1 = {(x, y)|4x = y}
6 =
This is a function. However,
R2 = (x, y)|x2 = y ,


is not a function. For example,

√ √
( x)2 = y, (− x)2 = y.

1.2.6 Graph of a function:

f : X → Y.
G(f ) = (x, y)|x, f (x); x ∈ X.

1.2.7 Linear functions:

We saw that horizontal lines are graphs of functions: y = f (x) = C for every x,
and Cis a fixed constant. Let us consider any line passing through the origin.
Let the vertical line at x = 1 meet the graph of the line at B. Let AB = m.
For any point D on the line with coordinates say (x, y), consider the △OCD as
shown. Since △OBA and △OCD are similar,
y DC BA
= = =m
x OC OA
1.2. Relations and functions 5

figure 1

Hence y = mx is the equation of the line. Next consider any line L(not horizontal
or vertical).

figure 2

Consider a line L′ through origin, parallel to line L. Let L′ has equation y = mx.
Let L intersect y-axis at R with OR = c. Then for P on L with coordinates (x, y),
y = P Q = P P ′ + P ′ Q = c + mx.
Hence now y = mx + c is the equation of any line (not horizontal, not verti-
cal).This is called a linear equation in the variablex and the function
y = f (x) := mx + c
6 1. Sets and functions

is called a linear function. Note that a linear function has two constants:
m and c. The constant m, coefficient of x, is called the slope of the line and
C is called the y − intercept. Slope m indicates how much the line is tilted.
For m = 0, the line is horizontal. For m > 0, the line is bending downwards on
negative side of the x-axis and bending upwards on the right side of the x-axis.
For m < 0, the reverse happens.
Geometrically, a line is completely determined by any two different points
on the line. Let P (x1 y1 ) and Q(x2 y2 ) lie on the line y = mx + c. Then
y1 = mx1 + c, y2 = mx2 + c.

figure 3

Hence
y1 − y2 y2 − y1
y1 − y2 = m(x1 − x2 )i.e., m = = .
x1 − x2 x2 − x1
and
y2 − y1
C = y1 − mx1 = y1 − x1 .
x2 − x1
Thus, the line can also be written as
   
y2 − y1 y2 − y1
y = x + y1 − x1
x2 − x1 (x2 − x1 )
 
y2 − y1
= (x − x1 ) + y1 .
x2 − x1
This is called two point form of the linear function.

Properties of Linear Functions y = mx + c

(i) Graph is a straight line cutting y-axis at the point (O, C).
(ii) For m = 0, the graph is a horizontal line, i.e.y = c for every x. Hence
it is a constant function.
1.2. Relations and functions 7

(iii) For m > 0, it is a straight line which is ’rising up’: for x1 > x2 ,
f (x1 ) > f (x2 ). One says y as a function of x is strictly increasing.
Similarly for m < 0, it is a straight line which is dropping downwards;
for x1 > x2 , f (x1 ) < f (x2 ). One says f is strictly decreasing func-
tion.
(iv)
For m ≥ 0, y = f (x) keeps on increasing indefinitely as x increases, one writes
this as
Limx→∞ f (x) = +∞
and y = f (x) keeps decreasing indefinitely as x decreases to −∞ i.e.
Limx→−∞ f (x) = −∞.

1.2.8 Note: The graph of a function f : X → Y, when X, Y ≤ IR is the subset

of the set IR2 . We can represent G(f ) in picture as follows: draw two perpendic-
ular lines,a horizontal line to represent X = IR, and the vertical line to represent
Y = IR. The point of intersection denotes the value (0, 0). For (x, y)εG(f ), we
locate it as a point in the plane by moving x units on a horizontal line and then
moving vertically by y units.

figure 4

The collection of these points give a visualization of the set G(f ).

Exercise 2: Relations and functions)

(2.1) Is very function is one-one?
(2.2) Is every function is onto?
(2.3) Sketch the linear functions:
(i) y = −2x + 2, −1 ≤ x ≤ 3.
8 1. Sets and functions

(ii) y = 2x − 2, −1 ≤ x ≤ 3.
(2.4) Find the equation of the line passing through the points (−1, −3) and
(4, 2). Write down it’s slope?
(2.5) If a person has a budget of Rs.600/ = and he wants to buy two items A
and B with prices Rs.6/ = and Rs.4/ = respectively. Find the budget
line? Analyze the effect on the budget line if the budget is increased
by 20%? What happens to the budget line if the price of B is doubled?
(2.6) The fixed cost of producing a good is Rs.12/ = and the variable cost is
7Q. Find the expression for total cost and average cost. What do you
think will be approximately average cost when the product is produced
in large numbers?
Solution (3):
x 0 1
(i) y = −2x + 2. Use two point form.
y 2 0
Points (0, 2), (1, 0), lie on the line as shown:

figure 5

x 0 1
(ii) y = 2x − 2.
y −2 0
Points (0, −2), (1, 0), lie on the line as shown:

figure 6
1.2. Relations and functions 9

Solution(4):
x1 = −1. y1 = −3, x2 = 4, y2 = 2. Equation is
y2 − y1
y − y1 = (x − x1 )
x2 − x1
2 − (−3)
y − (−3) = (x − (−1))
4 − (−1)
2+3
y+3 = (x + 1)
4+1
y = x + 1 − 3 = x − 2.
Slope = 1.

Solution(5): Budget line is

4
(i) 6A + 4B = 600, A = − B + 100.
6
A 0 100
B 150 0

figure 7

600 × 20
(ii) 20% of 600 = = 120. Thus, new budget is 720. New budget
100
4
line is 6A + 4B = 720, A = − B + 120.
6
A 0 120
B 180 0
(iii) If the price of B is doubled, then the budget line is 6A + 8B = 600,
8
A = − B + 100.
6
A 100 75
B 0 0
10 1. Sets and functions

figure 8

4 8
The slope has changed from −to − .
6 6
Solution(6): FC = 12, VC = 7, TC = 7Q + 12,
TC 12
AC = =7+ .
Q Q
12
For large Q, Q will be small. So the average cost will tend to 7.

1.2.9 Example(Constant functions):

Consider the function f : (1, 2) → IR defined by f (x) = 1 for every x ε(1, 2).
Then
G(f ) = {(x, 1)| xεI}, I = (1, 2)
Geometrically it is the line AB as shown in the picture below:

figure 9

In general, f : x → IR, where x ≤ IR and f (x) = c for every x εX, for some
c ∈ IR is called a constant function.
1.3. Operations of functions 11

1.2.10 Note: No vertical line can be the graph of any function.

General properties of function:

(1) One-one
(2) Onto
(3) Bijective
(4) Composition
(5) Algebra (addition, multiplication etc.)

1.3. Operations of functions

Let f, g : X → IR be functions and αεIR be any real number. Define the func-
tion αf : X → IR by (αf )(x) := αf (x), xεX. This is called a scalar multipli-
cation of a function.

1.3.1 Examples from economics:

Consider a product being produced. Let F C denotes the fixed cost(expenditure
incurred) even if nothing is produced. Let V C denotes the variable cost of
producing one unit. Then the total variable cost is V C × Q and the total cost
is given by
T C = F C + V CQ,
Q being the number of units produced. Thus, T C can be treated as a function of
Q. Normally, the fixed cost does not depend upon the number of units produced
whereas the variable cost depends upon each unit produced. If P is the price
per unit, then total revenue (T R) function is given by
TR = P × Q
and profit function is given by
Π(Q) : = TR − TC
= P × Q − [V C × Q + F C]
= (P − V C) × Q − F C.
Example(1) bank interest rates: At the beginning of the year, a person
deposited Rs.5000/ = in two bank accounts,each paying annual interest. The
interest rates were 4% and 6% per annum respectively.If the depositor has made
no withdrawal during the year and has earned total interest of Rs.2, 750/ =,
what was the amount he deposited in each account?
Solution: Let the first account has x-rupees, and second account has y-rupees
as initial deposits. Then
x + y = 50, 000 (1.4)
and
4
interest on first account = x × ,
100
6
interest on second account = y × .
100
4x 6y
Thus, Total interest= 100 + 100 = 2, 750, i.e.,
4x + 6y = 2, 75, 000 (1.5)
12 1. Sets and functions

From (1), y = 50, 000 − x. Putting this value of y in(2), we get

4x + 6(50, 000 − y) = 2, 75, 000
i.e.
4x − 6y + 300, 000 = 2, 75, 000
−2x = −25, 000, x = 12, 500
Hence, y = 50, 000 − 12, 500 = 37, 500/ = . Let us just observe that we had two
linear equations:
x + y = 50, 000, 4x + 6y = 2, 75, 000
and we found a common solution for both. Such problems fall under the heading
of ”Solutions of linear equations”,which you will study more in ’Linear Algebra’
lectures.

