UNIT 1: LINEAR EQUATIONS AND THEIR INTERPRETATIVE APPLICATIONA

Contents
1.1. Linear Equations, Functions and Graphs
1.1.1. Developing equation of a line
1.1.2. Special formats
1.2. Application of linear equations
1.2.1. Linear cost-output relationships: Variable Cost, Fixed cost, Total Cost,
Average Cost, Marginal Cost , Total Revenue and Total Profit
1.2.2. Break-even analysis : Model and Solution
1.2.3. Market Equilibrium Analysis
1.3. Summary

Unit Objectives
After end of this unit students should be able to:
 define algebraic expression, equation & linear equation
 explain the different ways of formulating(developing) equations of a line
 understand the breakeven point and its application
 define the cost output relationship
 explain the different cost elements

 Introduction
Mathematics, old and newly created, coupled with innovative applications of the rapidly
evolving electronic computer and directed toward management problems, resulted in a new
field of study called quantitative methods, which has become part of the curriculum of
colleges of business. The importance of quantitative approaches to management problems is
now widely accepted and a course in mathematics, with management applications is included
in the core of subjects studied by almost all management students. This manual develops
mathematics in the applied context required for an understanding of the quantitative approach
to management problems.

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1.1. Linear Equations , Functions and Graphs
Equation:
Equation: - A mathematical statement which indicates two algebraic expressions is equal.
Example: Y = 2X + 3
Algebraic expressions:
expressions: - A mathematical statement indicates that numerical quantities are
linked by mathematical operations.
Example: X + 2
Linear equations: - are equations with a variable & a constant with degree one.
- Are equations whose terms (the parts separated by +, -, = signs)
- Are a constant, or a constant times one variable to the first power
Example: 2X – 3Y = 7
- The degree (the power) of the variables is 1
- The constant or the fixed value is 7
- The terms of the equation are 2X and 3Y separated by – sign
However 2X + 3XY = 7 isn’t a linear equation, because 3XY is a constant times the product
of 2 variables.
* No X2 terms, No X/Y terms, and no XY terms are allowed.
- Linear equations are equations whose slope is constant throughout the line.
- The general notion of a linear equation is expressed in a form Y = mx + b where m =
slope, b = the Y- intercept, Y = dependent variable and X = independent variable.
If Y represents Total Cost, the cost is increased by the rate of the amount of the slope m.

Slope (m)
(m) = if X1  X2

Slope measures the steepness of a line. The larger the slope the more steep (steeper) the line
is, both in value and in absolute value.
Y Y m = undefined
+ve slope
m=0
-ve slope
X X
- A line that is parallel to the X-axis is the gentlest of all lines i.e. m = 0
- A line that is parallel to the Y-axis is the steepest of all lines i.e. m = undefined or
infinite.

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The slope of a line is defined as the change-taking place along the vertical axis relative to
the corresponding change taking place along the horizontal axis, or the change in the
value of Y relative to a one-unit change in the value of X.

1.1.1. Developing Equation of a Line

There are at least three ways of developing the equation of a line. These are:
1. The slope-intercept form
2. The slope-point form
3. Two-point form

1. The slope-intercept form

This way of developing the equation of a line involves the use of the slope & the intercept to
formulate the equation. Often the slope & the Y-intercept for a specific linear function are
obtained directly from the description of the situation we wish to model.
Example # 1
Given: Slope = 10, and
Y-intercept = +20, then
Slope-intercept form: the equation of a line with slope = m and Y-intercept b is
Y = mx + b
Y = 10X + 20
Interpretative Exercises
#2: Suppose that the Fixed cost (setup cost) for producing product X be br. 2000. After
setup it costs br. 10 per X produced. If the total cost is represented by Y:
1. Write the equation of this relationship in slope-intercept form.
2. State the slope of the line & interpret the number
3. State the Y-intercept of the line & interpret the number
2. The slope point form
The equation of a non-vertical line, L, of slope, m, that passes through the point (X 1, Y1) is:
defined by the formula Y – Y1 = m (X – X1)

Y – Y1 = m (X – X1)
Example #1  Y – 2 = 4 (X – 1)
Given: slop = 4 and Y – 2 = 4X - 4
Point = (1, 2) Y = 4X – 2

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3. Two - point form
Two points completely determine a straight line & of course, they determine the slope of the
line. Hence we can first compute the slope, then use this value of m together with either point
in the point-slope form Y – Y1 = m (X – X1) to generate the equation of a line.
 By having two coordinate of a line we can determine the equation of the line.

Two point form of linear equation: (Y – Y1) =

Example #1 given (1, 10) & (6, 0)

First slope = , then

Y – Y1 = m (X – X1)  Y – 10 = -2 (X – 1)
Y – 10 = -2X + 2
Y = -2X + 12

1.1.2. Special formats

a) Horizontal & vertical lines
When the equation of a line is to be determined from two given points, it is a good idea to
compare corresponding coordinates because if the Y values are the same, the line is
horizontal & if the X values are the same the line is vertical.
Example: 1 Given the points (3, 6) & (8, 6) the line through them is horizontal because
Both Y-coordinates are the same i.e. 6
The equation of the line becomes Y = 6, which is different from the form Y = mx + b

If the X-coordinates of the two different points are equal:

Example: (5, 2) & (5, 12) the line through them is vertical, & its equations is X = 5 i.e. X is
equal to a constant. If we proceed to apply the point slope procedure, we would obtain the
following.

Slope (M) = & if m =  infinite the line is vertical & the form of the

equation is: X = constant

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b) Parallel & perpendicular lines ( and)
Two lines are parallel if the two lines have the same slope, & two lines are perpendicular if
the product of their slope is –1 or the slope of one is the negative reciprocal of the slope of
the other.
However, for vertical & horizontal lines, (They are perpendicular to each other), this rule of
M1 (the first slope) times M2 (the second slope) equals –1 doesn’t hold true. i.e. M1 x M2  -1
Example: Y = 2X – 10 & Y = 2X + 14 are parallel because their slope are equal i.e. 2
Y = 3/2X + 10 & Y = -2/3X + 100 are perpendicular to each other because the

multiplication result of the two slope are –1 i.e.

c) Lines through the origin

Any equation in the variables X & Y that has no constant term other than zero will have a
graph that passes through the origin. Or, a line which passes through the origin has an X-
intercept of (0, 0) i.e. both X and Y intercepts are zero.

1.2. Application of linear equations

1.2.1. linear cost - output relationships:

relationships: – Variable Cost , Fixed Cost , Total Cost ,
Average Cost , Marginal Cost , Total Revenue and Total Profit
TR/TC profit Formula: TC = TVC + TFC
Or TP region TR = PQ
TC TR TP = TR - TC
Loss T
region E BEP = PQ – (VC + FC)
TVC H
A F G FC = PQ – Q.VC - TFC
TC
TFC = Q (P – VC) - FC
B C D G(No of units)
Where Q = units

produced & units

sold in revenue
TC = Total Cost
FC = Fixed Cost
VC = Unit variable
Cost

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Interpretation of the graph:

1. The vertical distance between AB, FC, GD is the same because Fixed Cost is the
same at any levels of output.
2. There is no revenue without sales (because Total Revenue function passes through the
origin), but there is cost without production (because of Fixed Cost) & the TC
function starts from A & doesn’t pass through the origin.
3. Up to point T, Total Cost is greater than Total Revenue  results in loss. While at
point T, (Total Revenue = Total Cost) i.e. Breakeven. (0 profit), & above point T, TR
> TC  +ve profit.
4. TFC remains constant regardless of the number of units produced. Given that there is
no any difference in scale of production.
5. As production increases, Total Variable Cost increases at the same rate and Marginal
cost is equal with Unit Variable Cost (MC
(MC = VC) only in linear equations.
6. As production increases TC increases by the rate equal to the AVC = MC (average
cost equal to marginal cost)
7. AVC is the same throughout any level of production, however Average Fixed Cost
(AFC) decreases when Quantity increases & ultimately ATC decreases when Q
increases because of the effect of the decrease in AFC.
8. As Quantity increases TR increases at a rate of P and average revenue remains
constant.

AR = = P  AR = P in linear functions

Example: A printer quotes a price of $ 7,500 for printing 1,000 copies of a book and $
15,000 for printing 2,500 copies. Assuming a linear relationships and that 2,000 copies
are assumed to be printed. Answer the following questions accordingly:
a) Find the equation relating the total cost, y, to x, the number of books printed
b) What is the variable cost?
c) What is the fixed cost?
d) What is the total cost?
e) What is the variable cost per book?
f) What is the average cost per book?

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 g) What is the marginal cost of the last book printed?
h) What is the total revenue if the price of a book will be $ 9?
i) What is the total profit?
Solution: given (1000, 7500), and (2500, 15000) ------ points, and numbers of
quantity = 2,000 units
A) Equation of the model
Y-Y1= m (X-X1)
Y-Y1÷ X-X1= Y2-Y1÷ X2-X1
Y-7500÷ X-1000 = 15000-7500 ÷ 2500-1000
Y-7500 ÷ X- 1000 = 7500 ÷ 1500
Y-7500 ÷ X- 1000 = 5
Y= 5X+2,500
B) The variable cost = 5X
= 5(2,000)
= $ 10,000
C) The fixed cost = $ 2,500
D) The total cost = variable cost + fixed cost
= $ 10,000+2,500
= $ 12,500
E) The unit variable cost = slope = 5 ( 10,000/2,000)
F) The average cost = total cost ÷ total quantity
= $12,500 ÷ 2,000
= $ 6.25
G) The marginal cost = slope = unit variable cost, whatever the amount of quantities
= $5
H) The total revenue = PX
= $ 9(2000)
= $ 18,000
I) The total profit = TR-TC
= $18,000-12,500
= $5,500

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1.2.2. Break- even Analysis
Break-even point is the point at which there is no loss or profit to the company. It can be
expressed as either in terms of production quantity or revenue level depending on how the
company states its cost equation.

Manufacturing companies usually state their cost equation in terms of quantity (because they
produce and sell) where as retail business state their cost equation in terms of revenue
(because they purchase and sell)

Case 1: Manufacturing Companies

Consider a Company with equation
TC = VC + FC / Total cost = Variable cost + Fixed cost
TR = PQ/ Total Revenue = Price x Quantity

At Break-even point, TR = TC i.e TR – TC = 0

PQ = VC + FC where Qe = Breakeven Quantity
PQ – VC.Q = FC FC = Fixed cost
Q (P – VC) = FC P = unit selling price

Qe = VC = unit variable cost

TR
TC/TR TC

Qe =

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Example #1 A manufacturing Co. has a Total Fixed Cost of Br. 10,000 & a Unit Variable
Cost of Br. 5. If the co. can sell what it produces at a price of Br.10, compute the following:
a) Write the Revenue, cost & Profit functions
b) Find the breakeven point in terms of quantity and sales volume
c) Show diagrammatically the Total Revenue, Total Cost, Total Profit, Fixed Cost and
Variable Costs.
d) Interpret the results
Answer
a) TC = VC + FC TR = PQ Profit () = TR – TC
TC = 5Q + 10,000 TR = 10Q = 10Q – (5Q + 10,000)
= 5Q – 10,000
b) At breakeven point, TR = TC
10Q = 5Q + 10,000
5Q – 10,000 = 0

Qe =

Qe = 2000 units
i.e. Breakeven Quantity is 2000 units
Sales volume = 2000 X 10 = 20,000 br.

25000 TR = 10Q  TR
20000 TC = 5Q + 10000 TVC = 5Q
15000 TVC T = 5Q - 10000
10000 TFC
5000 TFC
0
1000 2000 3000 4000 5000 Q (no. of units produced
& sold)
-5000 -
-10000 -

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Interpretation:
When a co. produces & sells 2000 units of output, there will not be any loss or gain (no
profit, no loss)
 The effect of changing one variable keeping other constant
Case 1 - Fixed cost
Assume for the above problem FC is decreased by Br. 5000, Citrus Paribus (other things
being constant)

TC = 5Q + 5000  Qe = = 1000 units

TR = 10Q
Therefore, FC   Qe  FC & Qe have direct relationship
FC   Qe 

Case 2-Unit variable cost

Assume for the above problem UVC decreased by 1 br. Citrus Paribus (keeping other thing
constant)

TC = 4Q + 10000  Qe =

TR = 10Q
Therefore, VC   Qe  VC & Qe have direct relationship
VC   Qe 
Case 3- Selling price
Assume for the above problem selling price is decreased by br. 1, Citrus Paribus,

TC = 5Q + 10,000  Qe =

TR = 9Q
Therefore P   Qe  Price and breakeven point have indirect relationship
P   Qe 
In the above example a company has the following options (to minimize its breakeven point
and maximize profit).
- decreasing FC
- decreasing unit VC
- increasing the unit selling price

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And if the organization is between option 2 & 3, it is preferable to decrease the unit variable
cost because if we increase the selling price, the organization May lose its customers & also
decreasing the FC is preferable.
TR

TC

TFC

Qe Q

Finding the quantity level which involves profit or loss

BEP = , any Q is related to the cost , profit----

 = TR – Tc Where: BEP = breakeven point

 = PQ – (VC.Q + FC)  = Profit
 = (P.Q – VC.Q) – FC TR = Total revenue
 = Q (P – VC) – FC TC = Total cost

Q = Quantity

C = Unit variable cost

Example #1 For the above manufacturing co. if it wants to make a profit of 25000 br. What
should be the quantity level?

TR = 10Q Q= when there is , the quantity produced &

sold have to be greater than the

Breakeven quantity

TC = 5Q + 10,000 =

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  = 25,000 = 7000 units
Q =?

If it expects a loss of br. 5000, what will be the quantity level?

Q= * when there is loss, the quantity produced & sold

should be less than the BEQ

Case 2 Merchandising /Retail Business
Breakeven Revenue = BEQ X P
Assume a bus. Firm with product A has the following cost & revenue items.
Variable cost of A = 100 br.
Selling price = 150 br.
Markup = Selling price – Variable cost = 150 – 100 = 50
i. as a function of cost, the markup is 50/100 = 50%
ii. as a function of retail price, the markup is 50/150 = 33.3 % it is also called margin.
Margin Cost of goods sold

The cost of goods sold = 100% - 33.3 % = 66.6%  67%

Selling price CGS
Given other selling expense = 1%of the selling price i.e. 0.01X

So, the TC equation becomes:

Y = 0.68X + FC
Where: X is sales revenue
Y is total cost
Out of 100% selling price, 68% is the variable cost of goods purchased & sold

Example Suppose a retail business sale its commodities at a margin of 25% on all items
purchased & sold. Moreover the company uses 5% commission as selling expense & br.
12000 as a Fixed Cost.

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Find the Breakeven revenue for the retail business after developing the equation
Solution Selling price 100% Let X represents selling price
Margin 25% Y = total cost
CGS 75% FC = 12000
Comm. Exp. 5% Xe = Breakeven revenue
Total VC 80%
Y = 0.8X + 12000
Break even revenue is obtained by making sales revenue & cost equals
At breakeven point TC = TR Y = mx + b
i.e. Y = X then, unit variable cost

0.8X + 12000 = X 

-0.2X = -12000
X = 60,000 br.  When the co. receives br. 60,000 as sales revenue,
there will be no loss or profit.

The Breakeven revenue (BER = ) method is useful, because we can use a single

formula for different goods so far as the company uses the same amount of profit margin for

all goods. However, in Breakeven quantity method or BEQ = it is not possible and

hence we have to use different formula for different items.

Example #1 It is estimated that sales in the coming period will be br. 6000 & that FC will
be br. 1000 & variable costs br. 3600, develop the total cost equation & the breakeven
revenue.

Answer: Y = X + 1000 = 0.6X + 1000

Where Y = Total Cost

X = Total revenue

BER = Xe =

At the sales volume of br. 2500, the company gets breaks even.
* When the breakeven revenue equation is for more than one item it is impossible to find the
breakeven quantity. It is only possible for one item by Qe = Xe/P
Where Xe = Break even revenue

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 P = selling price
Qe = Breakeven quantity
To change the breakeven revenue equation in to breakeven quantity, we have to multiple
price by the coefficient of X. likewise, to change in to breakeven revenue from Break even
quantity, we have to divide the unit VC by price.
Exercise: A company expects fixed cost of $ 22,800. Margin is to be 55 percent of retail.
Variable cost in addition to cost of goods is estimated at $ 0.17 per dollar of sales.
a) Write the equation relating cost and sales
b) Find the break-even point
c) What will net profit before taxes be on sales of $ 75,000?
d) Make the break-even chart?