Example(2)Demand function: In an economy, there are several variables,

that influence the demand for a good result.The quality demanded can depend
upon it’s price,income of consumers, taxes levied on the goods,and so on.The
simplest model for the demand is as a function for it’s price,written as Q = f (P ).
A very common situation is when f (P ) is a linear function.One normally express
P as a function of Q, say
P = aQ + b
where a, b are constants. In a normal situation, demand falls as price increases.
This means that a < 0, with graph

figure 10

Note that if P = b, then there is no demand. In case Q is expressed as a

function of P , i.e.
P −b
Q = g(P ) = , for a ± 0
a
Such a relation is called supply equation, or simply function.Normally one
is interested in the interplay between supply and demand. Note that both the
demand function and the supply functions are linear functions. One says that
the market is in equilibrium, when these two equations have a common
1.3. Operations of functions 13

solution,for that case quality demanded is equal to the quality supplied.Normally

the demand function is written as
P = a1 Qd + b1 , (a1 < 0)
and the supply function is written as
P = a2 Qs + b2 , (a2 > 0).
A common solution means Qd = Qs . Geometrically, it is the point of intersection
of the two lines.

figure 11

Example(3)Cost functions: Producing a product incurs cost which can de-

pend upon capital invested,and so on. The total cost of producing a goodwill
normally consists of the following:
• Fixed cost that does not vary with the level of output. this may include
cost of land and other initial infrastructure. This is normally denoted
as F C.
• Variable cost ,cost that varies with the level of output. For example
more raw material may be needed to increase output. This is normally
denoted by V C(Q), variable cost permit output, and depends upon Q,
the quantity produced.
Thus, total cost of producing Q units of a product is the function:
T C = T C(Q) = F C + V C(Q) × Q
The average cost of producing the product is given by the function
T C(Q) F C + V C(Q) × Q
AC(Q) = =
Q Q
In case VC(Q)is constant,say a, and F C = b, one calls the cost function as a
linear cost function and is given by
T C(Q) = b + aQ, where F C = B.
14 1. Sets and functions

figure 12

Example(4)Revenue function and the profit function: A firm receives

revenues when it sells its product(output). The total revenue function is defined
to be T R(Q) = P.R, where Q is the quantity produced and P is the unit price
of the good.
Note that in general, P itself may be a function of Q. In case, it is a constant
function, we say the firm is perfectly competitive and we have T R(Q) = P0 Q,
where P0 is the price of each unit of output. Note that in this case, it is a linear
function.

figure 13

The profit of the firm is the function given by

Y
(Q) = T R(Q) − T C(Q)

1.3.2 Example (Budget lines):

A small company has total budget of Rs.50, 000/= and it wants to manufacture
two products: product A and B.If product A costs Rs.200/= and product B
costs Rs.500/=, write the equations that will give their production(how many
1.3. Operations of functions 15

units of each type they can produce?) For this, let the company produce x units
of product A and y units of product B. Then
200x + 500y = 50, 000,
i.e.
2x + 5y = 500,
which is a linear equation with slope m = − 25 , y-intercepts 100 and x-intercepts
250.

figure 14

Suppose there is a fall of budget by 20%, how does the budget line changes?
For the new budget line, the equation is
20
200x + 500y = 50, 000 − 50, 000 × = 40, 000.
100
i.e., 2x + 5y = 400.
The slope of the new budget line is same. The y-intercept is 80, and the x-
intercept is 200.

figure 15
16 1. Sets and functions

Thus the budget lines are parallel to each other as long as the costs of inputs
do not change. That is why these are also called iso cost lines. Next suppose,
the budget remains the same, but the cost of producing A doubles.Then the new
budget line is given by
200(2x) + 500y = 50, 000, i.e.,4x + 5y = 500.
The slope of the new budget line is m = − 54 , the y intercept is 100, and x inter-
cept is 125.

figure 16

Can you guess what will happen to the original budget line if the cost of
producing each unit of B increasing by Rs.100? The new budget line would be
200x + (500 + 100)y = 50, 000, i.e., 2x + 6y = 500,
1 500
with slope m = − , y-intercepts at and x-intercepts at 250.
3 6

figure 17

1.3.3. Example (Tax,Revenue models):

Consider a welfare economy where every worker gets a subsidy of Rs.300/ = per
year from the government and his income (from other sources) is taxed at the
1.3. Operations of functions 17

rate of 30%. Then his take home earnings depends upon how much he earns
from other sources. Suppose he earns x amount per year from other sources.
Then his take home earnings per year is given by
y = 300 + (x − 0.3x) = 300 + 0.7x.

figure 18

x 0 100 500 1000

y 300 370 650 1000
This is a linear model. Let us consider a modification of the above tax scheme.
The government expect every worker to take home at least Rs.12, 000/ = per
year. Rs.12, 000/ = is taxed at the rate of 5% and for all income below Rs.12, 000,a
subsidy of 5% is given for the income falling short.The equations for his take
home earnings is given by

x − 0.05(x − 12, 000) if x ≥ 12, 000,
y=
x + 0.05(12, 000 − x) if x < 12, 000.
i.e., y = 0.95x + 600.
Thus, compared to earlier model, if the worker decides not to work at all, he
will be better off in this model. In the earlier model, he started taking home
whatever he earned when x = 1, 000, which in the second, for x = 1, 000, he take
home 1, 000 + 0.05 × 11, 000 = 1, 550/ =. Consider the change if the subsidy
rate is changed, say to 0.5% for income below 12, 000/ =:

x − 0.05(x − 12, 000) if x ≥ 12, 000,
y=
x + 0.05(12, 000 − x) if x < 12, 000.

0.95x + 600 if x ≥ 12, 000,
=
0.5x + 6, 000 if x < 12, 000.
Now the graph is piecewise linear. In this, only the workers who earn less
than Rs.12, 000/ = are benefited.

Exercise 3:Linear functions

18 1. Sets and functions

figure 19

figure 20

(3.1) Sketch the following linear functions:

(i) y = 12 − 3x.
(ii) y = −3x.
(iii) y = −3(x + 1).
(iv) y = 2x + 3.
(v) y = 2x + 5.
(vii) y = 2(x + 1).
(3.2) If the graph of the linear function y = mx + c passes through the points
(x1 , y1 ) and (x2 , y2 ), show that y = mx + c can be written as
 
y2 − y1
y − y1 (x − x1 ).
x2 − x1
(3.3) Express the following linear function in the slop-intercept form:
(i) 2x + 3y + 5 = 0.
(ii) x − y − 1 = 0.
(3.4) Find the slop intercept for the following linear functions:
1.3. Operations of functions 19