1.2.3. Market Equilibrium Analysis

When the supply and demand curves intersect, the market is in equilibrium. This is where
the quantity demanded and quantities supplied are equal. The corresponding price is the
equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

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 Putting the supply and demand curves from
the previous sections together. These two
curves will intersect at Price = $6, and
Quantity = 20.
In this market, the equilibrium price is $6
per unit, and equilibrium quantity is 20
units.
At this price level, market is in
equilibrium. Quantity supplied is equal to
quantity demanded (Qs = Qd).
Market is clear.

Surplus and shortage:

If the market price is above the equilibrium price, quantity supplied is greater than quantity
demanded, creating a surplus. Market price will fall.
Example: if you are the producer, you have a lot of excess inventory that cannot sell. Will
you put them on sale? It is most likely yes. Once you lower the price of your product, your
product’s quantity demanded will rise until equilibrium is reached. Therefore, surplus drives
price down.
If the market price is below the equilibrium price, quantity supplied is less than quantity
demanded, creating a shortage. The market is not clear. It is in shortage. Market price will
rise because of this shortage.
Example: if you are the producer, your product is always out of stock. Will you raise the
price to make more profit? Most for-profit firms will say yes. Once you raise the price of
your product, your product’s quantity demanded will drop until equilibrium is reached.
Therefore, shortage drives price up.
If surplus exist, price must fall in order to entice additional quantity demanded and reduce
quantity supplied until the surplus is eliminated. If a shortage exists, price must rise in order
to entice additional supply and reduce quantity demanded until the shortage is eliminated.

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 If the market price (P) is higher than $6 (where Qd =
Qs), for example, P=8, Qs=30, and Qd=10.
Since Qs>Qd, there are excess quantity supplied in
the market, the market is not clear. Market is in
surplus.

The price will drop because of this surplus.

If the market price is lower than equilibrium price,

$6, for example, P=4, Qs=10, and Qd=30.

Since Qs<Qd, There are excess quantity demanded

in the market. Market is not clear. Market is in
shortage.

The price will rise due to this shortage.

Government regulations will create surpluses and shortages in the market. When a price
ceiling is set, there will be a shortage. When there is a price floor, there will be a surplus.
Price Floor: is legally imposed minimum price on the market. A transaction below this
price is prohibited.

 Policy makers set floor price above the market equilibrium price which they believed
is too low.
 Price floors are most often placed on markets for goods that are an important source
of income for the sellers, such as labor market.
 Price floor generate surpluses on the market. Example: minimum wage.

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  Price Ceiling: is legally imposed maximum price on the market. A
transaction above this price is prohibited.
 Policy makers set ceiling price below the market equilibrium price which they
believed is too high.
 Intention of price ceiling is keeping stuff affordable for poor people.
 Price ceiling generates shortages on the market, Example: Rent control.
Changes in equilibrium price and quantity:
Equilibrium price and quantity are determined by the intersection of supply and demand. A
change in supply, or demand, or both, will necessarily change the equilibrium price, quantity
or both. It is highly unlikely that the change in supply and demand perfectly offset one
another so that equilibrium remains the same.
Example: This example is based on the assumption of Ceteris Paribus.
1) If there is an exporter who is willing to export oranges from Florida to Asia, he
will increase the demand for Florida’s oranges. An increase in demand will create a shortage,
which increases the equilibrium price and equilibrium quantity.
2) If there is an importer who is willing to import oranges from Mexico to Florida, he
will increase the supply for Florida’s oranges. An increase in supply will create a surplus,
which lowers the equilibrium price and increase the equilibrium quantity.
3) What will happen if the exporter and importer enter the Florida’s orange market at
the same time? From the above analysis, we can tell that equilibrium quantity will be higher.
But the import and exporter’s impact on price is opposite. Therefore, the change in
equilibrium price cannot be determined unless more details are provided. Detail information
should include the exact quantity the exporter and importer is engaged in. By comparing the
quantity between importer and exporter, we can determine who has more impact on the
market.
In the following table, an example of demand and supply increase is illustrated.

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 In this graph, supply is constant, demand
increases. As the new demand curve (Demand 2)
has shown, the new curve is located on the right
hand side of the original demand curve.
The new curve intersects the original supply
curve at a new point. At this point, the
equilibrium price (market price) is higher, and
equilibrium quantity is higher also.

In this graph, demand is constant, and supply

increases. As the new supply curve (SUPPLY 2)
has shown, the new curve is located on the right
side of the original supply curve.
The new curve intersects the original demand
curve at a new point. At this point, the
equilibrium price (market price) is lower, and the
equilibrium quantity is higher.

In this graph, the increased demand curve and

increased supply were drawn together. The new
intersection point is located on the right hand
side of the original intersection point.
This new equilibrium point indicated an
equilibrium quantity which is higher than the
original equilibrium quantity. The equilibrium
price is also higher. It is because demand has
increased relatively more than supply in this
case.

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Two-Product Supply and Demand Analysis
Here we consider the case of two products whose supply and demand expressions are
interrelated. As an example considers the following expressions in which p 1 and q1 are the
price of product ♯ 1 and the quantity demanded of product ♯ 1, respectively, and similarly for
the quantity demanded for product ♯ 2.
Product Demand Supply
♯1 p1= 2000-3q1-2q2 p1= 100+2q1+q2
♯2 p2= 2800-q1-4q2 p2= 200+3q1+2q2

Required: a) find the prices and quantities at equilibrium

Solution: to achieve equilibrium, the two price expressions for each product must be equal.
Hence,
For product ♯ 1: 2000-3q1-2q2 = 100+2q1+q2
For product ♯ 2: 2800-q1-4q2 = 200+3q1+2q2
Rearranging the last two expressions, we have
E1: 5q1+3q2 = 1900
E2: 4q1+6q2 = 2600
We obtain the equilibrium quantities supplied and demanded by solving the last pair of
equations in the usual manner:
18q2 = 5,400
Q2 = 300 units; q1= 200 units
p2 = $ 1,400; P1= $ 800

b) Now suppose the supply functions remain the same but a change occurs in the demand for
product ♯ 1 and, since the two products are interrelated, there is a corresponding change in
the demand for ♯ 2. Then suppose the outcomes are the new demand functions:
Product Demand
♯1 p1 = 2270 – 3q1 – 2q2
♯2 p2 = 2890 – q1 – 4q2

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Solution: equating these new demand expressions with the corresponding original supply
expressions leads to:
5q1 + 3q2 = 2170
4q1 + 6q2 = 2690

P1 = $ 915; p2 = $ 1,555
Q1= 275 units; q2 = 265 units

1.3. Summary
Linear equations: - are equations with a variable & a constant with degree one or are
equations whose terms (the parts separated by +, -, = signs) or are a constant, or a constant
times one variable to the first power
The slope of a line is defined as the change-taking place along the vertical axis relative to the
corresponding change taking place along the horizontal axis, or the change in the value of Y
relative to a one-unit change in the value of X.

There are at least three ways of developing the equation of a line. These are:
1. The slope-intercept form
2. The slope-point form
3. Two-point form
The following are the application of linear equations 1. linear cost - output
relationships(Variable
relationships(Variable Cost , Fixed Cost , Total Cost , Average Cost , Marginal Cost , Total
Revenue and Total Profit),2. Break-even point analysis (it is the point at which there is no
loss or profit to the company), 3.Market Equilibrium (W
(When the supply and demand curves
intersect, the market is in equilibrium. This is where the quantity demanded and quantities
supplied are equal).

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 Self Test Exercise
1. A sales man earns a weekly basic salary plus a sales commission of 20% of his
total sales. When his total weekly sales total br. 1000, his total salary for the week is
400. Derive the formula describing the relationship between total salary and sales.
2. If the relationship between Total Cost and the number of units made is linear, & if
costs increases by br. 7.00 for each additional unit made, and if the Total Cost of 10
units is br. 180.00. Find the equation of the relationship between Total Cost (Y) &
number of units made (X)

3. A salesman has a basic salary &, in addition, receives a commission which is a

fixed percentage of his sales volume. When his weekly sales are Br. 1000, his total
salary is br. 400. When his weekly sales are 500.00, his total salary is br. 300.
Determine his basic salary & his commission percentage & express the relationship
between sales & salary in equation form.
4. A printer costs a price of birr 1,400 for printing 100 copies of a report & br. 3000
for printing 500 copies. Assuming a linear relationship what would be the price for
printing 300 copies?

5. A sales man has a fixed salary of br. 200 a week In addition; he receives a sales
commission that is 20% of his total volume of sales. State the relationship between
the sales man’s total weekly salary & his sales for the week.

 Answer Key to Self Test Exercises

1. Y = 0.2X + 200
2. Y = 7X + 110
3. Y = 0.2X + 200
4. Y = 4X + 1000
Cost = 4.0 (300) + 1000 = br. 2200
5. Y = 0.20X + 200

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? Review questions
1. XYZ company’s cost function for the next four months is
C = 500,000 + 5Q
a) Find the BE dollar volume of sales if the selling price is br. 6 / unit
b) What would be the company’s cost if it decides to shutdown operations for the
next four months
c) If, because of strike, the most the company can produce is br. 100,000 units,
should it shutdown? Why or why not?
2. In its first year, “Abol Buna Co” had the following experience
Sales = 25,000 units Selling price = br. 100
TVC = br. 1,500,000 TFC = br. 350,000
Required:
a) Develop Revenue, cost & profit functions for the co. in terms of quantity.
b) Find the Breakeven point in terms of quantity
c) Convert the cost equation in terms of quantity in to a cost equation in terms of
revenue
d) Find the Breakeven revenue
e) If profit had been br. 500,000 what would have been the sales volume (revenue) &
the quantity of sales
f) What would have been the profit if sales are br. 2,000,000?
3. A small home business set up with an investment of $ 10,000 for equipment. The
business manufactures a product at a cost of br. 0.64 per unit. If the product sales for
Br. 1.20 per unit how many units must be sold before the business breaks even?
4. A retail co. plans to work on a margin of 44% of retail price & to incur other Variable
Cost of 4%. If the expected Fixed cost is Br. 20,000.
i. Find the equation relating Total Cost to sales
ii. Find the profit if sales are Br. 60,000
iii. Find the breakeven revenue
iv. If profit is Br. 15,000 what should be the revenue level?

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UNIT 2: MATRIX ALGEBRA AND ITS APPLICATION

Contents
2.1. Matrix Concepts
2.2. Dimensions & Types of matrices
2.3. Matrix operation& Techniques
2.4. The multiplicative inverse of a matrix
2.5. Matrix Applications
2.5.1. Solving systems of linear equations
2.5.2. Markov Chains: Concepts, Models and Solutions
2.6. Summary

Unit Objectives

After reading this unit, students will be able to:

 Explain what a matrix is
 Define the different types of matrices
 Perform matrix operations
 Find inverse of a square matrix
 Explain how to solve a systems of linear equations
 Solve word problems applying matrices
 Understand the concept of Markov chain

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 2.1. Matrix Algebra Concepts

Algebra is a part of mathematics, which deals with operations (+, -, x, ).

A matrix is a rectangular array of real numbers arranged in m rows & n columns. It is

symbolized by a bold face capital letter enclosed by a bracket or parentheses.

eg. in which ajj are real

numbers
Each number appearing in the array is said to be an element or component of the matrix.
Element of a matrix are designated using a lower case form of the same letter used to
symbolize the matrix itself. These letters are subscripted as a ij, to give the row & column
location of the element within the array. The first subscript always refers to the raw location
of the element; the second subscript always refers to its column location.
location. Thus, component
aij is the component located at the intersection of the ith raw and jth column.

The number of rows (m) & the number of columns (n) of the array give its order or its
dimension; M x n (reads as “M” by “n”).
Example: The following are examples of matrices

1 7 element a12 = 7
A= 5 3 this is 3 x 2 matrix a21 = 5
4 2 a32 = 2

X= 1 5 9 15 this is a 4 x 4 matrix
2 6 10 20 Element X44 = 45
3 7 11 30 X34 = 30
4 8 12 45 X42 = 8
X32 = 7
2.2. Dimensions &Types of Matrices

There are deferent types of matrices. These are:

1. Vector matrix – is a matrix which consists of just one row or just one column. It is an m
x 1 or 1 x n matrix.

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 i. Row vector- is a 1 x n matrix i.e. a matrix with 1 row
eg. W = -1 0 6 1x3
ii. Column vector-
vector- is an m x 1 matrix i.e. a matrix with one column only
eg. 0
Z= 20
5 3x1
2. Square matrix-
matrix- a matrix that has the same number of rows & columns. That is m=n
eg. 2 x 2, 3 x 3, nxn X= 1 2
3 42x2
3. Null or Zero matrix-
matrix- is a matrix having all elements equal to zero, no matter what the
dimension is.
It’s generally denoted by (O)m x n eg. Y = 0 0
0 0
3. Diagonal matrix- a square matrix in which each one of the non-diagonal elements
(elements not on the main diagonal) is zero.
Example; 2 0 0
D= 0 3 0
0 0 5 3x3
5. Identity (unit) matrix-
matrix- a square matrix in which all of the primary diagonal entries are
Equal to one & all of the off diagonal entries are zeros. It is denoted by I.

eg. I = 1 0 1 0 0 0
0 1 2x2 I2 = 0 1 0 0
0 0 1 0
0 0 0 1 4x4
N.B.
N.B. Each identity matrix is a square matrix.
* Primary diagonal represents: a11, a22, a33, a44---------ann entries element
A x I = A & I x A = A that is, the product of any given matrix & the identity
matrix is the given matrix itself. Thus, the identity matrix behaves in a matrix multiplication
like number 1 in an ordinary arithmetic.

5. Scalar matrix: - is a square matrix where elements on the primary diagonal are the
same.

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“An identity matrix is a scalar matrix but a scalar matrix may not be an identity matrix”.

3.1. Matrix operations and Techniques (Addition, Subtraction, Multiplication)

1. Matrix Addition/ Subtraction

Two matrices of the same dimension are said to be conformable for addition/subtraction.
Adding corresponding elements from the two matrices & entering the result in the same raw-
column position of a new matrix perform the addition.
If A & B are two matrices, each of site m x n, then the sum of A & B is the m x n matrix C
whose elements are:

Cij = aij +bij for i = 1, 2 --------m C11 = a11 + b11

j = 1, 2 ---------n C22 = a22 + b22
C12 = a12 + b12 etc

eg. 1 3 7 9 8 12
2 4 + 8 -10 = 10 –6

eg. –2 7 2 8 7 these two matrices aren’t

4 6 9 2x3 + 6 4 2x2 = conformable for addition
because they aren’t of the
same dimension.
Laws of matrix addition
The operation of adding two matrices that are conformable for addition has these two basic
properties.

1. A + B = B + A  the commutative law of matrix addition

2. (A + B) + C = A + (B + C)  the associative law of matrix addition

 The laws of matrix addition are applicable to laws of matrix subtraction, given
that the two matrices are conformable for subtraction A – B = A + (-B)

eg.A= 1 2 B= 0 1
3 4 2 5

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 A–B= 1 1
1 -1
2. Matrix Multiplication

a) By a constant (scalar multiplication)

A matrix can be multiplied by a constant by multiplying each component in the matrix by a
constant. The result is a new matrix of the same dimension as the original matrix.
If K is any real number & A is an mx n matrix, then the product KA is defined to be the
matrix whose components are given by K times the corresponding component of A; i.e.

KA = Kaij (m x n)

eg. If X = 6 5 7 , then 2X = (2 x 6) (2 x 5) (2 x 7)
2X = 12 10 14

Laws of scalar multiplication

The operation of multiplying a matrix by a constant (a scalar) has the following basic
properties. If X & Y are real numbers & A & B are m x n matrices, conformable for addition,
then
1. XA = AX 3. X (A + B) = XA + XB
2. (X + Y) A = XA + YA 4. X (YA) = XY (A)

eg. Given matrices A & B and two real numbers X & Y

A= 1 2 3 B= 4 2 1
4 5 6 3 0 5

X=2 Y=4

1) XA = AX
Proof: XA = 2 1 2 3 AX = 2 1 2 3

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 4 5 6 4 5 6

XA = 2 4 6 AX = 2 4 6
8 10 12 8 10 6
[

Therefore XA = AX

2) (X + Y) A = (XA + YA)
Proof:
 (X + Y) A means first add X with Y and then multiply the result by matrix A.
The result of X + y is (2 + 4) = 6 then 6 will be multiplied by matrix A

6 1 2 3 becomes 6 12 18
4 5 6 24 30 36

Therefore (X + Y) A =
6 12 18
24 30 36

 XA + YA mean multiply the constant numbers X and Y with matrix A independently,

and then add the two results together.
XA= 2 1 2 3 YA = 4 1 2 3
4 5 6 4 5 6

XA = 2 4 6 YA= 4 8 12
8 10 12 16 20 24

Then add the result XA with YA

XA + YA = 2 4 6 + 4 8 12
8 10 12 16 20 24

= 6 12 18
24 30 36

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Therefore it is true that (X + Y) A is equal with XA + YA
3) X (A + B) = XA + XB
Proof:
 X (A + B) means add matrix A and B first and then multiply the result by a constant X
Given constant number X = 2 matrices A and B then the result of X (A + B) will be

A= 1 2 3 B= 4 2 1 A+B= 5 4 4
4 5 6 3 0 5 7 5 11
X (A + B) = 2 5 4 4
7 5 11

= 10 8 8
14 10 22
 XA + XB means multiply matrices A and B by a constant number X independently
And then add the results

XA = 2 1 2 3 XB = 2 4 2 1
4 5 6 3 0 5
XA = 2 4 6 XB= 8 4 2
8 10 12 6 0 10

Then Add XA with XB

i.e. XA + XB = 2 4 6 + 8 4 2
8 10 12 6 0 10

= 10 8 8
14 10 22

Therefore it is true that X (A + B) is equivalent with XA + XB

4) X (YA) = XY (A)
Proof:

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  X (YA) means multiply the second constant number Y with matrix A first and then
multiply the first constant number X with the result.

YA = 4 1 2 3 X(YA) = 2 4 8 12
4 5 6 16 20 24

= 4 8 12 = 8 16 24
16 20 24 32 40 48
 XY (A) means multiply the two constant real numbers X and Y first and multiplies the
result by matrix A.
XY = 2 X 4 XY (A) = 8 1 2 3
= 8 4 5 6

= 8 16 24
32 40 48

Therefore it is also true that X (YA) = XY (A) of columns in B.

b) Matrix by matrix multiplication

If A & B are two matrices, the product AB is defined if and only if the number of Columns
in A is equal to the number of rows in B, i.e. if A is an m x n matrix, B should be an n x b.

If this requirement is met, A is said to be conformable to B for multiplication. The matrix

resulting from the multiplication has dimension equivalent to the number of rows in A & the
number columns in B.

If A is a matrix of dimension n x m (which has m columns) & B is a matrix of dimension p x

q (which has p rows) and if m and p aren’t the same product A.B is not defined. That is,
multiplication of matrices is possible only if the number of columns of the first equals the
number of rows of the second.

If A is of dimension n x m & if B is of dimension m x p, then the product A.B is of

dimension n x p
A B
Dimension Dimension

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 n x m m x p

Must be the same

Dimension of A.B
nxp

eg. A= 2 3 4 B= -1 7
6 9 7 2x3 0 8
5 1 3x2
AB = (2x – 1) + (3 x 0) + (4 x 5) (2 x 7) + (3 x 8) + (4 x 1)
= 18 = 42
(6x – 1) + (9 x 0) + (7 x 5) (6 x 7) + (9 x 8) + (7 x 1)
= 29 = 121
 AB = 18 42
29 121
Find BA =
B= -1 7 A= 2 3 4
0 8 6 9 7 2x3
5 1
3x2
B A
3 x 2 2 x 3 result 3 x 3 matrix

conformable

BA = (-1 x 2) + (7 x 6) (-1 x 3) + (7 x 9) (-1 x 4) + (7 x 7)

=40 60 45

(0 x 2) + (8 x 6) (0 x 3) + (8 + 9) (0 x 4) + (8 x 7)
= 48 72 56

(5 x 2) + (1 x 6) (5 x 3) + (1 x 9) (5 x 4) + (1 x 7)

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 16 24 27

BA = 40 60 45
48 72 56
16 24 27

Special properties of matrix application

1. The associative & distributive laws of ordinary algebra apply to matrix multiplication.
Given three matrices A, B & C which are conformable for multiplication,
i. A (BC) = (AB)C  Associative law, (not C (AB)
ii. A (B+C) = AB + AC  Distributive property
iii. (A + B) C = AC + BC  Distributive property
2. On the other hand, the commutative law of multiplication doesn’t apply to matrix
multiplication. For any two real numbers X & Y, the product XY is always identical to the
product YX. But for two matrices A & B, it is not generally true that AB equals BA. (In the
product AB, we say that B is pre multiplied by A & that A is post multiplied by B.)
3. In many instances for two matrices, A & B, the product AB may be defined while the
product BA is not defined or vice versa.
In some special cases, AB does equal BA. In such special cases A & B are said to be
Commute. A = 1 1 B= 2 2 AB = 4 4
1 1 2 2 4 4
2x2 2x2
BA = 4 4

4. Another unusual property of matrix multiplication is that the product of two matrices can
be zero even though neither of the two matrices themselves is zero: we can’t conclude
from the result AB = 0 that at least one of the matrices A or B is a zero matrix.

A= 3 0 0 B= 0 0 0 AB = 0 0 0
2 0 0 7 –10 4 0 0 0
1 0 0 8 3 2 0 0 0

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5. Also we can’t, in matrix algebra, necessarily conclude from the result AB = AC that B=
C even if A  0. Thus the cancellation law doesn’t hold, in general, in matrix
multiplication

eg. A= 1 3 B= 4 3 C= 1 2
-2 –6 2 5 3 4

AB = AC = 10 14 but B  C
-20 –28

3. The multiplicative inverse of a matrix

If A is a square matrix of order n, then a square matrix of its inverse (A -1) of the same order n
is said to be the inverse of A, if and only if A x A -1 = I = A-1 x A. Two square matrices are
inverses of each other, if their product is the identity matrix.
AA-1 = A-1 A = I.
Not all matrices have an inverse. In order for a matrix to have an inverse, the matrix must,
first of all, be a square matrix. Still not all square matrices have inverse. If a matrix has an
inverse, it is said to be invertible or Non- singular.
singular. A matrix that doesn’t have an inverse is
said to be singular.
singular. An invertible matrix will have only one inverse; that is, if a matrix does
have an inverse, that inverse will be unique.
Note: i. Inverse of a matrix is defined only for square matrices
ii. If B is an inverse of A, then A is also an inverse of B
iii. Inverse of a matrix is unique
iv. If matrix A has an inverse, A is said to be invertible & not all. Square matrices are
invertible.

Gauss-Jordan Inversion:
This is a technique used to compute the inverse of a matrix. If we are interested to compute
the inverse of matrix A, we augment an identity matrix that have the same dimension as A,
with it and continue to apply raw operations to the two matrices until the left matrix becomes

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an identity matrix. The right matrix which has an updated element is the inverse of the given
matrix.
A / I   I / A-1 
Finding the inverse of a matrix
Let’s begin by considering a tabular format where the square matrix A is augmented with an
identity matrix of the same order as A / I i.e. the two matrices separated by a vertical line.
Now if the inverse matrix A-1 were known, we could multiply the matrices on each side of
the vertical line by A-1 as
AA-1 / A-1 I
Then because AA-1 = I & A-1I = A-1, we would have I / A-1. We don’t follow this procedure,
because the inverse is not known at this juncture, we are trying to determine the inverse. We
instead employ a set of permissible row operations on the augmented matrix A / I to
transform A on the left of the vertical line in to an identity matrix (I). As the identity matrix
is formed on the left of the vertical line, the inverse of A is formed on the right side. The
allowable manipulations are called Elementary raw operations.
Elementary Row Operations:
Operations: are operations permitted on the rows of a matrix.
In a matrix Algebra there are three types of row operations:
Type 1: Any pair of rows in a matrix may be interchanged / Exchange operations
Type 2:
2: A row can be multiplied by any non-zero real number / multiple operations
Type 3:
3: A multiple of any row can be added to any other row / add A-multiple operation
In short the operation can be expressed as:
1. Interchanging rows
2. The multiplication of any row by a non-zero number.
3. The addition / subtraction of (a multiple of) one row to /from another row

eg.1. A= 4 3 2 B= -2 6 7  interchanging
-2 6 7 4 3 2 rows

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 2. A= 4 3 2 B= 8 6 4  Multiplying the first
-2 6 7 –2 6 7 rows by 2

3. A= 4 3 2 B= 4 3 2  multiplying the 1st row

-2 6 7 6 12 11 by 2 & add to the 2nd
row. This case there is no
change to the first row.
Theorem on row operations
A row operation performed on product of two matrices is equivalent to row operation
performed on the pre factor matrix
AB = C

Pre factor post factor product

Matrix matrix matrix

eg. A= 1 2 3 B= 1 2 C= 9 13
2 3 42x3 1 1 13 19 2 x 2
2 3 3x2

Interchange row1 (R1) with row-2 (R2)

A= 2 3 4 B= 1 2 C= 13 19
1 2 3 1 1 9 13
2 3

Basic procedures to find the inverse of a square matrix

1. To set ones first in a column & next zeros (within a given column)
2. To set zeros first in a matrix & next ones.

Ones first method

Find the inverse of the following matrix
A= 3 2
1 1

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augment A 3 2 1 0
with the same dimension  1 1 0 1
identity matrix first
Interchange rows (row 1 with row 2)
1 1 0 1
3 2 1 0

Multiply R1 by –3 & add to R2

(-3R1 + R2) i.e. No change to R1
1 1 0 1
0 -1 1 -3
Multiply R2 by –1 = (-R2)
1 1 0 1
0 1 -1 3

Multiply R2 by –1 & add to R1 Ones first:

first: try to set ones first in a column and then
1 0 1 -2 zeros of the same column and goes from left to right.
0 1 -1 3
Therefore inverse of A is
A-1 = 1 –2
-1 3

Zeros first method

A= 3 2
1 1

Find inverse of A
Augmentation  3 2 1 0
1 1 0 1

-2R2 + R1

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 1 0 1 -2
1 1 0 1

-1R1 + R2 Therefore, inverse of A

1 0 1 -2 i.e. A-1 = 1 -2
0 1 -1 +3 -1 3

EXERCISE: FIND THE INVERSE OF THE FOLLOWING MATRIX

C= 1 2
2 4

3.4. Matrix Applications

pplications

3.4.1. Solving Systems of Linear Equations

I. n by n systems
Systems of linear equations can be solved using different methods. Some are:
I. Matrix method
- Inverse method
- Gaussian method
II. Estimation method – for two (2) variable problems (equation)
Inverse method:
Steps1. Change the system of linear equation into matrix form. The result will be three
different matrices constructed using coefficient of the variables,
variables, unknown values and right
hand side (constant) values
2. Find the inverse of the coefficient matrix
3. Multiply the inverse of coefficient matrix with the vector of constant, and the
resulting values are the values of the unknown matrix.

eg. 2X + 3Y = 4 given this system of linear equation and applying

X + 2Y = 2 inverse method to find the unknown values.

Step1. Change it into matrix form

- Using coefficient construct one matrix i.e. coefficient matrix

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 1 3 = Coefficient matrix
1 2

- Using the unknown variables construct unknown matrix & it is a column vector (a
matrix which has one column)
X = vector of unknown
Y
-Using the constant values again construct vector of constant
4 = vector of constant
2

Step2. Find inverse of the coefficient matrix

Now we are familiar how to find an inverse for any square matrix. Assuming once first
method, find the inverse for matrix 2 3
1 2

Its inverse become 2 -3

-1 2

Step3. Multiply the coefficient inverse with the vector of constant

2 -3 4 = 2
-1 2 2 0

Therefore the resulting matrix that is 2 is

0

The value for the unknown variables i.e. X = 2

Y 0

Then X = 2 and Y = 0 that is unique solution.

* The logic is this given three matrices; coefficient matrix, unknown matrix and vector of
constant in the following order.

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 AX = B A = coefficient matrix
Given this we can apply different X = vector of unknown
Operations, say multiply both sides B = vector of constant
Of the expression by A-1
A-1AX = A-1B
IX = A-1B
X = A -1B this implies that multiplying inverse of the coefficient matrix will gives us
the value of the unknown matrix

Limitations of inverse method

- It is only used whenever the coefficient matrix is square matrix
- In addition to apply the method the coefficient matrix needs to have an inverse
- It doesn’t differentiate between no solution and infinite solution cases.

Gaussian method
It is developed by a mathematician Karl F. Gauss (1777-1855). It helps to solve systems of
linear equations with different solution approaches i.e. unique solution, No solution and
infinite solution cases.
“n” by “n” systems

Step: 1. Change the system of linear equation into a matrix form

2. Augment the coefficient matrix with the vector of constant.
3. Change the coefficient matrix into identity form by applying elementary row
operations and apply the same on the vector of constant.
4. The resulting values of the vector of constant will be the solution or the value of the
unknown

Example: 2X + 3Y = 4
X + 2Y = 2
Step1. Change it into matrix form

2 3 X = 4
1 2 Y 2

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 Coefficient unknown vector of
Matrix matrix constant

Step2. Augmentation
2 3 4
1 2 2

Step3. Change the coefficient matrix into identity form by applying elementary row
operation (use ones first method)
2 3 4
1 2 2
Change first the primary diagonal entry from the first row into positive one. Possible
operation is exchange row one with row two.
1 2 2
2 3 4

Next change the remaining numbers in the first column into zero, this case number 2
Now multiply the 1st row by –2 & add the result to row –2
1 2 2
0 -1 0
Then proceed to column 2 and change the primary diagonal entry i.e. –1 into 1
Multiply the 2nd row by –1 (-1R2)
1 2 2
0 1 0
Now change the remaining number with in the same column (column –2) into zero i.e.
number 2

Multiply 2nd row by –2 and add the result to the 1st row
1 0 2
0 1 0

Therefore X = 2 and Y = 0

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Example2. X+Y=2
2X + 2Y = 4
Step-1
1 1 X = 2
2 2 Y 4

Step-2 1 1 2
2 2 4

Multiply Row-1 by –2 & add the result to raw-1 (-2R1 + R2)

1 1 2
0 0 0

The next step is changing the primary diagonal entry in the 2 nd row to 1. But there is no
possible operation that can enable you to change it in to number 1.
Therefore the implication is that you can’t go further but we can observe something from the
result. And it is implying an infinite solution case.

Example 3: X+Y=5
X+Y=9

Step 1: 1 1 X = 5
1 1 Y 9

Step 2: 1 1 5
1 1 9

Change the encircled number above in to zero

Multiply the first row by –1 & add the result to the 2nd row.
1 1 5
0 0 4
0 = 4 no solution

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There is no possible operation that we can apply in order to change the primary diagonal
entry in the 2nd column without affecting the first column structure. Therefore stop there, but
here we can observe something i.e. it is no solution case.
Therefore, Gaussian method makes a distinction between No solution & infinite solution.
Unlike the inverse method:
* Summarizing our results for solving an “n” by “n” system, we start with the matrix.
(A/B), & attempt to transform it into the matrix (I/C) one of the three things will result.
1. an “n” by “n” matrix with the unique solution.
eg.
1 0 0 10
0 1 0 -5
0 0 1 3

2. A row that is all zeros except in the constant column, indicating that there are no solutions,
eg. 1 0 0 3
0 1 0 -5
0 0 0 7
3. A matrix in a form different from (1) & (2) indicating that there are an unlimited number
of solutions. Note that for an n by n system, this case occurs when there is a row with all
zeros, including the constant column.

Eg. 1 0 2 5
0 1 3 -3
0 0 0 0

Reference Exercise
1. X + 2Y – 3Z = 11 2. X + Y + Z = 4 3. X + Y + Z = 4
3X + 2Y + Z = 1 5X – Y + 7Z = 25 5X – Y + 7Z =20
2X + Y - 5Z = 11 2X – Y + 3Z = 8 X – Y + 3Z = 8
Unique solution case * No solution case * Many solution case
i.e X = -1

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 Y=3
Z=2

4. 2X + 6Y – Z = 18
Y + 3Z = 9
3X – 5Y + 8Z = 4 X = 1, Y = 3, Z = 2
II M by n linear systems
The m x n linear systems are those systems where the number of rows (m) and number of
columns (n) are unequal or it is the case where the number of equations (m) & the number of
variables (n) are unequal. And it may appear as m > n or m < n.
Linear equation where m > n
To solve an m by n system of equations with m > n, we start with the matrix (A/B) and
attempt to transform it into the matrix (I/C).