(i) 2y − 5x + 10 = 0.
(ii) y = 2.
(iii) x = −1.
(iv) y = x.
(3.5) Describe the following relationships mathematically:
(i) The relation between weekly earnings and hours worked if the wage rate is
Rs.20/ = per hour.
(ii) The relation between weekly take hour earnings with a tax rate of 10% for
earnings above Rs.2000/ = per week
(iii) The relation between weekly take hours earning with a tax rate of 10%
earnings above Rs.2000/ = per week and with a subsidy of 10% for earning
below Rs.2000/ = per week.
(iv) The relation between the weekly take hours pay and the member of hours
worked in a week if (i) and (ii) above hold.
(3.6) In an income-tax system with a tax rate of 30% and a subsidy of Rs.12000/ =
, write the functional relation for the take home earning of an individual. Find
the level of income above which an earner will be worse of than if there was
no taxes or subsidy.
(3.7) The demand of a product is a function of its price. To test the market,
the product is distributed free and only 200 pieces of the product were con-
sumed. If the product is priced at Rs.10/ = then only 100 pieces were sold.
If the demand and price is related by a linear function, find the price demand
relation.
(3.8) For each of the following supply (Q) and demand functions:
(i) Q = 64 − 4P, (ii) Q = −10 + 2P (iii) P =??,
analyze the following:
(i) The increase in demand when price changes by one unit.
(ii) The price (if any) at which demand is nil.
(3.9) If for a commodity, the supply-demand function is linear and
(i) P = 20 for Q = 20, (ii) P = 50 for Q = 80,
find the relation between Q and P . What effect does P have on Q?
(3.10) For each of the the total cost function given below:
(i)]TC = 5Q, (ii)TC = 10Q + 5,
find the
(i) Fixed cost.
(ii) The cost of producing an additional unit of the good.
(3.11) The variable cost of a product increases by Rs.1.50 for each unit produced,
while the fixed cost is Rs.55/ = .
(i) Write down the total cost function and draw its graph.
(ii) Determine the cost when 8 units are produced.
(3.12) It is known that the demand for a product is 80 units when its price is
Rs.5/= and it is 45 units when its price is Rs.12/=. If the demand function
is linear,
(i) Find the demand function.
(ii) Find the change in demand as the price increases by Rs.3/=
20 1. Sets and functions

(iii) Find the change is demand as the price is Rs.11/= each.

(3.13) A supplier supplies 50 units of a product when the price is Rs.6/ = each
and 90 units when the price per unit is Rs.11/ = per unit.
(i) Write the supply function as P = f (Q).
(ii) How many additional units are supplied for each successive Rs.1/ = in-
crease in price?
(iii) Find the price when 120 units are supplied
(iv) Find the price below which no unit is supplied.

1.4. Elasticity of linear functions

Recall,in general,the relation between price and demand is governed by the rule
that as price increases,the quantity demanded decreases and vise versa. How-
ever, this information is more qualitative,than quantitative.

1.4.1 Example: A manufacturer of a product,say a music player,will like to

know the effect of 5% increase in price on demand when the payment of the
music player for playing music is Rs.9, 000/ =. Will this effect be same when
the payment of the music player for playing music is say Rs.12, 000. Let us be
more specific. Suppose that the demand function is linear,
P = 2400 − 0.5Q.
Then 5% increase in price at Rs.9, 000 means
5
∆P = × 9, 000 = 450.
100
Since
∆P
= −0.5,
∆Q
we have
450
∆Q = − = −900.
0.5
i.e., there will be a decrease in demand by 900 units. Next the same %
increase at Rs.12, 000/ = will give
5
∆P = × 12, 000 = 600.
100
Thus,
600
∆Q = − = −1, 200.
0.5
i.e. there will be a decrease in demand by 1, 200 units. Thus, one has to analyze
at each price, the corresponding change in Q. Instead, one would like to have a
number (numerical value) associated with the demand function that will online
the responsiveness of the quantity demanded for the same price change at vari-
ous levels. To answer this, we saw above that slope of the linear function is not
suitable. Another reason for not selecting slope as a measure of responsiveness
is that it is dependant on units.

1.4.2 Example: Consider the price and demand function of cement given by
P = 500 − 50Q. (1.6)
1.4. Elasticity of linear functions 21

where Q is measured in metric tons and P refers to the price in Rupees per metric
ton. Suppose we change the units: we measure Q in Kilograms(1ton = 1, 000Kg.)
and P in Rs. per kilogram, then the above equation becomes
P = 0.5 − 0.00005Q. (1.7)
Note that in (3),

P 100 (per ton) 200 (per ton)

Q 8 (ton) 6 (ton)
which is same as
P 0.1 (per Kg.) 0.2 (per Kg.)
Q 8, 000 (Kg.) 6, 000 (Kg.)
and later two values lie on (4). Equations (3) and (4) represent the same price-
demand function in different units. They have different slopes. Thus, slope
cannot betaken as a measure of responsiveness to change.

1.4.3 Example: Let us observe that it is more natural to expect that the
percentage change in demand will be proportional to percentage change in price
(and both do not depend on units). Thus,
   
∆Q ∆P
× 100 ∝ × 100
Q P
i.e.
∆Q ∆P
=c ,
Q P
where c is the constant of proportionality. Thus,
 
∆Q   
Q ∆Q P
c = ∆P =
.
P
∆P Q
This is called the point of elasticity of demand at P and is denoted by ǫd .
Since for linear
P = a − bQ,
∆P
= −b
∆Q
we have,   
1 P
ǫd = −
b Q
Thus, ǫd is a scalar that indicates ratio of the % increase (decrease) in price at
P to that of % decrease(increase) in demand.

1.4.4 Note:
Since b, P, Q are all > 0, −∞ < ǫd < 0. the following cases arise:
(i) −∞ < ǫd < −1
As ǫd moves away from −1, demand becomes more and more responsive
to price.For example,a 5% increase in price for ǫd = 2 will give 10%
decrease in demand. Thus the region where −∞ < ǫd < −1, one says
demand is elastic.
22 1. Sets and functions

(ii) −1 < ǫd < 0

In this situation,the % change in demand is less than % change in
price.One saysdemand is inelastic.
(iii) ǫd = −1
One says demand is unit elastic, i.e. percentage change in demand is
equal to percentage change in price.

figure 21

1.4.5 Example:
Let the demand function for a commodity be given by
P = 2400 − 0.5q
1800 − 2400 600
• At P = 1, 800, Q = = = 1, 200. Thus elasticity of de-
−0.5 0.5
mand at P = 1800 is
 
1 1800
ǫd (1800) = − = −3
0.05 1200
which means that the demand is elastic. Thus at the price P = 1800, if there is
say 1% increase(decrease), then for Q there will be −3(1%) = −3% increase(decrease)
i.e., 3% decrease(increase)in demand.

1.4.6 Compare with the exact change:

1, 800
(i) At P1 = 1, 800, Q1 = 1, 200, 1% increase in P at P = 1, 800 is = 18.
100
Thus, new P is 1, 800 + 18 = 1, 818. For this P2 = 1818,
1818 = 2400 − 0.5(Q2 ),
gives
1818 − 2400 5820
Q2 = = .
−0.5 5
The %change in Q is
5820
Q2 − Q1 − 1200 180 1
× 100 = 5 × 100 = − × = −3%
Q1 1200 5 12
(ii) For P = 100,
100 − 2400 2300 × 10
Q= = = 4600.
−0.5 5
1.4. Elasticity of linear functions 23

Thus,
 
1 100
ǫd (100) = −
0.5 4600
1
= − = −0.04
23
Thus, even a decrease in price will not boost demand significantly.

1.4.7 Arc elasticity of demand: One can also analyze elasticity of demand
over a price interval. Suppose we want to measure elasticity of demand over the
price interval [P1 , P2 ]. This can be defined as
  !
∆Q P1 + P2
[P1 , P2 ] =
∆P Q1 + Q22
  
−1 P1 + P2
=
b Q1 + Q2
1.4.8 Price elasticity of supply:
This can be defined similarly. A supply function is normally given by
P = a + dQ,
where d > 0 (Q is quantity supplied).
1.4.9 Definition: If
• | Point elasticity of demand | > 1, one says demand is elastic.
• | Point elasticity of demand | = 1, one says demand is unit elastic.
• | Point elasticity of demand| < 1, one says demand is inelastic.
because demand is less responsive to the change.