One of the three things will result:

1. An m by n identifying matrix above m – n bottom rows that are all zeros, giving the
unique solution:

1 0 0 3 3X1 + 2X2 + X3 = 23
0 1 0 -5 X1 + 3X2 + 2X3 = 26
0 0 1 4 2X1 + X2 + 2X3 = 10 3, 5, 4
0 0 0 0 4X1 + 5X2 + 3X3 = 49

2. A row that is m – n bottom raw is all zeros except in the constant column, indicating that
there are no solutions

eg. 1 0 0 3 2X1 + X2 = 30
0 1 0 -5 X1 + 2X2 = 24
0 0 1 7 4X1 + 5X2 = 72
0 0 0 1
3. A matrix in a form different from (1) & (2), indicating that there are an unlimited
number of solutions

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eg. 1 0 2 -4 3X1 + 2X2 + X3 = 6
0 1 3 8 6X1 + 4X2 + 3X3 = 12
0 0 0 0 9X1 + 6X2 + 3X3 = 18
0 0 0 0 15X1 + 10X2 + 5X3 = 30

Linear Equations where m < n

Our attempts to transform (A/B) into (I/C) in the case where m < n will result in:

1. A raw which is all zeros except in the constant columns, indicating that there are no
solutions, or

2. A matrix in a form different from number one above indicating that there are an unlimited
number of solutions.
“Every system of linear equations has No solution, exactly one Solution or
infinitely many solutions.”
solutions.”

Example: Solve the following systems of linear equations

1) 4X1 + 6X2 – 3X3 = 12
6X1 + 9X2 – 9/2X3 = 20
No solution
X1 + 3X2 + X3 = 6
-X1 + X2 + X3 = 2
Unlimited solution
2X1 + 3X2 + 4X3 + X4 = 37
X1 + 2X2 + 3X3 + 2X4 = 24
3X1 + X2 + X3 + 3X3 = 33
Unlimited solution

Solution for an “n” by “n” system

1. 1 2 -3 11 2. 1 1 1 4
3 2 1 1 5 -1 7 25
2 1 -5 11 2 -1 3 8

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 -3R1+R2 / -2R1+R3 –5R1 + R2 / -2R1 + R3
1 2 -3 11 1 1 1 4
0 -4 10 -32 0 -6 2 5
0 -5 4 -22 0 -3 1 0
-1/4 R2 / -2 R2 + R1 / 3 R2 + R3 -1/6 R2 / -R2+R1 / 3 R2 + R3

1 0 2 -5 1 0 4/3 13/2
0 1 -5/2 8 0 1 -1/3 –5/6
0 0 -13/2 13 0 0 0 -5/2

-2/13 R3 / 5/2 R3 + R2 / -2 R3 + R1 this implies No solution case

1 0 0 -1
0 1 0 3
0 0 1 -2
3) 1 1 1 4
1 0 0 X -1 5 -1 7 20
0 1 0 Y = 3 2 -1 3 8
0 0 1 Z -2 –5R1 + R2 / -2R1 + R2
X = -1
Y 3 1 1 1 4
Z –2 0 -6 2 0
X = -1 Y = 3 Z = -2 0 -3 1 0
-1/6 R2 / 3 R2 + R3 / -R2 + R1
1 0 4/3 4
0 1 -1/3 0
0 0 0 0
This implies that there are so many or infinite solution

“m” by “n” systems

1) 3 2 1 23 2) 2 1 30
1 3 2 26 1 2 24
2 1 2 19 4 5 72
4 5 3 49 R1 R2 / -2R1 + R2 / -4R1 + R3

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R1 R2 / -3R1 + R2 / -2R1+R3 / -4R1 + R4 1 2 24
1 3 2 26 0 -3 -18
0 -7 -5 -55 0 -3 -24
0 -5 -2 -33
0 -7 -5 -55
-1/7 R2 / -3R2+R1 / 5R2 + R3 / 7R2 + R4 -1/3 R2 / -2R2 + R1 / 3R2 + R3
1 0 -1/7 17/7 1 0 14
0 1 5/7 55/7 0 1 6
0 0 11/7 44/7 0 0 -6
7/11R3 / -5/7R3 + R2 / 1/7R3 + R1 this implies that there is no
solution which uniquely satisfy
the system
1 0 0 3
0 1 0 5 3) 3 2 1 6
0 0 1 4 6 4 3 12
0 0 0 0 9 6 3 18
15 10 5 30
Unique solution case 1/ 3R1 / -6R1 + R2 / -9R1+ R3 /
-15R1 + R4
 X1 = 3 X2 = 5 X3 = 4 1 2/3 1/3 2
0 0 1 0
0 0 0 0
0 0 0 0
This implies that there are unlimited numbers of solutions

m by n system where m <n

i.e. number of equations are less than # of variables
1) 4X1 + 6X2 – 3X3 = 12
6X1 + 9X2 – 9/2X3 = 20

4 6 -3 X1 12
6 9 -9/2 X2 = 20

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 X3

4 6 -3 12
6 9 -9/2 20
1/4R1 / -6R1 + R2
1 3/2 –3/4 3
0 0 0 2
No solution
2) X1 + 3X2 + X3 = 6
-X + X2 + X3 = 2

1 3 1 X1 6
-1 1 1 X2 = 2
X3

1 3 1 6
-1 1 1 2
1xR1 + R2
1 3 1 6
0 4 2 8
1/4R2
1 3 1 6
0 1 ½ 1/2
Infinite solution

3.4.2. Markov Chains: Concepts, Model and Solutions

This model is a forecasting model. It is probabilistic (stochastic) model. A Russian

Mathematician called Andrew Markov around 1907 develops this model.

Mathematics for Management (MGMT121) Page 47

Markov chains are models, which are useful in studying the evolution of certain systems over
repeated trials. These repeated trials are often successive time periods where the state
(outcome condition) of the systems in any particular time period can’t be determined with
certainty. Therefore, a set of transition probabilities is used to describe the manner in which
the system makes transition from one period to the next. Hence, We can predict the
probabilities of the system being in a particular state at a given time period. We can also talk
about the long run or equilibrium or steady state.

The necessary assumptions of the chain:

1. The system condition (outcome) state in any given period depends on its state in the
Preceding period & on the transition probabilities
2. The transition probabilities are constant overtime
3. Change in the system will occur once & only once each period
eg. If it’s a week, it is only once in a week
4. The transition period occurs with regularities
* If we start with days, we use the day until we reach our end.

Information flow in the analysis

The Markov model is based on two sets of input data
 The set of transition probabilities
 The existing or initial or current conditions or states
The Markov process, therefore, describes the movement of a system from a certain state in
the current state/time period to one of n possible states in the next stage. The system makes in
an uncertain environment, all that is known is the probability associated with any possible
move or transition. This probability is known as transition probability, symbolized by P ij. It is
the likelihood that the system which is currently in state i will move to state j in the next
period. From these inputs the model makes two predictions usually expressed as vectors.

1. The probabilities of the system being in any state at any given future time
period
2. The long run (equilibrium) or steady state probabilities.

The set of transition probabilities are necessary for both prediction (time period n, & steady
state), but the initial state is needed for only the first prediction.

Input data prediction (outcome)

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 Set of transition Steady states
Probabilities Or long run states

about the past

The probability of
Currently / initial The system being in
States Any sate at any give
about today time
Example
Currently it is known that 80% of customers shop at store 1 & 20% shop at store 2. In
reviewing a past data suppose we find that out of all customer who shopped at store 1 in a
given week 90% remain loyal for the next week (store one again), 10% switch to store 2. On
the other hand, out of all customers who shopped at store 2, in a given week 80% remains
loyal for the next week (store 2 again), 20% switch to store 1. What will be the proportion of
customers shopping at store 1 & 2 in each of the next two weeks?
Solution
Let S1 be the proportion of store 1
S2 be the proportion of store 2
- Initial state/current state probability matrix for store one and two will be:
V12 = (0.8 0.2)
To the next weekly shopping period
from one S1 S2 Transition probability matrix
week S1 0.9 0.1 is a square matrix such that each
shopping S2 0.2 0.8 entry indicates the prob. Of the
period system moving from a given state another state.
- The sum of rows in the transition matrix should be 1
- We have to be consistent in writing the elements
Markov Chain Formula

a) Vij (n) = Vij (n – 1) x P where P = Transition matrix

Vij (n) = Vector for period n
Vij (n – 1) = Vector for period n – 1
V12 (0) = (0.8 0.2) current share
V12 (1) = V12 (1 –1 ) x P

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 = V12 (0) x P
(0.8 0.2) 0.9 0.1
0.2 0.8
= (0.8 x 0.9) + (0.2 x 0.2) (0.8 x 0.1) + (0.2 x 0.8)
= 0.72 + 0.04 0.08 + 0.16
= 0.76 0.24
V12 (1) = (0.76 0.24)
V12 (2) = V12 (2 – 1) x P
= V12 (1) x P
(0.76 0.24) 0.9 0.1
0.2 0.8
(0.76x 0.9) + (0.24 x 0.2) 0.76 (0.1) + (0.24 x 0.8)
(0.732 0.268)
b) Long run market share

Assumption

In the log run the share of the systems is assumed to be constant.

Let - the share of store 1 in the long run be V1
- the share of store 2 in the long run be V2

n p n+1
(V1 V2) 0.9 0.1 = (V1 V2)
0.2 0.8
0.9V1 + 0.2V2 = V1
0.1V1 + 0.8V2 = V2
-V1 + 0.9V1 + 0.2V2 = 0
0.1V1 + 0.8V2 – V2 = 0
-0.1V1 + 0.2V2 = 0
0.1V1 + (0.2V2) = 0

0.9V1 + 0.2 (V2 – V1) = V1

0.9V1 + 0.2 – 0.2V1 = V1
0.7V1 + 0.2 = V1
0.2 = 0.3V1

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 V1 = 2/3
V2 = 1 – V1
= 1 – 2/3
V2 = 1/3

In the long run 67% of the customers will shop in store 1 & 33% in shop 2.

Prediction:
Long run: only the transition matrix
= At specified time:-
time:- the transition matrix & state vector. Hence unless the transition matrix
is affected, the long run state will not be affected. Moreover, we can’t know the number of
years, weeks to attain the long run state / point but we can know the share.

3.5. Summary

A matrix is a rectangular array of real numbers arranged in m rows & n columns. It is

symbolized by a bold face capital letter enclosed by a bracket or parentheses.

There are deferent types of matrices. These are: Vector matrix, Square matrix, Null or zero
matrix, Identity (unit) matrix, Scalar matrix

Two matrices of the same dimension are said to be conformable for addition. Adding
corresponding elements from the two matrices & entering the result in the same raw-column
position of a new matrix perform the addition

If A is a square matrix of order n, then a square matrix of its inverse (A -1) of the same order n
is said to be the inverse of A, if and only if A x A-1 = I = A-1 x A

Markov chains are models, which are useful in studying the evolution of certain systems over
repeated trials.
 Self Test Exercises
1. A Manufacturing firm which manufactures office furniture finds that it has the
following variable costs per unit in dollar/unit

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 Desks Chairs Tables Cabinet
Material 50 20 15 25
Labor 30 15 12 15
Overhead 30 15 8 20
Assume that an order of 5 desks, 6 chairs, &4 tables & 12 cabinets has just been received.
What is the total material, labor & overhead costs associated with the production of ordered
items?
2. Kebede carpet co. has an inventory of 1,500 square yards of wool & 1,800 square yards
of nylon to manufacture carpeting. Two grades of carpeting are produced. Each roll of
superior grade carpeting requires 20 sq. yards of wool & 40sq. yards of nylon. Each roll
of quality-grade carpeting requires 30 square yards of wool & 30 square yard of nylon. If
Kebede would like to use all the material in inventory, how many rolls of superior &
how may rolls of quality carpeting should be manufactured?
3. Getahun invested a total of br. 10000 in three different saving accounts. The accounts
paid simple interest at an annual rate of 8%, 9% & 7.5% respectively. Total interest
earned for the year was br. 845. The amount in the 9% account was twice the amount
invested in the 7.5% account. How much did Getahun invest in each account

4. A division of the ministry of public health has conducted a simple survey on the public
attitude towards smoking. From the results of the survey the department concluded
that currently only 20% of the population smokes cigarette & every month 10% of non-
smokers become smokers where as 5% of smokers discontinue smoking.
Required:
Required:
1. Write the current & transition matrices
2. What will be the proportion of the non-users (non-smokers) & users (smokers) in the
long run
5. A population of 100,000 consumers make the following purchases during a particular
week: 20000 purchase Brand A, 35,000 Brand B & 45000 purchase neither Brand. From
a market study, it is estimated that of those who purchase Brand A, 80% will purchase it
again next week, 15% will purchase brand B next week, & 5% will purchase neither
brand. Of those who purchase B, 85% will purchase it again next week, 12% will
purchase brand A next week, & 3% will purchase neither brand. Of those who purchase
neither brand, 20% will purchase A next week, 15% will purchase Brand B next week, &

Mathematics for Management (MGMT121) Page 52

 65% will purchase neither brand next week. If this purchasing pattern continues, will the
market stabilize?? What will the stable distribution be?
Yes. The share of A, B and C is = (0.4 0.5 0.1) respectively
6. A vigorous television advertising campaign is conducted during the football reason to
promote a well-known brand X shaving cream. For each of several weeks, a survey is
made & it is found that each week 80% of those using brand X continue to use it & 20%
switch. It is also found that those not using brand X, 20% switch to brand X while the
other 80% continue using another brad.

a) Write the transition matrix, assuming the transition percentage continue to hold for
succeeding weeks.
b) If 20% of the people are using brand X at the start of the advertising campaign,
what percentage will be brand X 1week later? Two weeks later?

 Answer Key to Self Test Exercises

1. D Ch T Cb
Mt 50 20 15 25 5 Desk
Lab. 30 15 12 15 6 Chair
FOH 30 15 8 20 4 Tables
12 Cabinet
Material cost = (50 x 5) + (20 x 6) + (5 x 4) + (25 x 12)
= 730 br.
Labor cost = (30 x 5) + (15 x 6) + (12 x 4) + (15 x 12)
= $ 468.00
FOH cost = (30 x 5) + (15 x 6 ) + (8 x 4) + (20 x 12)
= $ 1710.00

2. Given: wool inventory 1500 yards

nylon inventory 1800 yards
Grade one carpet The other grade carpet
Wool requirement

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 per roll 20 Sq. 30 Sq.
Nylon requirement
per roll 40 Sq. 30 Sq.

Let X be rolls of superior grade carpeting &

Y be rolls of quality grade carpeting
20 30 X 1500 20 30 1500
40 30 Y = 1800 40 30 1800

2 3 150
20X + 30Y = 1500 4 3 180
40X + 30Y = 1800 1/2 R1 / -4R1 + R2
-20X = -300
X = 15 1 3/2 75
0 -3 -120
20X + 30Y = 1500 –1/3 R2/ -3/2 R2 + R1
20 (15) + 30Y = 1500 1 0 15
30Y = 1500 – 300 0 1 40
Y = 1200
30
Y = 40 X = 15 & Y = 40

3. Total investment 10000.00

interest earned from the three accounts 8%, 9% and 7.5%
total interest earned for the year was 845.00
amount in 9% = 2 (amount in 7.5%)

Let Amount invested in 8% account be X1

Amount invested in 9% account be X2
Amount invested in 7.5% account be X3

X1 + X2 + X3 = 10,000

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 0.08X1 + 0.09X2 + 0.075X3 = 845
X2 = 2(X3)
or

X1 + X2 + X3 = 10,000
0.08X1 + 0.09X2 + 0.075X3 = 845
X2 – 2X3 = 0

1 1 1 10,000
80 90 75 845,000
0 1 -2 0
-80R1 + R2
1 1 1 10,000
0 10 -5 45,000
0 1 -2 0
1/10R2 -R2 + R1 -R2 + R3

1 0 3/2 5500
0 1 -1/2 4500
0 0 -3/2 -4500
-2/3 R3 ½ R3 ½ R3 + R2 -3/2 R3 + R1

1 0 0 1000
0 1 0 6000
0 0 1 3000
X1 = 1000,
1000, X2 = 6000,
6000, X3 = 3000

4.
1) Let U – stands for Smokers
N – Stands for non-Smokers

Initial state VUN (0) = (0.2 0.8)

To the next month

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 Smokers Non smokers
From Smokers 0.95 0.05 P = .95 .05
one month Non-smokers 0.10 0.90 .10 .90
2). VUN(1) = VUN(0) x P VUN(2) = VUN(1) x P
= (0.2 0.8) .95 .05 = (.27 .73) . .95 .05
.10 .90 .10 .90

= ( 0.27 0.73) = (0.3295 0.6705)

5. Given: 20,000 purchase brand A

35,000 purchase brand B
45,000 purchase neither brand
Total consumers = 100,000 (20,000 + 35,000 + 45,000)

Let VA represents the share of brand A purchasers

VB represents the share of Brand B purchasers
VN represent the share of neither brand purchasers

The system is arranged in a weekly basis

To the next week shopping period
From A B N
One week A 0.80 0.15 0.05
Shopping B 0.12 0.85 0.03 = P
Period N 0.20 0.15 0.65
The stable market means the long run or steady state market because it is noted that in the
long run the share will be stable.
And in the long run we have said that the share at n period is equal with the share at n + 1
period. Therefore
(The share at n period) x (the transition probabilities) = (the share at n + 1 period)
Let the share of brand A purchasers be V1 in the long run
the share of brand B purchasers be V2 in the long run
the share of neither purchasers be V3 in the long run
Then (V1 V2 V3) 0.80 0.15 0.05
0.12 0.85 0.03 = (V1 V2 V3)