1.4.10 Note: For

P = a − bQ
 
1 P
ǫd = −
b Q
 
1 P
= −
b P −a
(−b)
 
1 (−b)P P
= − = .
b P −a P −a

Thus,  
P
|ǫd | = +1 ⇐⇒ − = 1.
P −a
⇐⇒ 2P = a
a
⇐⇒ P = .
2
24 1. Sets and functions

1.4.11 Coefficient of elasticity of demand in terms of price:

For the price-demand function,
P = a − bQ, b > 0,
  
1 P
ǫd = − .
b Q
  !
1 P
= − P −a
b −b
P
= .
P −a
This has following consequences:
P
(i) ǫd = −1 iff P −a = −1 i.e., P = −P + a, i.e., P = a/2.
P
(ii) −∞ < ǫd = −1 iff P −a = −1. i.e., P < a/2.
P
(iii) −1 < ǫd < 0 iff P −a > −1. i.e., P > a/2.
1.4.12 Note:
P
ǫd = implies that as P nears a,demand becomes more sensitive. For ex-
P −a
ample, consider
P = 2400 − 0.5Q.
For
100
P = 2300, Q = = 200.
0.5
And
  
1 2300
ǫd (2300) = −
0.5 200
2300
= − = −23
100
Thus, at P = 2300, 1% increases in price will trigger 23% decrease in demand.

figure 22

Exercise 4: Elasticity of linear functions

 1.4. Elasticity of linear functions 25

(4.1) When the price of a good is Rs.20/ =, the price elasticity of demand is
−0.7. Calculate the percentage change is demand Q when
(i) The price P increases by 5%.
(ii) The price P decreases by 8%.
(4.2) Let Q, the demand of a certain product, be given by Q = 250 − 5P, where
P is the price of each unit of the product. Calculate the price elasticity of
demand for the prices P = 20, 25, 30. Describe the effect of the percentage
change of price on demand at these prices.
(4.3) Let the demand function be given by

Q = 1800 − P.

Find the price elasticity of demand when Q = 100, 500, 900.

(4.4) The demand function for a product is given by P = 90 − 0.05 Q. Calculate
the units of the product demanded when ǫd = −1, ǫd = 0.
(4.5) Calculate the supply function P = 20 + 0.5 Q.
(i) Calculate the price elasticity of supply when price is Rs.40/ = .
(ii) Calculate the interval price elasticity of supply where price increases from
Rs.40/ = to Rs.60/ = .
(iii) Calculate the percentage change in quantity supplied in response to a price
increases of 10% for P = Rs.40/ = .
(4.6) Solve the following quadratic equations:
(i) x2 − 4x + 3 = 0.
(ii) 2x2 − 19x10 = 0.
(4.7) For the following find the vertex, axis of symmetry and sketch them:
(i) y = 2x2
(ii) y = 2x2 + 4
(iii) y = 2(x + 4)2
(4.8) Let y = f (x) denote the demand (y) verses price (x) relation. Find the
values (if any) when demand is zero, for the following:
(i) y = x2 − 4
(ii) y = x2 + 4x
(iii) y = x2 + 4
(iv) y = x2 + 2x − 3.
(4.9) Let the fixed cost of producing a product be Rs.6/= and the variable cost
be Rs.2/= per unit. If the demand function is P = 15 − 3Q, Write the profit
function, and find the number of units need to be produced for break-even.
Also find the number of units needed to have maximum profit.
(4.10) Show that the following sequences are convergent. Also find their limit:
1 −1 n n (−1)n
(i) {3 + }n≥1 (ii) {( ) }n≥1 (iii) { } n≥1 (iv) 3 + { }n≥1
n 2n (n + 1)2 2n
n
2
(v) { }n≥1 .
(1 + 3n
(4.11) Show that the following sequences are divergent:
(−1)n 3n
(i) {n2 }n≥1 (ii) {(−1)n n2 }n≥1 (iii) {2n }n≥1 (iv) { }n≥1 .
2n
26 1. Sets and functions

(4.12) Give examples of sequences {an }n≥1 and {bn }n≥1 such that
(i) The sequence {an + bn }n≥1 is convergent but neither {an }n≥1 nor {bn }n≥1
is convergent.
(ii) The sequence {an }n≥1 is bounded but not convergent.

1.5. Non linear functions

Though many of the demand,supply,cost,taxation,models are linear. There are
other real life situations which cannot be represented by linear models.

1.5.1 Example:
Let the unit price of a commodity be Rs. 3.50/ =.Then the total revenue of the
firm selling this product is a function of the units sold:
Total revenue := T R = P × Q = 3.5Q
where Q is the number of units sold. This is a linear relation. Here the unit
price does not change. This is called perfectly competitive policy.Suppose
the firm decides to link the unit price to the demand function,say,
P := −2Q + 50,
i.e., price decreases as demand increases. This is called monopolist policy. In
this case, the total revenue as a function of demand,i.e., Q is given by
TR = P × Q
= (−2Q + 50) Q.
= −2Q2 + 50Q.
which is no longer linear.

1.5.2 Definition: A function

f (x) = ax2 + bx + c, x ∈ X ⊆ R, a 6= 0.
is called a quadratic function.

1.5.3 Solutions of a quadratic:

Suppose the profit function of firm is given by
Π(Q) = aQ2 + bQ + c,
where Q is the number of units sold. Then the value of Q such that Π(Q) = 0
will give the number of units the firm should sell to break even. Thus, it is
important to know the values of x for which
ax2 + bx + c = 0. (1.8)
Such values are called roots of the quadratic. For this, note that since a 6= 0,
solutions of (5) are same,as that of
bx c
x2 + + = 0,
a a
1.5. Non linear functions 27

i.e.    2  2
b b b c
x2 + 2 x+ = − ,
2a 2a 2a a
i.e.,
2
b2 − 4ac

b
x+ = (1.9)
2a 4a2
Hence, if b2 − 4ac ≥ 0, then
√
b b2 − 4ac
x+ =± ,
2a 2a
i.e., √
b2 − 4ac
x = −b ± .
2a
These are the values of x for which (5) will be satisfied if b2 − 4ac ≥ 0. In case,
b2 − 4ac ≤ 0, equation (5) is not satisfied by any x4 since there is no number
whose square is negative (see equation(6)). In the language of mathematics, for
the quadratic, ax2 + bx + c, the quantity b2 − 4ac is called the discriminant of
the quadratic. Thus, we have the following cases:
(i) b2 − 4ac < 0, quadratic has no roots.
b
(ii) b2 − 4ac = 0, quadratic has two equal roots: x = − 2a
√
2 b2 − 4ac
(iii) b − 4ac > 0,quadratic has two distinct roots: x1 = −b + ,
√ 2a
2
b − 4ac
x2 = −b −
2a
1.5.4 Graph of a quadratic:
Let
f (x) = ax2 + bx + c, a 6= 0.
We observe the following:
(i) The graph will cut x-axis at points x1 , x2 , the roots of the quadratic
equation: ax2 + bx + c = 0 Thus the graph passes through the points
(x1 , 0), (x2 , 0).
(ii) The graph will cut y-axis at y = f (0) = c. Thus the graph passes
through the points (0, c), on y-axis.
(iii) Let us look at the specific case when b = c = 0. Then f (x) = ax2 . Note
in this case, x1 = x2 = 0. Further, if a > 0, then,f (x) = ax2 > 0 =
f (0)∀x. Thus, f (x) has the smallest value 0 at x = 0, and hence the
graph always stays above the x-axis. As x > 0 increases,f (x) increases.
Further,
f (x) = ax2 < ax for 0 < x < 1.
and
f (x) = ax2 > ax for x > 1.
Thus, the graph of f is given as shown in next fig.
For a < 0, is just the reflection of the graph of (−a) x2 about
the x-axis.In either case, the point (0, 0) is called the vertex of the
quadratic.
28 1. Sets and functions

figure 23

figure 24

(iv) For a general quadratic,

2
f (x) = a (x − h) + bx + c
where
b = −2ah, c = ah2 + k
i.e.
b b2 4ac − b2
h=− and k = c − ah2 = c − =
2a 4a 4a
One can show that for a quadratic function
y = f (x) = ax2 + bx + c.
= a(x − h)2 + k,
b 4ac − b2
for h = − and k = Clearly if a > 0, thenf (x) will keep increasing,
2a 4a
for x > h, indefinitely as x increases. Hence
Limx→+∞ ax2 + bx + c = +∞, for a > 0.

By symmetry about the line x = h,

Limx→−∞ f (x) = +∞.
Similarly, for a < 0,
Limx→+∞ f (x) = −∞ = Limx→−∞ f (x).
1.5. Non linear functions 29

The point (h, k) lies on the graph and is the point when graph ’turns around’.
Further, it is symmetric with respect to the line x = h. The graph is given by

figure 25

figure 26

Thus, f (x) has ’maximum/minimum’ value at (h, k) depending upon a > 0

or a < 0.

1.5.5 Examples:
For producing a particular product, there is a fixed cost of Rs.18/ =, and a
variable cost of Rs.4/ = per unit. The demand function for the product is given
by
P = −2Q + 24.
Thus, profit function is given by
Π(Q) = (−2Q + 24)Q − 18 − 4 × Q
= −2Q2 + 20Q − 18 (1.10)
The value of Q for which the firm will break even is Π(Q) = 0, i.e.,
−2Q2 + 20Q − 18 = 0
i.e.,
Q2 − 10Q + 9 = 0
i.e.,
√
10 ± 100 − 36
Q = +
√2
10 ± 64
= +
2
10 ± 8
= + = 1, 9.
2
30 1. Sets and functions

Since Π(Q) is a quadratic with a < 0, the graph is downward parabola with
vertex at (from (6).)
b 20
h = − =− =5
2a 2(−2)
4ac − b2 4 × (−2) × (−18) − (20)2
k = =
4a −8
144 − 400 256
= = = 32.
−8 8
Thus the graph is

figure 27

The firm makes maximum profit of 32 by producing 5 units.

Exercise 5: Quadratic equation (5.1) (5.2) (5.3) (5.4) (5.5) (5.6) Solve
the following quadratic equations:
(i) x2 − 4x + 3 = 0
(ii) 2x2 − 19 − 10 = 0
(5.7) For the following quadratic functions find the vertex, axis of symmetry,
the y-intercept and the x-intercept? Also sketch them.
(i)
(ii)
(5.8) If the fixed cost of producing a product is 6 and the variable cost per
unit is 2 with demand function P = 15 − 3Q. Write the profit function and find
the break-even units the firm should produce? Also find the number of units
that will give maximum profit to the firm?

1.6. Polynomial functions

1.6.1 Definition:
A function f : x ⊆ R → R,defined by
f (x) = a + 0 + a1 x + a2 x2 + ...an xn ,
where a0 , a1 , ...an are real numbers called polynomial function. The highest
n such that an 6= 0 is called the degree of this polynomial function. The value
of x such that f (x) = 0, is called a root of the polynomial.
1.6. Polynomial functions 31

1.6.2 Example:
For n = 3,
f (x) = a0 + a1 x + a2 x2 = a3 x3
is called the cubic function. The special case,
f (x) = x3 ,
has only one root x − 0. Note, f (−x) = −f (x). Thus graph of f is reflected
downwards:

figure 28

The graph of the general cubic can be drawn using techniques of calculus as
we shall see later.

1.6.3 Note:
A polynomial function can be thought of as a function obtained from the con-
stant functions and the function g(x) = x, by algebraic operations on functions
as described before.

1.6.4 Example:
A firm’s fixed cost of producing a good is Rs.6/ = and the variable cost is given
by 3 − 5Q2 , write the total cost and the average cost functions. Find the total
profit function if demand function is P = 6 − q. Find the break even points for
the firm ?

Solution:
FC = 6.
VC = 3 − 5Q2 .
TC = F C + V C × Q.
= 6 + (3 − 5Q2 )Q = 6 + 3Q − 5Q3 .
TC 6
AC = = + 3 − 5Q.
Q Q
TR = P × Q = (6 − Q)Q = 6Q − Q2 .
Π(R) = TR − TC
= 6 + 3Q − 5Q2 − 6Q + Q2 .
= 6 − 3Q − 4Q2 .
32 1. Sets and functions

1.6.5 Example:
If the demand function is
P = 24 − 2Q
and
F C = 18, V C(Q) = 4Q
find an expression for the profit function in terms of Q. Find the values of Q
when the firm breaks even and when it’s profit is maximum?
Solution:
The total cost function is
TC = F C + V C(Q).
= 18 + 4Q.
Total revenue function is
T R = P × Q = 24Q − 2Q2 .
Hence, the profit function is
Π(Q) = TR − TC
= 24Q − 2Q2 − 18 − 4Q.
= −2Q2 + 20Q − 18.
Note that, the graph of Π(Q) will be convex (cup down). The firm will break
even when Π(Q) = 0. That is
−2Q2 + 20Q − 18 = 0.
i.e.,Q2 − 10Q + 9 = 0,
i.e.,
√
10 ±
100 − 36 10 ± 8
Q= = = 9, 1.
2 2
The firm breaks even for Q = 1, makes profit for 1 < Q < 9 and starts losing
for Q > 9. The maximum of Π(Q) will be given by:
Π(Q) = −2[Q2 − 10Q + 9.]
= −2[(Q − 5)2 − 16
= −2(Q − 5)2 + 32.
Thus the maximum profit is Π(Q) = 32 for Q = 5

Exercise 6:Quadratic Equation Given the supply and demand functions:

P = Q2S + 12QS + 32.
P = −Q2d − 4Qd + 200.
find the equilibrium price and quantity ?

Solution: For equilibrium, if Qd = QS = Q. Then, at this value of Q,

P = Q2 + 12Q + 32.
P = −Q2 − 4Q + 200.
1.6. Polynomial functions 33

Thus,
Q2 + 12Q + 32 = −Q2 − 4Q + 200.
i.e., 2Q2 + 16Q − 168 = 0, i.e., Q2 + 8Q − 84 = 0.
This gives √
8± 64 + 336 8 ± 20
Q=− =−
2 2
Hence,
Q = 6, −14.
Since demand cannot be negative, Q = 6 and hence P = 62 + 12 × 6 + 32 = 140.
 Chapter 2

Sequences and series

2.1. Introduction
In this section, we look at the mathematical concept of sequences which finds
applications in finance and economics.

2.1.1 Definition:
A sequence of elements of a set is an ordered collection of that set. If the first
element is a1 , second element a2 and in general, the nth element of the collection
is an , we write this sequence as

a1 , a2 , ..., an , ..

or just an n ≥ 1.

2.1.2 Example:

(i) The sequence {an }n ≥ 1, where an = n∀n ∈ N is just the numbers

1, 2, 3, ....n, ...

Similarly, {an }n ≥ 1 with Gn = 2n + 1, is

3, 5, 7, ...

.
(ii) If for a sequence {an }n ≥ 1, an − an − 1 = d, for every n ≥ 2, where
d is a constant, the sequence is called an arithmetic sequence.or an
arithmetic progression. The constant d is called the common dif-
ference of the arithmetic sequence. The nth term of such a sequence

35
36 2. Sequences and series

is given by

an = an−1 + d
= an−2 + 2d
= ....
= a1 + (n − 1)d.

an
(iii) For a sequence = r for every n ≥ 1.
an−1

where r is some constant, then the sequence {an }n≥1 is called a Geometric
sequence and r is called the common ratio of the geometric sequence.

2.1.3 Examples:
A manufacturer produces 1200 chairs per week. After week 1, he decides to
increase the production for which he has two choices:

• Increase the output by 80 chairs. more per week.

• Increase the output by 5% per week.

We want to find the output in each choice over first 10 weeks. Also find the
work (for each scheme), when the production exceeds 8000 chairs.
Solution:
It has two schemes:
Scheme 1:

a1 = 1200.
a2 = 1200 + 80.
a3 = a2 + 80 = a1 + 2 × 80, and so on.