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 0.20 0.15 0.65
0.8V1 + 0.12V2 + 0.2V3 = V1
0.15V1+ 0.85V2 + 0.15V3 = V2
0.05V1 + 0.03V2 + 0.65V3 = V3
V1 + V2 + V3 = 1
Therefore V1 = 1 – V2 – V3
Substitute 1 – V2 – V3 in place of V1 to reduce your system in to two variable case
Take the first equation
0.8V1 + 0.12V2 + 0.2V3 = V1
0.8 (1- V2 – V3) + 0.12V2 + 0.2V3 = 1 – V2 – V3
0.8 – 0.8V2 – 0.8V3 + 0.12V2 + 0.2V3 + V2 + V3 = 1
Add similar variables together
0.32V2 + 0.4V3 = 1- 0.8
0.32V2 + 0.4V3 = 0.2 this is a summarized equation from the first equation. And do
the same for the second equation.
0.15V1 + 0.85V2 + 0.15V3 = V2
0.15 (1 – V2 – V3) + 0.8V2 + 0.15V3 = V2
0.15 – 0.15V2 – 0.15V3 + 0.85V2 + 0.15V3 = V2

Add together similar variables and take the constant values to the right side.
-0.3V2 = -0.15
V2 = -0.15
-0.30
V2 = 0.5 this implies the long run share for the purchasers of brand B will be
50%. Then using this value and the first summarized equation (0.32V2 + 0.4V3 = 0.2)

Find the value of V3 in the long run

That is, 0.32 (0.5) + 0.4V3 = 0.2
0.16 + 0.4V3 = 0.2
0.4V3 = 0.20 – 0.16
V3 = 0.04
0.04 = V3 = 0.1
This implies the share of neither brand purchases in the long run will be 10%. Hence the
share of Brand A purchasers will be 0.4 (1 – 0.5 – 0.1)

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 Because we said above V1 = 1 – V2 – V3
Therefore V1 = 1 – 0.5 – 0.1
V1 = 0.4

That is the long run share of Brand A purchasers will be 40% of the total population
i.e. VA VB VN = (0.4 0.5 0.1)

6. A) let X be the proportion of brand X users

X1 be the proportion of other brand users

To the next week

Shopping period

From this X X1
Week X 0.80 0.20 =P
Shopping X1 0.20 0.80
period
B) Current users of brand X = 20% then, the users of other brand will be 80%
VXX1 (0) = (0.20 0.80)
VXX1 (1) = VXX1 (0) P
= (0.20 0.8) 0.80 0.20
0.20 0.80
= (0.32 0.68)
The proportion of brand X and other brand users after one week period is expected to be 32%
and 68% respectively. Then the expected users in the 2nd week will be
VXX1 (2) = VXX1 (2 – 1) (P)
= VXX1 (1) P
= (0.32 0-.68) 0.80 0.20
0.20 0.80
= 0.392 0.608
The expected share of brand X and other brand users is 39.2% and 60.8% in the second
-week.

? Review Questions

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1. A certain manufacturer produces two product P & q. Each unit of product P requires (in
its production) 20 units of row material A & 10 units of row material B. each unit of
product of requires 30 units of raw material A & 50 units of raw material B. there is a
limited supply of 1200 units of raw material A & 950 units of raw material B. How
many units of P & Q can be produced if we want to exhaust the supply of raw materials?
2. Attendance records indicate that 80,000 South Koreans attended the 2002 world cup at
its opening ceremony. Total ticket receipts were Birr 3,500,000. Admission prices were
Birr 37.5 for the second-class and Birr 62.50 for the first class. Determine the number of
South Koreans who attended the football game at first class and second class.

UNIT 3: INTRODUCTION TO LINEAR PROGRAMMING

Contents
3.1. Concepts
3.2. Formulation of Linear Programming Models
3.2.1. The Maximization Problem
3.2.2. The Minimization Problem

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 3.3. Solution Approaches to Linear Programming Problems
3.3.1. Graphic Solution Approaches to Linear Programming Problems
3.3.2. Simplex Solution Approaches to Linear Programming Problems
3.4. Summary

Unit Objectives

At the end of this chapter students will be able to

 Explain the concepts of linear programming
 Apply the knowledge of linear programming to solve managerial problems
 Use linear programming models to solve managerial problems having quantitative
application.

 Introduction
This unit begins our coverage of linear programming, which is one of the most popular tools
of management science. A linear programming (LP) model is mathematical representation of
linear programming problems. Graphic or simplex approaches can be used to find optimal
solutions to certain linear programming problems in which the solution must satisfy a given
set of requirements, or constraints.

The purpose of this unit is to provide you with an introduction to linear programming
models. Emphasis is placed on familiarization with terminology, model formulation, and
finds solutions for linear programming models using graphic or simplex Method. The unit is
designed to help you to develop two very important skills:
1. The ability to formulate an LP model in mathematical terms.
2. The ability to solve linear programming model using graphic solution methods

3.1. Concepts of Linear Programming

Linear programming- is an optimization method which shows how to allocate scarce

resources in the best possible way subject to more than one limiting condition expressed in
the form of inequalities and /or equations.
 It Enables users to find optional solution to certain problems in which the solution
must satisfy a given set of requirements or constraints.

Mathematics for Management (MGMT121) Page 60

  Optimization in linear programming implies either maximization (max) Profit,
revenue, sales, market share or minimization (min) Cost, time, distance, or a certain
objective function.
 Involves linearly related multi-variety functions i.e. functions with more than one
independent variables.

The goal in linear programming is to find the best solution given the constraints imposed by
the problem, hence the term constrained optimization.

3.2. Formulation of Linear Programming Model

LP models are mathematical representation of LP problems. Some models have a specialized

format where as others have a more generalized format. Despite this, LPMs have certain
characteristics in common knowledge of these characteristics enables us to recognize
problems that are amenable to a solution using LP models and to correctly formulate an LP
model. The characteristics can be grouped into two categories: Components and
assumptions. The components relate to the structure of a model, where as the assumptions
describe the conditions under which the model is valid.
Components Assumptions
1. Objective function 1. Linearity
2. Decision variables Model 2. Divisibility
Model
3. Constraints Structure 3. Certainty Validity
4. Parameters and Right. 4. Non-negativity
Hand Side Values
1. Components of LP Model

a) The Objective function: is the mathematical/ quantitative expression of the objective

of the company/ model. The objective in problem solving is the criterion by which all
decisions are evaluated. In LPMs a single quantifiable objective must be specified by
the decision maker. For example, the objective might relate to profits, or costs or
market share, best to only one of these. Moreover, because we are dealing with
optimization, the objective will be either maximization or minimization, but not both
at a time
b) The Decision Variables: represent unknown quantities to be resolved for. These
decision variables may represent such things as the:

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 - Number of units of different products to be sold
- The number of dollars to invest in various projects
- The number of ads to place with different media
Since the decision maker has freedom of choice among actions, these decision
variables are controllable variables.
c) The constraints: are restrictions which define or limit the attainability (achievability)
feasibility of a proposed course of action. They limit the degree to which the
objective can be pursued.
A typical restriction embodies scarce resources (such as labor supply, RMs,
production capacity, machine time, storage space), legal or contractual requirements
(leg. Product standards, work standards), or they may reflect other limits based on
forecasts, customer orders, company policies etc.
d) Parameters- are fixed values that specify the impact that one unit of each decision
variable will have on the objective and on any constraint it pertains to as well as to
the numerical value of each constraint.
The components are the building blocks of an LP model. We can better understand their
meaning by examining a simple LP model as follows.
Example:
Maximize: 4X1 + 7X2 + 5X3 (profit)… objective function subject to
2X1 + 3X2 + 6X3 300 labor hrs
5X1 + 4X3 200 raw mata. System
Constraints
3X1 + 5X2 + 2X3 360
X1 = 30 Individual
X1 – qty of product 1 X2 40 Constraints
Variables
Decision

X2 qty of product 2 X1, X2, X3 0 Non negativity constructs

X3 qty of product 3
System constraints-
constraints- involve more than one decision variables
Individual constraint- involve only one decision variable.
None-negativity constrains- specify that no variable will be allowed to take on a negative
value. The non negativity constraints typically apply in an LP model, whether they are
explicitly stated or not.

2. Assumption of LP models
a) Linearity

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The linearity requirement is that each decision variable has a linear impact on the objective
function and in each constraint in which it appears. Taking the above example, producing one
more unit of products add br 4 to the total profit. This is true over the entire range of possible
values of x1. The same applies (true) to each of the constraints.
b) Divisibility: The divisibility requirement pertains to potential values of decision variables.
If is assumed that non-integer values are acceptable. For example: 3.5 TV sets/ hr would be
acceptable 7TV sets/ 2hr.
c) Certainty: The parameters are known and constant. The certainty requirement involves
two aspects of LP models. The constraint equations do not change.
(1) With respect to model parameters (i.e. the numerical values) –If is assumed that these
values are known and constant. Eg. In the above example each unit of product 1
requires 2 labor hours is known and remain constant, and also the 300 labor available is
deemed to be known and constant.
(2) All the relevant constraints identified and represented in the model are as they are.
d) Non-negativity-
Non-negativity- The non-negativity constraint is that negative values of variables are
unrealistic and, therefore, will not be considered in any potential solutions, only positive
values and zero will be allowed.
Steps for formulating Linear Programming Models
Just as it is important to carefully formulate the model that will be used to solve the problem.
If the LP model is ill formulated, ill-structured, it can easily lend to poor decisions.

Formulating linear programming models involves the following steps:

1) Define the problem/ problems definition:
definition: to determine the no. of type 1 and type 2
products to be produced per month so as to maximize the monetary profit given the
restriction.
2) Identity the decision variables or represent unknown quantities.
* Let X1 and X2 be the monthly quantities of type 1 and type 2 products.
3) Determine the objective function: Once the variables have been identified, the
objective function can be specified. It is necessary to decide if the problem is
maximization or a minimization problem and the coefficients of each decision
variable.

4) Identify the constraints

 system constraints- more than one variable
 individual constraints- one variable

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  Non-negativity constraints.

3.2.1. The Maximization Problem

Example: A firm that assembles computers computer equipment is about to start

production of two new micro computers. Each type of microcomputer will require
assembly time, inspection time, and storage space. The amount of each of there
resources that can be devoted to the production of micro computers is limited. The
manager of the firm would like to determine the quantity of each micro computer
to produce in order to maximize the profit generated by sales of these micro
computers.

Additional information
In order to develop a suitable model of the problem, the manager has met with the design and
manufacturing personnel. As a result of these meetings, the manager has obtained the
following information:
Type 1 Type 2
Profit per unit $ 60 $ 50
Assembly time per unit 4hrs 10hrs
Inspection time per unit 2hrs 1hr
Storage space per unit 3 cubic ft 3 cubic ft
The manager also has acquired information on the available company resources. These
(weekly) amounts are:
Resource Resource available
Assembly time 100hrs
Inspection time 22hrs
Storage space 39cubic feet

The manager has also met with the firms marketing manager and learned that demand for the
micro computers was such that what ever combination of these two types of micro computers
is produced, all of the out put can be sold.

Solution
Step 1:
1: Problem definition
- To determine the no. of two types of microcomputers to be produced (and sold) per
week so as to maximize the weekly profit given the restrictions.

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Step 2: Identify the decision Variable
- Let X1 and X2 be the weekly quantities of type 1 and type 2 microcomputers
respectively.
Step 3: Develop the objective function
Maximize or Z max = 60X1 + 50X2
Step 4: Constraint identification
 System constraints: 4X1 + 10X2 100hrs Assembly
2X1 + X2 22hrs Inspective
3X1 + 3X2 39 cub Feet Storage
 Individual constraints ….No
 Non-negativity constraint ….X1, X2 0

In summary, the mathematical model for the microcomputer problem is:

Z max = 60X1 + 50X2
Subject to
4X1 + 10X2 100
2X1 + X2 22
3X1 + 3X2 39
X1, X2 0
3.2.2. Minimization Problems

Example: the agricultural research institute suggested to a farmer to spread out at least 4800
kg of a special phosphate fertilizer and not less than 7200 kg of a special nitrogen fertilizer to
raise productivity of crops in his fields. There are two sources for obtaining these mixtures A
and B. Both of these are available in bags weighing 100 kg each and they cost $40 and $24
respectively. Mixture A contains phosphate and nitrogen equivalent of 20 kg and 80 kg
respectively, while mixture B contains these ingredients equivalent of 50 kg each.

Write this as a linear programming problem and determine how many bags of each type
should the farmer buy in order to obtain the required fertilizer at minimum cost.

Required: Formulate the linear programming model for the problem.

1. Problem Definition

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Determining the number of bags of mixtures A and B that must be purchased, so as to satisfy
the requirements set and minimize total cost, given the limiting factors.
2. Variable representation
Let be the number of bags of mixture A that must be purchased
be the amount of bags of mixture B that must be purchased
be the minimum cost
3. Developing objective function

4. Constraint identification

3.3. Solution Approaches to Linear Programming Problems

There are too approaches to solve linear programming problems.

1. The graphic solution method
2. The algebraic solution/ simplex algorithm

3.3.1. The Graphic solution Method

It’s a relatively straight forward method for determining the optional solution to certain linear
programming problems.
It gives us a clear picture.
This method can be used only to solve problems that involve two decision variables.
However, most linear programming applications involve situations that have more than two
decision variables, so the graphic approach is not used to solve these.
Example 1: Solving the micro-computer problem with graphic approach.
Z max: 60X1 + 50X2
S.t: AX1 + 10X2 100
2X1 + X2 22
3X1 + 3X2 39
X1 X2 0
Steps
1. Plot each of the constraints and identify its region.

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 2. Identify the common region, which is all area that contains all of the points that
satisfy the entire set of constraints.
3. Determine the optional solution-identify the points which lead to maximum benefit or
minimum cost.
4X1 + 10X2 = 100 2X1 + X2 = 22 3X1 + 3X2 = 39
X1 0 25 X1 0 11 X1 0 13

X2 10 0 X2 22 0 X2 13 0

24
Region ABCDE is called feasible region
(0 22)

20
point C = ? 2x1 + x2 = 22 x-3
3x1 + 3x2 = 39
-6x1 + 3x2 = -66
16
3x1 + 3x2 = 39
12 -3x1 = -27
x1 = -27/-3 = 9
2(9) + x2 = 22
8
x2 = 22 – 18 = 4
Point D = 3x1 + 3x2 = 39 x - 4
4 4x1 + 10x2 = 100x3
= -12x1 + 12x2 = -156

0
12x1 + 30x2 = 300

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 18x2 = 144
A 4 8 B 12 16 20 24
x2 = 8
3x1 + 3(8) = 39
3x1 = 39 – 24
x1 = 15/3 = 5

To identity the maximum (minimum) value we use the corner point approach or the extreme
point approach. The corner point/ extreme point approach has one theorem. It states that:

For problems that have optional solutions, a solution will occur at an extreme, or corner
point. Thus if a problem has a single optional solution, it will occur at a corner point. If it has
multiple optional solutions, at least one will occur at a corner point consequently, in
searching for an optional solution to a problem, we need any consider the extreme points
because one of those must be optional. Further, determining the value of the objective
function at each corner point, we could identify the optional solution by selecting the corner
point that has the best value (i.e. maximum or minimum, depending on the optimization case)
of the objective function. Extreme points represent interactions of constraints.

Determine the values of the decision variables at each corner point. Some times, this can be
done by impaction (observation) and sometimes by simultaneous equation.

Substitute the value of the decision variables at each corner point into the objective function
to obtain its value at each corner point.
After all corner points have been so evaluated, select the one with the highest or lowest value
depending on the optimization case.
Value of the obi
Corner Coordinates How function Z = 60X1 + 50X2
Points X1 X2 determined?
A 0 0 observation 0 br
B 11 0 observation 660 br
C 9 4 Simultaneous 740 br
equation
D 5 8 Simultaneous 700 br

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 equation
E 0 10 Observation 500 br

Basic Solution
X1 = 9 X2 = 4 Z = 740 Br.
After we have got the optimal solution, we have to substitute the value of the decision
variables into the constraints and check whether all the resources available are used or not. If
there is any unused resource we can use it for any other purpose. The amount of unused
resource is known as slack- the amount of a scarce resource that is unused by a given
solution. The slack can range from zero, for a case in which all of a particular resource is
used, to the original amount of the resource that was available (i.e. none of it is used.)