Thus, a1 , a2 , ... is an arithmetic sequence with common difference 80. Hence

output in 10th week is

a1 0 = a1 + (n − 1)d
= 1200 + (10 − 1)80
= 1200 + 9 × 80
= 1920.

The output will exceed 8000 chairs. When Tn ≥ 8000, i.e.,

a1 + (n − 1)d ≥ 8000.

i.e., 1200 + (n − 1)80 ≥ 8000. i.e., (n − 1) ≥ 8000 − 1200 = 6800.

6800
Thus, n − 1 ≥ = 85 i.e., n ≥ 86.
80
th
Thus, in 86 week, production will be 8000 chairs.
2.1. Introduction 37

Scheme 2:
a1 = 1200
 
5 5
a2 = 1200 + × 1200 = 1200 1 +
100 100
 
5 5 5
a3 = a2 + × 1200 = 1200 1 + + × 1200
100 100 100
... = ...
 n−1
5
an = 1200 1 + ,n ≥ 2
100

105
Thus the output from a geometric sequence with common ratio r = . Hence
100
output after 10 weeks will be
T1 0 = a1 r n − 1
 10−1
105
= 1200 ×
100
= 1200 × (1.05)9 .

2.1.4 Example (simple interest):

Amount P0 invested at a rate of r% per year with simple interest means that
r
every year, the investor will set P × .Thus, if P1 , P2 , ... denote the principal
100
amount along with interest earned till year 1, 2, ... so on, then
R  r 
P1 = P0 + P0 × = P0 1 + ,
100 100
 
R r 2r
P1 = P0 + P0 × + P0 × = P0 1 + ,
100 100 100
and so on. Thus, {Pn }n ≥ 1 an arithmetic sequence with common difference
r 
P0 .
100

2.1.5 Example (Compound interest):

In compound interest scenario, not only the amount invested earns interest, the
principal plus interest earned (if any) also earns interest. For example, if P0
is the amount invested at the rate of r% per annum, then after one year the
amount grows to
r  r 
P1 = P0 + P0 × = P0 1 + .
100 100
At the end of the second year, the principal grows to
r
P2 = P1 + P1 ×
100
 r 
= P1 1 +
 100 
r 2
= P0 1 + ,
100
38 2. Sequences and series

and so on. Thus, if Pn denotes the total amount to which P0 has grown after n
years, then  r n
Pn = P0 1 + , n ≥ 1.
100  r 
Thus {Pn }n ≥ 1 is a geometric series with common ratio 1 + .
100

Question about sequences:

Given a sequence {an }n ≥ 1 ,one would like to know what happens to an for n
very large ?
 2.1. Introduction 39

2.1.6 Examples:
(i) Consider the sequence {n}n ≥ 1. As n becomes large an = n becomes large
and can be made as large as we want. This is typical example of a sequence
which ”diverges to +∞”.

(ii) Consider the sequence {n}n ≥ 1. In this case, as n becomes large, an = n1

becomes small. In fact, by choosing n larger enough we can make an = n1 as
small as we want. In a sense ”an is approaching a = 0. In fact, given any small
number ǫ > 0, we can find n0 such that
1
|an − 0| = < ǫ ∀ ≥ n0 ,
n

2.1.7 Definition:
Let {an }n ≥ 1 be a sequence. We say {an }n ≥ 1 is convergent to a number L,if
given ǫ > 0, ∃ some N, such that
|an − L| < ǫ,
for every n ≥ N. In this case, we write
lim → ∞ an = L.
n

A sequence {an }n ≥ 1 which is not convergent is said to be divergent.

2.1.8 Examples:
1
(i) { }n ≥ 1 is convergent to 0.
n

(ii) {(−1)n }n ≥ 1 is not convergent as it alternatively fluctuates between −1 and

1.

1
(iii) { } ≥ 1 is convergent to 0 as it becomes smaller and smaller as n be-
n+3
comes larger.

(iv) {n2 }n ≥ 1 is not convergent as n2 becomes large.

2.1.9 Theorem: Let { n1 }n ≥ 1 be sequences such that

lim an = Land lim bn = M.
n→∞ n→∞

Then, the following hold:

(i) The sequence {an ± bn }n ≥ 1 is convergent with
lim (an ± bn ) = L ± M.
n→∞

(ii) The sequence {(an bn )}n ≥ 1 is convergent with

lim (an bn ) = LM.
n→∞
40 2. Sequences and series

an
(iii) If M 6= 0, then the sequence is well defined for some n0 and
bn n≥n0
L
lim (an bn ) =
n→∞ M
(iv) If {cn }n≥1 is a sequence such that
an ≤ cn ≤ bn ∀{n ≥ n0 },
for some n0 and L = M , then
lim cn = L.
n→∞

2.1.10 Some important sequences: For α ∈ R, the sequence

(i) {αn }n≥1 is convergent if 0 < |α| < 1.
(ii) {αn }n≥1 is divergent if |α| > 1.

2.1.11 Examples:
 
1+n
(i) The sequence is convergent to 1 because
2+n n≥1

1
1+n +1 1
= n → =1
2+n 2 1
+1
n
 
n
(ii) The sequence is convergent to 1 because
n + 1 n≥1
n n+1−1 1
= =1− → 1.
n+1 n+1 n+1
(iii) Consider the sequence {an }n≥1 , where ∀n,
an = a + ar + ... + arn−1 ,
a,r are fixed. Then
a(1 − rn )
an = .
1−r
Thus,
a
lim{n → ∞}an = if r < 1.
1−r
a
The sequence is divergent for 1/2 ≥ 1. The limit 1−r is called the sum
of the geometric series: a, ar, ar2 , ....
(iv) If a sequence is monotonically increasing and is bounded above, then
it is convergent.
(v) If a sequence is monotonically decreasing and is bounded below, then
it is convergent.
(vi) The sequence {an }n≥1 , where
2.1. Introduction 41

 n
1
an = 1 + , n≥1
n
is convergent. It’s limit is denoted by ′ e′ , called euler’s number. In fact it can
be shown as ∀x ∈ R, the limit
 x n
lim{n → ∞} 1 +
n
exists, and is denoted by ex . This gives us a function R −→ R, x 7→ ex , ....
????
Exercise 7: Sequences)
(1) Write first four terms of the sequences:
(i) {(−1)n }n≥1 .

(ii) { n1 }n≥1 .

(iii) {1 − n1 }n≥1 .

(iv) { 21n }n≥1 .

(2) Show that for an arithmetic sequence {an }n≥1 with common difference
d, Sn , the sum of the first n terms is given by
n
Sn = [2a1 + (n − 1)d]
2
.
(3) Show that for a geometric sequence {an }n≥1 with common ratio r, the
sum of the first n-terms is given by
a1 (rn − 1) a1 (1 − rn )
Sn = = .
r−1 1−r
Term of a geometric sequence is given by
an = an−1 r.
= an−2 r2 .
= a1 rn−1 .
(4) Show that the following sequences are convergent. Also compute their
limit: 
1
(i) 3 + .
n n≥1
(−1)n
 
(ii) 3 + .
2n n≥1
 
1
(iii) (− )n .
2 n≥1
 
n
(iv) .
(n + 1)2 n≥1
 n 
2
(v) .
1 + 3n n≥1

(5) Show that the following sequences are divergent:

42 2. Sequences and series

n2

(i) n≥1
.

(−1)n n2

(ii) n≥1
.

(iii) {2n }n≥1 .

(−1)n 3n
 
(iv) .
2n n≥1

(6) Give examples of sequences {an }n≥1 ,{bn }n≥1 such that:
(i) {an + bn }n≥1 is convergent but neither {an }n≥1 nor {bn }n≥1 is
convergent.

(ii) {an }n≥1 is bounded but not convergent.

(iii) Neither {an }n≥1 nor {bn }n≥1 is convergent but {an + bn }n≥1 is
convergent.