Computing the amount of slack

Originally unused Amount of slack
Amount used available (Available-used)
Constraint X1 = 9X2 = 4
Assembly 4(9) + 10(4) = 76 100 100 – 76 = 24 hrs
Impective 2(9) 9+ 1(4) = 22 22 22 – 22 = 0 hr
Storage 3(9) + 3(4) = 39 39 39 – 39 = 0 hr
Constraints that have no slack are sometimes referred to as binding constraints since they
limit or bind the solution. In the above cases, inspection time and storage space are binding
constraints, while assembly time has slack.

Knowledge of unused capacity can be useful for planning. A manager may be able to use the
remaining assembly time for other products, or, perhaps to schedule equipment maintenance,
safety seminars, training sermons or other activities

Interpretation: The Company is advised to produce 9 units of type 1 micro computer and 4
units of type 2 micro computers per week to maximize its early profit to Br. 740, and in
doing so the company would be left with unused resource of 24 assembly hrs which can be
used for other purposes.
Example 2: Solving the diet problem with graphic approach.
C min = 5X1 + 8X2
10X1 + 30X2 140 10X1 + 30X2 = 140

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 20X1 + 15X2 145 X1 0 14
X1 , X2 0 X2 14/3 0
20X1 + 15X2 = 145 X1 0 +-25
X2 9.67 0

X2

12

8
A
4
B
0 X1
4 8 12 C 16

20X1 +15X2 = 145

Value of obj
coordinates How determined Function cmin = 5X + 8X2
Points X1 X2
A 0 9.67 Observation 77.3 br.
B 5 3 Simul. equn. 49 br.
C 14 0 Observation 70 br.

Basic solution X1 = 5 pounds X2 = 3 pounds C = 49 br.

Interpretation to make the diet the minimum cost of br 49 we have to purchase 5
pounds of type 1 food and 3 pounds type 2 food.

If there is a difference between the minimum required amount and the optimal solution, we
call the difference surplus; that is: surplus is the amount by which the optimal solution causes
a constraint to exceed the required minimum amount. It can be determined in the same way
that slack can: substitute the optimum values of the decision variables into the left side of the

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constraint and solve. The difference between the resulting value and the original right-hand
side amount is the amount of surplus.
Surplus can potentially occur in a constraint.

3.3.2. The Simplex Algorithm/ Algebraic Solution Method

The simplex method is an iterative technique that begins with a feasible solution that is not
optimal, but serves as a starting point. Through algebraic manipulation, the solution is
improved until no further improvement is possible (i.e. until the optional solution has been
identified.) each iteration moves one step closer to the optional solution.

The optimal solution to a linear programming model will occur at an extreme point of the
feasible solution space. This is true even if a model involves more than two variables;
optimal solutions will occur at these points of the feasible solution space; some will be
outside of the feasible solution space. Hence, not every solution will be a feasible solution.
Solutions which represent in fasseetwim of constraints are called basic solutions; those which
also satisfy all of the constraints, including the non-negativity constraints, are called basic
feasible solutions. The simplex method is an algebraic procedure for systematically
examining basic feasible solutions. If an optimal solution exists, the simplex method will
identify it. # of basic solution n + mCm  not all basic solutions are feasible.

The simplex procedure for a maximization problem with all constraints consists of the
following steps.
1. Write the LPM in a Standard form: When all of the constraints are written as equalities,
the LP program is said to be in a standard form. We convert the LPM in to a standard
form by applying the slack variables, s, which carries a subscript that denotes which
constraint it applies to. For example, s 1 refers to the amount of slack in the first
constraint, S2 to the amount of slack in the second constraint, and so on. When slack
variables are introduced to the constraints, they are no longer inequalities b/c the slack
variable accounts, they become equalities. Further more, every variable in a model must
be represented in the objective function. However, since slack does not provide any real

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 contribution to the objective, each slack variable is a assigned a coefficient of zero in the
objective function.
Slack = Requirement – Production, scruples – Production – Requirement
Taking the microcomputer problem, its standard form is as follows

Z max = 60X1 + 50X2 Z max = 60X1 + 50X2 + 0S1 + 0S2 + 0S3

4X1 + 10X2 100 4X1 + 10X2 + S1 = 100
2X1 + X2 22  2X1 + X2 + S2 = 22
3X1 + 3X2 39 3X1 + 3X2 + S3 = 39
X1, X2 0 All variables 0
(X1, X2, S1, S2, S3 0)
2. Develop the initial tableau
a. List the variables across the top of the table and write the objective function
coefficient of each variables just above it.
b. There should be one row in the body of the table for each constraint. List the slack
variables in the basis column, one per row.
c. In the Cj column, enter the objective function coefficient of zero for each slack
variable.
d. Compute values for row Zj. Cj = Coeff of variable J in the obj function.

e. Computer values for Cj – Zj. bj = RHSV of constraint i.

Aij – coefficient of variable j in constraint i

Pivot column Pivot element

Solution Cj 60 50 0 0 0 100/4 = 25
leaving
Basis X1 X2 S1 S2 S3 RHSV 22/2 = 11
S1 0 4 10 1 0 0 100 39/3 = 13

S2 0 2 1 0 1 0 22
S3 0 3 3 0 0 1 39
Zj 0 0 0 0 0 0
Cj – Zj 60 50 0 0 0
Initial feasible solution
S1 = 100 Obtained by
Entering variable S2 = 22 equating tow
S3 =39 Variables to
X1 = 0 Zero
X2 = 0 Decision
Z = 0 Variable
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3. Develop subsequent tables
3.1 Identify the entry variable –variable that has a largest positive value in the Cj – Zj
row.
3.2 Identify the leaving variable –using the constraint coefficient or substitution rates in
the entering variable column divide each one into the corresponding quantity value.
However do not divide by a zero or negative value. The smalls non negative ratio that
results indicate which variable will leave the solution
4. Find unique vectors for the new basic variable using row operations on the pivot element.
-1/2 R21 –4R2new + R1old, -3R2new + R3old
Solution Cj 60 50 0 0 0
Cj = bi/xj (aij)
Basics X1 X2 S1 S2 S3 RHSV 56/8 = 7
11/1/2 = 22
S1 0 0 8 1 -2 0 56 6/3/2 = 4
X1 60 1 ½ 0 ½ 0 11
S3 0 0 3/2 0 -3/2 1 6
Zs 60 30 0 30 0 660
Cj – Zj 0 20 0 -30 0

Incoming Variable

Solution Cj 60 50 0 0 0 RHSV
Basis X1 X2 S1 S2 S3
S1 0 0 0 1 6 -16/3 24
X1 60 1 0 0 1 -1/3 9
X2 50 0 1 0 -1 2/3 4
Zj 60 50 0 10 40/3 740
Opportunity cost
Cj – Zj 0 0 0 -10 -40/3

5. Compute Cj – Zj row
6. If all Cj – Zj Values are zeros and negatives, you have reached optimality
7. If this is not the case (step 6), repeat 2 to 5 until you get optional solution.
“A simplex solution in a maximization problem in optional if the Cj – Zj row consists
entirely of zeros and negative numbers (i.e. there are no positive values in the bottom
row.)”

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 Note: The variables in solution all have unit vectors in their respective columns for the
constraint equations. Further, note that a zero appears in row C – Z in every column
whose variable is in solution, in row C – Z in every column whose variable is in solution,
indicating that its maximum contribution to the objective function has been realized.
Example 2
A manufacture of lawn and garden equipment makes two basic types of lawn mowers; a push
type and a self propelled model. The push type require 9 minutes to assemble and 2 minutes
to package; the self-propelled mover requires 12 minute to assemble and 6 minutes to
package. Each type has an engine. The company has 12hrs of assembly time available, 75
engines, and 5hrs of packing time profits are Birr 70 for the self propelled model and br 45
for the push type mower per unit.

Required:
1. a. To determine how many units of each type of mower to produce so as to maximize
profit.
b. Let X1 be push type mower
X2 be self propelled mower
c. Determine the objective function
Z max = 45X1 + 70 X2
d. Identify constraints
9X1 + 12X2 720 minutes ……assembly time
2X1 + 6X2 300 minutes ……..packing time
X1 + X2 75 engine ………….Engines
X1, X2 0
In summary
Z max = 45X1 + 70X2
S.t. 9X1 + 12X2 720
2X1 + 6X2 300
X1 + 2 75
X1, X2 0

2. a. Write the Lpm in a standard form

Z max = 45X1 + 70X2 + 0S1 + 0S2 + 0S

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 S.T. 9X1 + 12X2 + S1 = 720
2X1 + 6X2 + S2 = 300
X1 + X2 + S3 = 75
X1 X2, S1, S2, S3 0
a. Develop the initial tableau

Solution C 45 70 0 0 0 RHSV
Basis X1 X2 S1 S2 S3
Qij = Bi/aij
S1 0 9 12 1 0 0 720
720/12 = 60
S2 0 2 6 0 1 0 300
300/6 = 50 – Leaving
S3 0 1 1 0 0 1 75 75/1 = 75
Z 0 0 0 0 0 0
C–Z 45 70 0 0 0

entering

c. Develop the subsequent tableaus

1/6R2, - 1R2new + R3, -12R2new + R1
C 45 70 0 0 0
Solution Basis X1 X2 S1 S2 S3 RHSV
S1 0 5 0 1 -2 0 120
X2 70 1/3 1 0 1/6 0 50
S3 0 2/3 0 0 -1/6 1 25
Z 70/30 70 0 70/6 0 3500
C–Z 65/3 0 0 -70/6 0

Entering
1/5R1, -1/3 R1new + R2old, -2/3R, New + R3 old

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 C 45 70 0 0 0 Optimal solution
Solution Basis X1 X2 S1 S2 S3 RHSV X1 = 24units

X1 45 1 0 1/5 -2/5 0 24 X2 = 42units

S1 = 0
X2 70 0 1 -1/15 3/10 0 42
S2 = 0
S3 0 0 0 -2/15 1/10 1 9
S3 = 9 engine
Z 45 70 13/3 3 0 4020 Z = 4020
C-Z 0 0 -13/3 -3 0

9X1 + 12X2 = 720 2X1 + 6X2 = 300 X1 + X2 = 75

X1 0 80 X1 0 150 X1 0 75
X2 60 0 X2 50 0 X2 75 0

X2
120

9X1 + 12X2 = 720

100 2X1 + 6S2 = 300

9(150 – 3X2) + 12X2 = 720

80 1450 – 27X2 + 12X2 = 720

730 = 15X2
X2 = 730/15
60
9X1 = 720 – 4 (730/3)
9X1 + 12X2 = 720
40 E

20
D

A for Management (MGMT121)

Mathematics Page 76
 C 2X1 + 6X2 = 300

0 20 40 60 B 80 100 120 140 X1

Coordinates How determinable? Profit

Points X1 X2 45X1 + 70X2
A 0 0 observation 45(0) + 70(0) = 0
B 75 0 observation 45(75) + 70(0) = 3375
C 60 15 simultaneous 45(60) + 70 (15) = 3750
D 24 42 simultaneous 45 (24) + 70 (42) = 4020
E 0 50 observation 45(0) + 70 (50) = 3500
X1 = 24 b) 2 (24) + 6 (42) =300
X2 = 42
Z = br. 4020 c) 24 + 42 = 75
66
Constraints
a) (24) + 12(42) = 720 75 – 66 = 9
S3 = 9
Interpretation: The Company is advised to produce 24 units of push type mower and 40 units
of self-propelled mowers so as to realize a profit of Br. 4020. in doing so, the company
would be left with unused resource of engine which can be used for other purposes.

3.4. Summary

Linear Programming is an optimization technique which shows how to allocate scarce

resources in the best possible ways subject to more than one limiting conditions.
Lpm is a mathematical representation of linear programming problems. In order for
linear programming models to be used, the problems must involve a single objective,
a linear objective function and linear constraints, and have known and constant
numerical values.

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 Linear programming models are composed of decision variables and numerical values
that are arranged into an objective function and set of constraints. The constraints are
restrictions that can pertain to any decision variable or to a combination of decision
variables. In general, variables are not allowed to have negative values. These
restrictions are referred to as non-negativity constraints.

 Self Test Exercises

1. An electronics firm produces three types of switching devices. Each type involves a
two-step assembly operation. The assembly times are shown in the following table:
Assembly time per unit (minutes)
Station 1 Station 2
Model A 2.5 3.0
Model B 1.8 1.6
Model C 2.0 2.2
7.5hr 7.5hr
Each workstation has a daily working time of 7.5 hrs. The manager want to obtain the
greatest possible profit during the next five working days. Model A yields a profit of br. 8.25
per unit, Model B a profit of br 7.5 per unit and model C a profit of Br 7.8 per unit. Assume
that the firm can sell all it produces. During this time, but it must fill outstanding orders for
20 units of each model type.

Required.
Required. Formulate the linear programming model of this problem.

2. A Firm manufactures three products which must be processed through some of or all
four departments. The table below indicates the number of hours a unit of each
product requires in the different departments and the number of pounds of raw
materials required. Also listed are the cost per unit, selling price, and weekly
capacities of both work-hours and raw materials. If the objective is to maximize total
weekly profit, formulate the linear programming model. (Only the model)
Weekly
Product A Product B Product C Availability
Department 1 3 4 2 120 hours

Department 2 2 2 100 hours

Department 3 4 1 80 hours
Department 4 2 3 6 150 hours
Pounds of raw Material per Unit 5 4 3 250 pounds

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Selling price $ 50 $ 60 $ 65
Cost / unit 41 40 43
3. Solve the following linear programming problem
(a) (Use simplex method)
Z max. 40X1 + 32X2
Subject to
40X1 + 20X2  600
4X1 + 10X2  100
2X1 + 3X2  38
X1, X2 0
(b) C min. : 50X1 + 80X2
Subject to
20X1 + 30X2 1400
10X1 + 40X2 1200
X1, X2  0
(Use the graphic method
(c) Z max: X1 + 1.2X2 + 2X3
Subject to
X1 + 2X2  150
X1 + 2X3  150
2X1 + X2  80
2X1 + 3X2 + X3  225
X1X2X3  0
(Use the simplex method)

 Answer Key to Self Test Exercises

1. Step 1: Problem definition: to determine the number of three types of searching
devices to be produced to be produced and sold for the next 5 days (working) so as to
maximize the 5 days profit.

2. Variable representation
Let X1, X2, and X3 be the number of model A, B and C sketching devices to be produced and
sold.

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 3. Develop objective function
Z max = 8.25X1 + 7.50X2 + 7.80X3

4. Constraint identification
2.5X1 + 1.8X2 + 2.0X3 450minutes…Assembly time station 1 System
Constraints
3.0X1 + 1.6X2 + 2.2X3 450minutes…. Assembly time station2
X1 20 …. Model A
Individual
X2 20 ….Model B Constraints
X3 20….Model C
X1, X2, X3 0 ….no negativity
Summary
Z max = 8.25X1 + 7.50X2 + 7.8X3
Subject to: 2.5X1 + 1.8X2 + 2X3 450
3X1 + 1.6X2 + 2.2X3 450
X1 20
X2 20
X3 20
X1 X2 X3 0

2. Problem: Determine the number of three products (A, B, & C) that must be
produced and sold in order to maximize the total weekly profit of the firm,
given the different limiting factors.

Let, X1 = the number of product A, that must be produced & sold

X2 = the number of product B, that must be produced & sold
X3 = the number of product C, that must be produced & sold
bjective function: profit maximization
Z max = 9X1 + 20X2 + 22X3
Constraints:
 Production time constraints: 3X1 + 4X2 + 2X3  120
 Production time constraints 2X2 + 2X3  100
 Production time constraints 4X1 + X2  80
 Production time constraints 2X1 + 3X2 + 6X3  150

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  Raw material constraints: 5X1 + 4X2 + 3X3  250

Non-negative restrictions: X1, X2, X3 0

 Therefore, Z max: 9X1 + 20X2 + 22X3
Subject to:
3X1+ 4X2+2X3  120
2X2 + 2X3  100
4X1 + X2  80
2X1 + 3X2 + 6X3  150
5X1 + 4X3 +3X3  250
X1, X2, X3  0

3. a. Problem: determining the number of bentwood rocking chairs and bentwood

coffee tables that must be manufactured in order to maximize the total profit,
given the different limiting factors.

Let, X1 = the number of bentwood rocking chairs that must be manufactured & sold
X2 = the number of bentwood coffee tables that must be manufactured & sold
Objective function: profit maximization
Z max = 40X1 + 32X2
Constraints
 Raw material const. (Rosewood): 40X1 + 20X2  600
 Wood working hour const. 4X1 + 10X2  100
 Finishing hour constraint 2X1 + 3X2  38
Non-negative restrictions: X1, X2  0
 Therefore, Z max = 40X1 + 32X2
Subject to:
40X1 + 20X2  600
4X1 + 10X2 100
2X1 + 3X2  38
X1 , X2  0
Standard form
Z max = 40X1 + 32X2 + OS1 + OS2 + OS3

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 Subject to:
40X1 + 20X2 + S1 = 600
4X1 + 10X2 + S2 = 100
2X1 + 3X2 + S3 = 38
X1 , X2 ,S1 , S2, S3, 0

Initial Tableau
Soln. Cj 40 32 0 0 0 Quantity
bases X1 X2 S1 S2 S3 (RHSV) Q/X1
S1 0 40 20 1 0 0 600 15
S2 0 4 10 0 1 0 100 25
S3 0 2 3 0 0 1 38 19
Zj 0 0 0 0 0 0
j = Cj – Zj 40 32 0 0 0
1/40 R1 / -4R1 new + R2 old / / -2R1 new + R3 old
Soln. Cj 40 32 0 0 0 quantity
bases X1 X2 S1 S2 S3 (RHSV) Q/X2
X1 40 1 ½ 1/40 0 0 15 30
S2 0 0 8 –1/10 1 0 40 5
S3 0 0 2 –1/20 0 1 8 4
Zj 40 20 1 0 0 600
j =Cj- Zj 0 12 –1 0 0
1/2 R3 / -1/2R3 new + R1 old / -8R3 new + R3 old

Soln. Cj 40 32 0 0 0 (Quantiy)
bases X1 X2 S1 S2 S3 (RHSV)
X1 40 1 0 3/80 0 –1/4 13
S2 0 0 0 1/10 1 –4 8
X2 32 0 1 –1/40 0 ½ 4
Zj 40 32 7/10 0 6 648
j = cj –zj 0 0 –7/10 0 –6
 Since, the numbers in j = cj – zj row are all 0 & Negative it shows that this solution
is optimal solution.

Mathematics for Management (MGMT121) Page 82

 X1 = 13 , X2 = 4, S2 = 8 (unused) hours Z max = $ 648

 Proof for Question No. 2 by Graphic Method

* 40X1 + 20X2 = 600 X1 0 15
X2 30 0

* 4X1 + 10X2 = 100 X1 0 25

X2 10 0

* 2X1 + 3X2 = 38 X1 0 19
X2 12.7 0

40X1 + 20X2 = 600

30 (0, 30)

25

20

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 2X1 + 3X2 = 38 15
(0, 12.7)
4X1 + 10X1 = 100

10 B (4, 10)
C

5
D
(0, 0)
A E(15, 0) (19, 0) (25, 0) X1
0 5 10 15 20 25 30

C.P X1 X2 Value of O.F

40X1 + 32X2
A 0 0 Observation 0
B 6 10 Observation 320
C 10 6 Elimination 592
D 13 4 Elimination 648 *
E 15 0 Observation 600

* Point C

4X1 + 10X2 = 100

-2 2X1 + 3X2 = 38
4X1 + 10X2 = 100
-4X1 – 6X2 = -76
4X2 = 24
4 4
X2 = 6
4X1 + 10(6) = 100

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 4X1 + 60 = 100
4X1 = 100 – 60
4X1 – 40
4 4 X1 = 10

Point D
40X1 + 20X2 = 600 40X1 + 20 (4) = 600
-20 2X1 + 3X2 = 38 40X1 + 80 = 600
40X1 + 20X2 = 600 40X1 = 600 - 80
-40X1 – 60X2 = -760 40X1 = 520
-40X2 = -160 40 40
-40 –40 X1 = 13
X2 = 4

Interpretation
It is advisable for the company to produce 13 units of bentwood rocking chairs and 4 units
coffee tables and maximize its profit to birr 648, by doing so the company may be left with 8
unused wood working hours, therefore, the company can use these unused hours for other
purposes.

(b) * Problem: determine the number of two types of that must be produced by the two
machines (M I & M II) in order to minimize costs of operating the machines.

* Let X1 = the number of tiers that must be produced by M I

X2 = the number of tiers that must be produced by M II

* Objective function: cost Minimization

Z min = 50X1 + 80X2
* Constraints:
 Grade A tiers constraints: 20X1 + 30X2 1,400
 Grade B tiers constraints: 10X1 + 40X2  1,200
* Non-negative restrictions X1 , X2  0
 Therefore, Z min = 50X1 + 80X2
Subject to:

Mathematics for Management (MGMT121) Page 85

 20X1 + 30X2 1,400
10X1 + 40X2 1,200
X1, X2  0
 Solution for Question No. 3 Graphic Method
* 20X1 + 30X2 = 1,400
X1 0 70
X2 46 – 7 0
* 10X1 + 40X2 = 1,200
X1 0 120
X2 30 0
20X1 + 30X2 = 1400 X2
60
50 (0, 46.7)
40
10X1 + 40X2 - 120030
20 B (?)
10
0 (70,0) C (120,0) X1
10 20 30 40 50 60 70 80 90 100 110 120

Corner X1 X2 How Value of objective

Points F: 50X1 + 80X2
A 0 46.7 Obser. 3736
B 40 20 Elimin. 3600 *
C 120 0 Obser. 6000

* Point B
20X1 + 30X2 = 1400  in order to Minimize
-2 10X1 + 40X2 = 1200 costs of operating the Machines
20X1 + 30X2 = 1400 M I  Has to produce 40 tires

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 -20X1 + 80X2 = -2400 M II  has to produce 20 tires
-50X2 = -1000 Z min = 3600
50 50
X2 = 20
10X1 + 40 (20 = 1200
10X1 + 800 = 1200
10X1 = 1200 – 800
10 ½ R2 / -R2new + R4 old
Soln Cj 1 1.2 2 0 0 0 0 Quantity Q/x2
Bases X1 X2 X3 S1 S2 S3 S4 (RHSV)
S1 0 1 2 0 1 0 0 0 150 75
X3 2 ½ 0 1 0 ½ 0 0 75 75
S3 0 2 1 0 0 0 1 0 80 80
S4 0 3/2 3 0 0 -1/2 0 1 150 225 50
Zj 1 0 2 0 1 0 0 150
j = Cj – Zj 0 1.2 0 0 -1 0 0

1/3 R4 / -R4 New + R3 old / -2R4 new + R1 old

Soln Cj 1 1.2 2 0 0 0 0 Quantity
Bases X1 X2 X3 S1 S2 S3 S4 (RHSV)
S1 0 0 0 0 1 1/3 0 -2/3 150
X3 2 ½ 0 1 0 ½ 0 0 75
S3 0 1 0 0 0 1/6 1 -1/3 30
X2 1.2 1/2 1 0 0 -1/6 0 1/3 50
Zj 1.6 1.2 2 0 0.8 0 0.4 210
j = Cj – Zj -0.6 0 0 0 -0.8 0 -0.4

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  since there is no positive number in Aj = Cj – Z raw we can suggest that we reach
the optimum solution therefore, X2 = 50
X3 = 75
S1 = 50
S3 = 30
and Zj = 210

? Review Questions

1. The agricultural research institute suggested to a farmer to spread out at least 4800
kg of a special phosphate fertilizer and not less than 7200 kg of a special nitrogen
fertilizer to raise productivity of crops in his fields. There are two sources for
obtaining these mixtures A and B. Both of these are available in bags weighing 100
kg each and they cost $40 and $24 respectively. Mixture A contains phosphate and
nitrogen equivalent of 20 kg and 80 kg respectively, while mixture B contains these
ingredients equivalent of 50 kg each.

Write this as a linear programming problem and determine how many bags of each
type should the farmer buy in order to obtain the required fertilizer at minimum cost.

Required: a. Solve the problem using Graphic Method

b. Solve the problem using Graphic Method

2. A company produces three sizes of window fans: small, medium and large. The
manager has formulated an LPM for fan production:

Briefly explain or define each of these parts of the model:

A.
B. No 6 in the objective function

Mathematics for Management (MGMT121) Page 88

 C. The term labor, metal and plastic
D. The 160 hour
E.

UNIT 4: MATHEMATICS OF FINANCE

Contents
4.1. Overview of Exponential and Logarithmic Functions
4.2. Simple Interests and Discount
4.2.1. Computing Simple Interest
4.2.2. Promissory Notes and Bank Discount
4.3. Compound interest
4.3.1. Compound Amount(Maturity Value)
4.3.2. Present Value(Principal) of Compound Amount
4.3.3. Nominal and Effective Interest Rate
4.4. Ordinary Annuities

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 4.4.1. Sum of Ordinary Annuity
4.4.2. Sinking Fund Payment
4.4.3. Present Value of Ordinary Annuity
4.4.4. Amortization
4.4.5. Mortgage Payment
4.5. Summary

Unit Objectives

After studying this unit, you should be able to:

 Understand the difference Between simple interest and compound interest;
 use annuity formula to solve business and economics problems which involve
finance;
 Analyze and solve mortgage problems;
 Analyze future and present value of money (sum of money and/or an annuity) and
 Solve sinking fund and amortization problems.

 Introduction

The basic concept of mathematics of finance is that money has time value which is described
either as present value or future. Present value is the value of money today; future value is
the value of money at some point in the future. The different between money now and the
same money in the future is called interest. Interest have a wide spread influence over
decisions made by businesses and every of us in our personal lives. Therefore, the basic
objective of this unit is to discuss interest rates and their effects on the value of money.
Specifically, it covers simple interest, compound interest, annuity and mortgage problems.

Mathematics for Management (MGMT121) Page 90

4.1. Simple Interest and Discount
Interest is the price paid for the use of a sum of money over a period of time. It is a fee paid
for the use of another’s money, just rent is paid for the use of another’s house. A savings
institution (Banks) pays interest to depositors on the money in the savings account since the
institutions have use of those funds while they are on deposit. On the other hand, a borrower
pays interest to a lending agent (bank or individual) for use of the agent’s fund over the term
of the loan.

Interest is usually computed as percentage of the principal over a given period of time. This
is called interest rate. Interest rate specifies the rate at which interest accumulates per year
throughout the term of the loan. The original sum of money that is lent or invested/ borrowed
is called the principal.

Interests are of two types: simple interest and compound interest. In the first part of this unit
we shall explore these two concepts.

4.1.1. Computing Simple Interest

If interest is paid on the initial amount of money invested or borrowed only and not on
subsequently accrued interest, it is called simple interest. The sum of the original amount
(principal) and the total interest is the future amount or maturity value or in short
amount. Simple interest generally used only on short-term loans or investments –offen of
duration less than one year. Simple interest is given by the following formula.

I = prt ….. ---------------------------------- (1)

Where: I = Simple interest
P = principal amount
r = Annual simple interest rat
t = time in years, for which the interest is paid
If any three of the four variables are given, you can solve for the fourth (unknown variable)
and their relationship is as follows:
Amount (A) = P + I
= P + Prt. factor out the common term P
= P (1 + rt) ………………………………………(2)

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 P = I/rt or P = ……………(3)

r = I/pt………………………….(4)
t = I/pr …………………………(5)

Example 1
Ato Kassahun wanted to buy TV which costs Br. 10, 000. He was short of cash and went to
Commercial Bank of Ethiopia (CBE) and borrowed the required sum of money for 9 months
at an annual interest rate of 6%. Find the total simple interest and the maturity value of the
loan.

Solution:
p = Br. 10,000 A=P+I
t** = 9 months = 9/12 = ¾ year = P (1 + rt)
r = 6% per year = 0.06 = 10, 000 (1 + 0.06 x ¾)
I=? A=? = 10, 000 x 1.045
Interest (I) = Prt = Br. 10, 450
= 10, 000 x 0.06 x ¾
= Br. 450
The total amount which will have to be repaid to CBE at the end of the 9 th month is
Br. 10, 450 (the original borrowed amount plus Br. 450 Interest).
** Note: It is essential that the time period t and r be consistent with each other. That is if r is
expressed as a percentage per year, t also should be expressed in number of years
(number of months divided by 12 if time is given as a number of months). If time is

given as a number of days, then t = . this approach is known as ordinary

interest year method which uses a 360 day years, whereas if we use 365 days years
the approach is called exact time method.

Example 2
How long will it take if Br. 10, 000 is invested at 10% simple interest to double in value?
Solution
Given: p = Br.10, 000 I = prt Divide both sides of the equation by pr
and solve for t.
r = 10% = 0.10

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A = Br.20, 000 (2 x 10, 000) t = I*/pr

t =? =

= 10 Years
I* = Amount (A) – principal (p)
= 20, 000 – 10, 000
= 10,000
Therefore it will take 20 years for the principal (Br. 10, 000) to double itself in value if it is
invested at 10% annual interest rate.

Example 3
How much money you have to deposit in an account today at 3% simple interest rate if you
are to receive Br. 5, 000 as an amount in 10 years?

Solution

A = Br. 5, 000 P=
t = 10 Years
=
r = 3% = 0.03
P=? = Br. 3, 846.15

In order to have Br. 5, 000 at the end of the 10 th year, you have to deposit Br. 3846.15 in an
account that pays 3% per year.

Example 4.
At what interest rates will Br. 5, 000 yield Br. 2, 000 in 8 years time.
Solution:
P = Br. 5, 000 r = I/pt

I = Br. 2, 000 =

t = 8 years = 0.05 = 5%
r =?
Example 5.
Find the Interest on Br. 5, 000 at 10% for 45 days.
Solution:

Mathematics for Management (MGMT121) Page 93

P = Br. 5, 000 I = Prt
t = 45 days = 45/360 years = 5, 000 x 0.1 x 45/360
r = 10% = 62.50 Br.
I=?

4.1.2. Promissory Notes and Bank Discounts

A business may both make a promissory note and receive one. Notes receivable and notes
payable are formal arrangements promising payment. Often a debtor signs a promissory
note, which serves as evidence of a debt. The promissory note is a written promise to pay
principal with interest at a maturity date. A business owner might discount a note if cash
is needed quickly and he or she does not wish to hold the note until its maturity date.
How is Computed? As with loans, some notes specify the maturity date, while others
state the period of the note, in days or months. When the maturity value is given in days,
the maturity date is determined by counting the days from issue. Interest is usually
computed on the basis of a 360-day year (12 months x 30 days per month.) Recall from
Sec. 1 that the following formula is used:
Interest = principal x interest rate x time

For example, the maturity date of a 90-day note issued May 6, 20x8, is August 4, 20x8,
computed as follows:

Time period of loan 90 days

May 31
Issuance date 6 25 days
June 30 days
July 31 days
Total 86 days
Maturity date August 4 days

When the period is given in months, the note`s maturity date falls on the same day of the
month as the date of the note is issued. For example a 6-month note dated January 15
matures on July 15. If the due date of the note falls on a non-business day, the maturity

Mathematics for Management (MGMT121) Page 94

 date is the next business day, with the additional day(s) added to the period for which
interest is charged.
If you are holding a promissory note from a supplier or other party, you may find
yourself in the position of needing more money before the due date, in which case you
may discount the note receivable at a bank or finance company.

The proceeds received by the holder at the time the note is discounted are equal to the
maturity value less the bank discount (interest charge). The bank discount is based on the
period of time the bank will hold the note and the note`s interest rate. The interest rate
charged by the bank need not be the same as the interest rate on the marker`s note. In
fact, it is usually higher, because the bank generally charges a higher interest rate. The
rate may also be different because of changes in the going interest rate since the note was
originally written. The maturity value of the note is found as follows:

Maturity value = face value of note + interest income

The bank discount is:

Bank discount = maturity value x bank discount x period of time held by bank
Example 1. On June 30, 20xx, Susan Ray, a business owner, issued a 180-day, 18 percent
note to the Denmark Company to pay a short-term business loan $10,000. The note`s
interest rate 6 months later will be $900, calculated as follows:

Principal x rate of interest x time = interest

5.
$10,000 x 18% x 6 months = $900

Example 2. The Solvay Tool Company received the following notes:

Interest Rate Face
Date Term (%) Amount

(a) Aug. 2 4 months 6 $1,000

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 (b) Aug. 11 60 days 8 7,500

(c) Sept. 9 45 days 9 2,000

(d) May 20 90 days 12 5,000

The due date and amount of interest on each note is:

Due Date Interest Rate (%) Face Amount

(a) Nov. 30 $ 20 ($1,000 x 4/12 x 6%) $1,020.00

(b) Oct. 10 100 ($7,500 x 60/360 x 8%) 7,600.00

(c) Oct. 24 22.50 ($7,200 x 45/360 x 9%) 2,022.50

(d) Aug. 18 150 ($5,000 x 90/360 x 12%) 5,150.00

Example3. On June 20, 20x8, the Bunyan Grass Seed Company received a 90-day, 12
percent note receivable for $5,000. On August 5 the company, in need of cash, discounts
the note at its bank. The bank charges a discount rate of 15 percent. The proceeds from
the discounted note are 5,077.04 calculated as follows:
Bank discount = maturity value x discount rate x period note is held by bank

Face value of note dated June 20 $ 5,000.00

Add: Interest on note ($5,000 x 12% x 90/360) $ 150.00

Maturity value of note due Sept. 18 $ 5,150.00

Bank discount on maturity value ($5,000 x 12% x 90/360) $ 72.96

The net proceeds received by the payee at the time of discounting are:
Net proceeds = maturity value - bank discount

Maturity value of note dated Sept. 18 $ 5,150.00

Less: Discount period (Aug. 5 - Sept. 18 = 34 days)

Discount on maturity value (34 days at 15%) $ 72.96

Net proceeds of note after discounting $ 5,077.04

Mathematics for Management (MGMT121) Page 96

 1.3. Compound Interest

If the interest, which is due, is added to the principal at the end of each interest period (such
as a month, quarter, and year), then this interest as well as the principal will earn interest
during the next period. In such a case, the interest is said to be compounded. The result of
compounding interest is that starting with the second compounding period, the account earns
interest on interest in addition to earning interest on principal during the next payment
period. Interest paid on interest reinvested is called compound interest.