2.1.12 Some special functions:

(1) Power function: Recall that given any real number a ∈ R, and any
positive integer n, we can define an , the product of a with itself taken
n times. Note that for n, m ∈ N.
(i) a0 := 1
(ii) (an )(am ) = an+m = (am )(an ).

Next suppose n is a negative integer. Then we can define

1
an :=
, if a 6= b
a−n
Then for any two integers n, m
(an )(am ) = an+m
To see this, for example consider the case when n > 0, m < 0 and
n > −m.Then,
an
an+m = an−(−m) = = an am .
a−m
Other cases can be proved similarly. Next, suppose we want to define
ar , where both p, q are positive integers. Then we would like to define
 p
ar = ap/q = a1/q

provided we can give meaning to a1/q for q > 0. Clearly, a1/q should
be a number such that
 q
a1/q = 1.

This is a mathematical fact: Given a
< 0, q ∈ N, there is a unique

q
number,denoted by a1/q such that a1/q = 1.
2.1. Introduction 43

(2) Exponential function: Once again for rationals r1 , r2 , one can check
that
ar1 ar2 = ar1 +r2
Next, we would like to define ax for any x ∈ R. This can be done using
the notion of sequences in R.For x ∈ R,choose a sequence of rational
numbers {rn }n≥1 such that rn → x. Define

ax := limn→∞ (arn )

One can show that this is well defined,and has some nice properties as
stated next.
2.1.13 Definition: For every a > 0, a 6= 1, there exists a function f : R −→ R+ ,
denoted by f (x) := ax with the following properties:
(i) The domain of f (x) = ax is all real numbers. The range is the set of
all positive real numbers.
(ii) a(x+y) = ax ay and (ax )y = axy for all x, y ∈ R.
(iii) For a > 1, f (x) is increasing.
(iv) For 0 < a < 1, f (x) is decreasing.
(v) For a > 0, with a 6= 1, f (0) = 1.
(vi) For a > 1, limx→∞ f (x) = +∞, limx→∞ f (x) = 0.
(vii) For 0 < a < 1, limx→∞ f (x) = 0, limx→∞ f (x) = +∞.

x
Graphs of ax and a1 , and 0 < a < 1, are reflections of each other against y-
axis.

figure 29

The function ax is called the exponential function with base ′ a′ . There

is a special case of this function where a = e, the Eular’s number. This number
e is an irrational number between 2 and 3, and it can be defined in terms of limit
of sequences:
 n
1
e = limn→∞ 1 + .
n
We shall not go into details. In fact, one can show that
 x n
exp(x) := ex = limn→∞ 1 + , x ∈ R.
n
44 2. Sequences and series

2.2. Application of sequences

2.2.1 Example(Simple and compound interest:)
Simple interest is the fixed percentage r% of the principal P0 that is paid to an
investor each year. Thus, the amount of interest that an investor will get in n
years is
In = P0 × r × n.
Thus, the principal P0 will grow to an amount Pn in n years given by
Pn = P0 + Prn = P0 (1 + nr).
As a function of n, Pn is linear. On the other hand, for the compound interest at
the rate of {r%} per annum, the interest is calculated on the principal plus the
interest earned in the previous year. Thus, after one year, the principal grows
to
P1 = P0 + P0 × r = P0 (1 + r)
For the second year, the principal is P1 and hence the interest for the second
year
I2 = P1 r.
Thus, total capital P2 after 2 years will be
P2 = P1 + I2 = P1 + P1 r = P1 (1 + r) = P0 (1 + r)2 .
In general, if P0 is the initial capital, with r% the rate of annual interest, it will
grow into
Pt = P0 (1 + r)t (∗)

Now suppose, the interest is paid each six-monthly. Then, rate of interest
for each part will be 2r and time interval will be 2t units. Thus,in the above
equation, the capital under this new scheme in t years, will be
r
Pt = P0 (1 + )2t
2
In general,if the year is divided into m parts, then we have,
r
Pt = P0 (1 + )mt .
m
For m very large, it seems more appropriate to model the growth of P0 to Pt by
r
Pt = limm→∞ P0 (1 + )mt
m
r
= P0 [limm→∞ P0 (1 + )m ]t .
m
It can be shown that for every r
r
limm→∞ (1 + )m .
m
exists and is called the exponential of the number r, denoted by exp(r). Let
e := exp(1).
One can show that this is a number between 2 and 3, with approximate value.
e = 2.178....
2.2. Application of sequences 45

r 1
Further, intuitively (putting = ).
m n
r 1
limm→∞ (1 + )m = [limn→∞ (1 + )n ]r .
m n
This motivates one to write,
exp(r) = er .
In fact, the reason for this notation is that, it makes sense for any real number
r and behaves like exponent,as we shall see later. This motivates the following:
2.2.2 Note:
(i) For a > 1, the exponential function is called the growth curve. Sim-
ilarly, for a < 1, the exponential function is called the decay curve.
(ii) For a > 0, a 6= 1, the functions
f (x) = ax , g(x) = xa (x > 0)
have very similar properties. For example, both are strictly increasing
functions. However, ax grows much faster than xa for a > 1. For
example, for a = 2, x = 10, 100, 1000 we have

2x x2
10 2
2 = 1024 (10) = 100
2100 = 12676... (100)2 = 10, 000
21000 = 107150... (1000)2 = 10, 000, 00

Above claim can be proved more regionally using technique of

calculus.
(iii) The exponential function with base ′ e′ - the Euler’s number has special
significance, that we shall see later. It is an irrational number between
2 and 3.
(iv) As we saw earlier, exponential function is useful in modelling problems
involving growth/decay. For example, for an annual interest rate of r,
the capital resulting after t years, of compound interest is modelled as
P (t) = P0 ert ,
whereP0 is the initial investment. This is called continuous com-
pound interest.
Another situation is that of modelling total revenue of a firm. Suppose it
is expected to increase at 10% annually and the initial(present) total revenue is
T0 , then a continuous model of growth of revenue will be
T R = T0 e(10/100)t = T0 e0.1t .
In case, there is a decline, the model is
T R = T0 e−0.1t .

2.2.3 Example (1): Suppose Rs.100/ = is invested at an annual rate of interest

of 10%. Calculate the value of investment in 5 years if the interest is compounded
46 2. Sequences and series

(i) annually ?
(ii) quarterly ?
(iii) continuously ?
Solution:
(i) Since
Pn = P0 (1 + r)n ,
for n = 5,
P5 = 100(1 + 0.1)5
= 100 × (1.1)5 = Rs.161.05/ =
(ii) For quarterly,
r
P5 = P0 (1 + )5×4
4
 20
0.10
= 100 1 + = 100(1.025)20 = Rs.163.86/ =
4
(iii) For continuous,
Pt = P0 e0.1t
Then,
P5 = P0 × e.5 = 100 × e.5 = 100 × (2.718).5 = 164.863...

Example(2):
A credit card company charges interest at the rate of 2% per month. Calculate
the equivalent interest rate?
Solution:
Let the annual interest rate be r.Then for an outstanding balance of P0 , total
amount payable at annual rate will be
 r 
P = P0 1 + (1)
100
 12
2
For monthly interest, it will be P = P0 1 + . (2)
100
From (1) and (2)
 12
 r  2
P = P0 1 + = P0 1 +
100 100
Thus,
r
1+ = (1.02)12
100
ie.,
r
= (1.02)12 − 1.
100
Hence,
r = 100[(1.02)12 − 1] = 0.2682
so, the annual rate of interest is 26.82%.
2.2. Application of sequences 47

Example(3)Population growth:
Consider the population growth of the village given by the function
p(t) = 623e0.02t t > 0
Here, p(t) represent the population at time t. Here are some observations:
• At t = 0 (this is time when one started taking observations),
p(0) = 623e0 = 623.
• One can plot the graph of the function p(t) using techniques of calculus
and device algorithms to plot them on computers. Using the graphs,
one can find the value of p(t) for a given t. One can do this algebraically
also. For example, one would like to find t at which population will
be, say 2000. For this, we have to find t such that
2000 = p(t) = 623e0.02t ,
2000
ie., e0 .02t = .
623
To find t such that above equation is satisfied, is done with the help of logarith-
mic functions.

Example(4)Consumption function:
The consumption of a certain item depends upon an independent variable y. For
example,y could be the income of a household and C(y) is the consumption of
that income. Consider the situation
C(y) = 200(1 − e−0.4y ).
Let us recall that 2 < e < 3. Thus, f (y) = C −0.4y is an exponential function
with f (0) = 1 and limy → ∞ f (y) = 0. Thus,limy → ∞ C(y) = 200. The graph
of the consumption function is given by

figure 30

The above analysis says that the consumption increases as the income in-
creases. However it never goes beyond 200.
Example(5)production function:
The output Q of any production process depends upon many inputs: land,
capital, labour, raw material, and so on. Let us restrict to the case when Q
depends upon capital K and labour L. This is represented as
Q = Q(K, L).
48 2. Sequences and series

In this, K and L are treated as independent variables and Q depends upon K

and L. It is an example of a function of two variables. In the special case, when
Q(K, L) = AK α Lβ
where A, α, β are fixed constants.
Note that Q(K, L) is a product of two exponential functions. Suppose the inputs
K and L are both changed by the same proportion, say λ. We want to know
how will Q change? Note that if
Q1 = Q1 (K1 , L1 ) = AK1α Lβ1 ,
Then for
K2 = λK1 , L2 = λL1
Q2 = Q(K2 , L2 ) = Q(λK1 , λL1 )
= A(λK1 )α (λL1 )β = Aλα+β K1α Lβ1 = λα+β Q1 .
Thus, we have the following:
(i) If α + β = 1, then Q2 = Q1 . This means that if both capital and labor
are changed by a proportion λ, then output Q also changes by the
same proportion.
(ii) If α + β < 1, then the proportionate change in the output is less than
the proportionate change in each output. For example, if both K and
L are doubled and
α + β = 0.8, then Q2 = λ0.8 Q1 = (2)0.8 Q1 = 1.7Q1 .
(iii) If α + β > 1, then the proportionate change in the output is more than
the proportionate change in each output.For example, if both K and
L are doubled and
α + β = 1.5, then Q2 = λ1.5 Q1 = (2)1.5 Q1 = 2.8Q1 .
This is called increasing returns to scale.
The production function Q(K, L) = AK α Lβ is known as Cobb-Douglas func-
tion.
Example(6):
(i) The population of a tribe was 750 in 1947. If the population growth is
given by the equation
P (t) = 750 e(0.05t),
where P(t) is the population at time t, then P(t) will go on increasing
as t increases. This is a model of unlimited growth.
(ii) Let the population of a certain type of bacteria be given by
P (t) = 10(1 − e−0.2t ).
Then, as t → ∞, e−0.2t → 0 and hence P (t) = 10 as t → ∞.
Thus, eventually the population will stabilize to 10. This is a model of limited
growth.

2.2.4 The logarithmic function:

For a > 0, a 6= 1, since the exponential function is one-one from R onto R+ =
2.2. Application of sequences 49

(0, +∞), it has inverse function. This is called the logarithmic function with
base a and is denoted by loga (x). Thus,
loga : R+ −→ R,

loga (x) = y if and only if ay = x.

It has the following properties:
(i) The domain is the set of all positive real numbers and range is all real
numbers.
(ii) For a > 1 loga (x), is a strictly increasing function and for 0 < a < 1,
it is strictly decreasing function.
(iii) loga (1) = 0 for every a.
(iv) loga (x, y) = loga (x) + loga (y) for every x, y ∈ R.
(v) loga (xn ) = nloga (x)for every n.

+∞, if a > 1,
(vi) limx→+∞ loga (x) =
−∞, if a < 1.

+∞, if a > 1,
(vii) limx→0 loga (x) =
−∞, if a < 1.

figure 31

2.2.5 Remark:
(i) For a = e, the function loge (x) is called the natural logarithm func-
tion. For a = 10, it is called common logarithm function.
(ii) The conversion from one base to another is given by the following:
loge (x)
loga (x) = a>0
loge (a)
(iii) For a > 0, a 6= 1,
ax = exp(ln (a))x = exln (a) = exp(xln (a)).
Thus, ax can be expressed in terms of exponential and natural loga-
rithm function. Above also given ln (ax ) = xln (a).
(iv) Normally, the values of ln (x), log(x) and exp(x) are obtained from log
tables or calculators.

Exercise 8: Exponential and Logarithmic Functions)

50 2. Sequences and series

(1) A firm revenue declines continuously at an annual rate of 10% so that

the total revenue (in millions) in t years is modelled by
T R = 6e−0.1t .
(i) Calculate the current revenue and the revenue after two years?
(ii) Express T in terms of T R?
(iii) Find the number of years after which the revenue will be below
5 millions?

Solution(i): Current revenue is at t = 0. Thus,

T R(0) = 6.
After 2 years, i.e., t = 2,
T R(2) = 6e−0.1×2 = 6e−0.2 = 4.9
As
TR
= E −0.1t.
6
Taking logarithm of both sides,
TR
ln ( ) = −0.1t
6
Thus,
TR
t = −10ln( ).
6
For
T R = 5, t = −10ln(56) = 10(ln 6 − ln 5).

(2) The percentage y of Indians possessing a car in t years, after it was

introduced, is modelled as
y = 80 − 70e−0.2t
Find the percentage of Indians that have cars:
(i) At the launch of the product ?
(ii) After 3 years ?
(iii) What is the market saturation level ?
(iv) After how many years, the percentage of Indians having car will
be 75%?
Solution(2):
(i) At launch t = 0. Thus,
y = 80 − 70e0 = 10%
(ii) After 3 years, t = 3, gives
y = 80 − 70e−0.2×3 = 80 − 70e−0.6 = 41.58%
(iii) The market saturation means the limiting value of y as t increases
to +∞. Since e−0.2t → 0, as t → ∞, we have y = 80 as t = ∞.
Thus market will saturate at 80%
2.2. Application of sequences 51

(iv) To find t in terms of y, we have

y = 80 − 70e−0.2t
i.e.,
80 − y
e−0.2t =
70
Thus,
80 − y
(0.2)t = ln ( ,)
70
i.e.,
80 − y
t = −5(ln ( ))
70
For y = 75%
80 − 75
t = −5ln ( )
70
5
= −5ln () = 5(ln (70) − ln (5)) = 13.20
70
Thus, after about 14 years the percentage of Indians having cars will
break through 75% barrier.
(3) A firm turnover y, measured in million of rupees after t years is given
by
y = 8e0.09t.
Find the
(i) Turnover in the first year of trading?
(ii) After how many years the turnover be doubled?
Solution(3):
(i) For t = 0, turnover y = 8 millions.
(ii) For turnover to be doubled, i.e., y = 16, we have
16 = 8e0.09t
i.e.,
e0.09t = 2.
Thus,
0.09t = ln (2)
i.e.,
ln (2)
t= .
0.09
(4) The percentage y of a household possessing their own home in t years
is modeled by
30 − 25e−0.2t .
Find the percentage of households that have their own house
(i) At the start of this model?
(ii) After 10 years?
(iii) What is the saturation level for the percentage of households to have
their own home?
(iv) After how many years the percentage of houses having their own house
will be 25%?
52 2. Sequences and series

Solution(4):
(i) At the start,t = 0, gives
y = 30 − 25e−0.2×0 = 30 − 25 = 5.1.
(ii) After 15 years,i.e.,t = 15,
y = 30 − 25e−0.2×15 = 30 − 25e−3
(iii) For saturation level,we have to compute
limt→∞ y = limt→∞ (30 − 25e−0.2t)
= 30 − 25(limt→∞ e−0.2t ) = 30.
(iv) For y = 25%,
25 = 30 − 25e−0.2t ,
i.e.,
25 − 30 = −25e−0.2t, i.e., e−0.2t = 5/25 = 1/5
Thus,
ln (5)
−0.2t = ln (1) − ln (5) i.e., t =
0.2