4.3.1. Compound Amount (Maturity Value )

The sum of the original principal and all the interest earned is the compound amount. The
difference between the compound amount and the original principal is the compound interest.

The compound interest method is generally used in long-term borrowing unlike that of the
simple interest used only for short-term borrowings. The time interval between successive
conversions of interest into principal is called the interest period, or conversion period, or
Compounding period, and may be any convenient length of time. The interest rate is usually
quoted as an annual rate and must be converted to appropriate rate per conversion period for
computational purposes. Hence, the rate per compound period (i) is found by dividing the
annual nominal rate (r) by the number of compounding periods per year (m):
i = r/m

Example if r = 12%, i is calculated as follows:

Conversion period (m) Rate per compound period (i)
1. Annually (once a year) -------------------------------- i = r/1 = 0.12/1 = 0.12
2. Semi annually (every 6 months) --------------------- i = r/2 = 0.12/2 = 0.06
3. Quarterly (every 3 months) -------------------------- i = r/4 = 0.12/4 = 0.03
4. Monthly ------------------------------------------------- i = r/12 = 0.12/12 = 0.01
Example 1
Assume that Br. 10, 000 is deposited in an account that pays interest of 12% per year,
compounded quarterly. What are the compound amount and compound interest at the end of
one year?

Mathematics for Management (MGMT121) Page 97

Solution
P = Br. 10, 000
r = 12%
t = 1 year
m = No. of conversion periods = 4 times per quarter. This means interest will be
computed at the end of each three month period and added in to the principal.

i = r/m 12%/4 = 3%

In general, if p is the principal earning interest compounded m times a year at an annual rate
of r, then (by repeated use of the simple interest formula, using i = r/m, the rate per period,
the amount A at the end of each period is:
(1) A = p (1 + i)………………compound amount at the end of first period.
If we are interested in determining the compound amount after two periods, it may be
computed using the equation:
(2) Compound amount = Compound amount + Interest earned during
after two periods after one period the 2nd period
A = p (1 + i) + [P (1 + i)] (i)
Factoring P and (1 + i) from both terms of the right side of the equation gives us:
A = P (1 + i) (1 + i)
= P (1 + i)2
(3) Compound amount = Compound amount + Interest earned
after three periods after two period during the 3rd period
A = P(1 + i)2 + [P (1 + i)2] (i)

Factor out p and (1 + i)2 from the terms on the right side of the equation and it gives
you:
A= P (1 + i)2 (1 + i)
= P (1 + i)3
(4) Compound amount
th
= P (1 + i)n
after n period
The compound amount formulas developed so far are summarized below:
1. Compound amount after one period = p (1 + i)1
2. Compound amount after two periods = p (1 + i)2

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 3. Compound amount after three periods = p (1 + i)3
4. Compound amount after nth periods = p (1 + i)n
………….* Compound amount formula.
A = P (1 + i)n
Where: A = amount (future value) at the end of n periods.
P = Principal (present value)
i = r/m = Rate per compounding period.
n = mt = total number of conversion periods
t = total number of years

m = number of compounding/ conversion periods per

Year
r = annual nominal rate of interest
Now let us solve the above problem.
A = 10, 000 (1.03)1 = Br. 10, 300……..1st quarter
A = [10, 000 (1.03)] (1.03) = 10, 000 (1.03)2 = 10, 609 …….2nd quarter.
A = [10, 000 (1.03)2] (1.03) = 10, 000 (1.03)3 = 10, 927.27 …….3rd quarter.
A = [(10, 000) (1.03)3] (1.03) = 10, 000 (1.03)4 = 11, 255.088 ……..4th quarter.
In general, the compound amount can be found by multiplying the principal by (1 + i) n. So
for the above problem the amount at the end of the year, using the general formula, is equal
to:
A = P (1 + i)n n = mt = 4 x 1 = 4
= 10, 000 (1.03)4 i = r/m = 12%/4 = 3%
= Br. 11, 255.088

Compound Interest = Compound amount – original principal

= 11, 225.088 – 10, 000
= Br. 1, 255.088

We may evaluate “A” in several different ways. Among the possible alternatives are:
1. Use a hand-held calculator with a Y x function key. This is the procedure most often
used.

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 2. Using Logarithms
Restate the equation by finding for log A (or In A) and then finding the antilog, using
either a hand-held calculator with logarithmic functions or a table of logarithms. Let us
illustrate this alternative.

A = 10, 000 (1.03)4

log A = log 10, 000 + log (1.03)4
= log 10,000 + 4 log 1.03
= log 104 + 4 log 1.03

= 4 + 4(0.01284)
= 4 + 0.05135
log A = 4.05135
A = Antilog 4.05135
= Br. 11255.117

3. The third way of finding the compound amount is using specially prepared tables
which provide values of (1 + i)n for selected values of i and n.

Therefore, to calculate the value of “A” or other variables in the compound interest formula,
you can use any of these three approaches which ever convenient to you.

Example 2. Find the compound amount and compound interest after 10 years if Br. 15, 000
were invested at 8% interest;
a) If compounded annually
Compounding annually means that there is one interest payment period per year. Thus
t = 10 years
m=1
n = mt = 1 x 10 = 10
i = r/m = 8 %/1 = 8% = 0.08
The compound amount will be:
A = 15, 000 (1.08)10
= 15, 000 (2.158925)
= Br. 32, 383.875

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  Compound Interest = compound amount (A) – Principal (P)
= 32, 383.875 – 15, 000
= Br. 17, 383.875

b) If compounded semiannually
Compounding semiannually means that there are two interest payment periods per
year. Thus, the number of payment periods in 10 years n = 2 x 10 = 20 and the
interest rate per conversion period will be i = r/m = 8%/2 = 4%. The compound
amount then will be:
A = P (1 + i)n
= 15, 000 (1.04)20
= 15, 000 (2.191123
= Br. 32, 866.85
Compound Interest = A – P
= 32, 8666.85 – 15, 000
= Br. 17, 866.85

c) If Compounded quarterly
If compounding takes place quarterly (four times a year), then an 8% annual interest
rate, the interest rate per conversion period will be i = 0.08/4 = 0.02, there will be a
total of n = 4 x 10 = 40 conversion periods over the 10 years. The compound amount
will be:
A = 15, 000 (1.02)40
= 15, 000 (2.208039)
= Br. 33, 120.60

d) If compound monthly
p = 15, 000
t = 10 years
m = 12 (12 payment periods per year)
n = 12 x 10 = 120 payment periods over the 10 years
i = r/m = 8%/12 = 0.667% = 0.00667

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Under these conditions:
A = 15, 000 (1. 00667)120
= 15, 000 (2.220522)
= Br. 33, 307.84
Interest = Br. 18, 307.84 (33,307.84 – 15,000)
e) If compounded weekly
m = 52
n = 10 x 52 = 520
i = 8%/52 = 0.154% = 0.00154, then
A = 15, 000 (1.00154)520
= Br. 33, 362.60
Interest = 33,362.60 – 15,000
= 18362.60

f) Try your self: if Compounded daily, and hourly, what will be the compound amount
respectively? Answer = Br. 33,380.19 and Br. 33, 382.99 respectively.
g) If compounded continuously (Instantaneously),
(Instantaneously), what happens to the compound
amount if interest is compounded continuously? To drive a formula for continuous
compound interest, we begin by writing:
(1 + i)n = (1 + r/m) mt
Then, by inserting 1 = r/r in the exponent, we obtain
(1 + r/m)mt (r/r) = (1 + r/m) (m/r). (rt)
Then, letting m/r = X, we have
[(1 + 1/x)x] rt
As X increases indefinitely, the term (1 + 1/x) x approaches the value of the familiar
mathematical constant e = 2.7182818……. This means that the factor
(1 + i)n = [(1 + 1/x)x]rt approaches
ert as n increases indefinitely. The resulting formula for the amount under continuous
compounding of interest is given by:

A = P ert
………………..**
Where: A= amount at the end of time t under continuous compounding
p = principal
r = annual rate, compounded continuously

Mathematics for Management (MGMT121) Page 102

 t= time, in years
Note: the value of ert may be found using a calculator.
Solution:
p = br. 15, 000 A = P ert
t = 10 years = 15, 000 (e0.08 x 10)
A=? = 15, 000 x e0.8
= 15, 000 x 2.22554
= Br. 33, 383.11
Compound Interest = 33, 383.11 – 15, 000
= Br. 18, 383.11
What can you observe from the above discussion? When a number of conversion period
within a year increases, the interest earned also increases continuously toward an upper limit.
The limiting case occurs where interest is compounded continuously.

Example 3.
How long it take to accumulate Br. 8, 000 if you invest Br. 6, 000 at 12% compounded
monthly?

Solution:
P = Br. 6, 000 A = P (1 + i)n
A = Br. 8, 000 8000 = 6000 (1.01)n
r = 12% we can use logarithm to solve this problem

i = r/m = 1%= 0.01 = (1.01)n

t = ? n? log 1.3 = (1.01)n
log 1.3 n log 1.01

n=

n = 28.92 29 months
It takes 29 months for Br. 6000 invested at 12% to grow to Br. 8000

4.3.2. Present value (Principal ) of Compound Amount

Frequently it is necessary to determine the principal P which must be invested now at a given
rate of interest per conversion period in order that the compound amount A be accumulated

Mathematics for Management (MGMT121) Page 103

at the end of n conversion periods. Under these conditions, p is called the present value of A.
This process is called discounting and the principal is now a discounted value of future
income A. If:
A = P (1 + i)n then dividing both sides by (1 + i)n leads to

P= = A (1 + i)-n

P = A (91 + i) -n ……… ………* Present value of compound amount.

Example 4. How much should you invest now at 8% compounded semiannually to have
Br. 10, 000 toward your brother’s college education in 10 years?
Solution
A = Br. 10, 000 P = A (1 + i)-n
t = 10 years = 10, 000 (1.04)-20
m=2 = 10, 000 (0.456387)
n = mt = 20 = Br. 4563.87
r = 8%
i = r/m = 4% = 0.04
p=?

4.3.3. Nominal and Effective Interest Rate

An effective rate is the simple interest rates that would produce the same return in one year
had the same principal been invested at simple interest without compounding. In other words,
the effective rate r converted m times a year is the simple interest rate that would produce an
equivalent amount of interest in one year. It is denoted by re.

If principal p is invested at an annual rate r, compounded m times a year, then in one year,
A = P (1 + r/m)m
What simple interest rate will produce the same amount A in one year? We call this simple
interest rate the effective rate. To find re we proceed as follows:

(Amount at simple interest after 1 year) = (Amount at compound interest after 1 year)
P (1 + re) = p (1 + r/m)m ……….Divide both sides by p
1 + re = (1 + r/m)m …………..isolate re on the left side and gives you:

re = (1 + r/m)m - 1

Mathematics for Management (MGMT121) Page 104

 ………..* effective interest rate formula.
Where: r = nominal annual rate of interest
m = no. of conversion periods per year.
re = e r - 1 …………..** effective interest rate in continuous compounding.

Example 5. An investor has an opportunity to invest in two investment alternatives A and B

which pays 15% compounded monthly, and 15.2% compounded semi-annually
respectively. Which investment is better investment, assuming all else equal?
Solution
Nominal rate with different compounding periods cannot be compared directly. We must find
the effective rate of each nominal rate and then compare the effective rates to determine
which investment will yield the larger return.
Effective rate for investment A Effective rate for Investment B
r = 15% r = 15.2%
m = 12 m=2
i = 1.25% = 0.0125 i = 7.6% = 0.076
reA = (1 + i)m – 1 reB = (1.076)2 - 1
= (1.0125)12 – 1 = 15.778%
= 16.076%
Since the effective rate for investment A (16.076%) is greater than the effective rate for
investment B (15.778%), A is the preferred investment alternative.

Example 6. What is the effective rate corresponding to a nominal rate of 16% compounded
quarterly?
re = (1 + 0.16/4)4 -1
= (1.04)4 –1
= 1.169859 – 1
= 16.99%

4.4. Annuities

An annuity is any sequence of equal periodic payments. The payments may be made weekly,
monthly, quarterly, annually, semiannually or for any fixed period of time. The time between
successive payments is called payment period for the annuity. If payments are made at the

Mathematics for Management (MGMT121) Page 105

end of each payment period, the annuity is called an ordinary annuity.
annuity. If payment is made
at the beginning of the payment period, it is called annuity due.
due. In this course we will
discuss only ordinary annuities. The amount, or future value, of an annuity is the sum of all
payments plus the interest earned during the term of the annuity.

The term of an annuity refers to the time from the begging of the first payment period to the
end of the last payment period.

4.4.1. Ordinary Annuity

An ordinary annuity is a series of equal periodic payments in which each payment is made at
the end of the period. In an ordinary annuity the first payment is not considered in interest
calculation for the first period because it is paid at the end of the first period for which
interest is calculated. Similarly, the last payment does not qualify for interest at all since the
value of the annuity is computed immediately after the last payment is received.

4.4.1.1. Sum (Future value or Amount) of ordinary annuity

Example1.
Example1. What is the amount of an annuity if the size of each payment is Br. 100 payable
at the end of each quarter for one year at an interest rate of 4% compounded quarterly?
Solution
Periodic payment (R) = Br. 100
Payment interval (Conversion period) = quarter
Nominal (annual rate) = r = 4%
Interest per conversion period (i) = r/m = 4%/4 = 1%
Future value of an annuity = ?
  Periods (quarter)
Now 1 2 3 4
Br. 0 Br.100 Br. 100 Br. 100 Br. 100 Amount
Br. 100
Br. 100 (1.01)1
Br. 100 (1.01)2

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 Br. 100 (1.01)3
Future value (sum) = 406.04 Br.

Compound interest = Amount – R(n)

= 406.04 – 100 (4)
= Br. 6.04
If R represents the amount of the periodic payment, i represents the interest rate per payment
period, and n represents the number of payment periods, then

R R R -------- R R
Periods
0 1 2 3 ------- n-1 n
The first payment of R accumulates interest for n-1 periods, the second payment R for n – 2
periods etc. The last payment accumulate no interest, the next to last payment accumulates
one period for interest. So using the future value for compound interest we see the future
value of the annuity:
A = R (1 + i) n-1 + R (1 + i)n-2 + ………..+ R (1 + i)1 + R….Equation 1
Multiplying each side of the equation by (1 + i), we obtain
A (1 + i) = R (1 + i)n + R (1 + i)n-1 + ……….+ R(1 + i)2 + R (1 + i) …… Eg. 2.

Then subtracting the first equation (eq. 1) from the second equation (eq. 2), gives you:
A (1 + i) = R (1 + i)n + R (1 + i)n-1 + …….+ R (1 + i)2 + R (1 + i)
A = R (1 + i)n-1 + ……..R (1 + i)2 + R(1 + i) + R
A (1 + i) – A = R (1 + i) n – R
A [(1 + i)] = R [(1 + i)n –1]
A (i) = R[(1 + i)n –1] Dividing both sides by i, we have

A=R
………………..* Amount of an ordinary annuity

Where: A = Amount (future value) of an ordinary annuity at the end of its term

R = Amount of periodic payment

i = interest rate per payment period
n = (mt) total no. of payment periods

Mathematics for Management (MGMT121) Page 107

Solve the above problem (example 1) using the annuity formula:

A=

= Br. 406.04

Example 2. Mr X. Deposits Br. 100 in a special savings account at the end of each month. If
the account pays 12%, compounded monthly, how much money, will Mr. X have
accumulated just after 15th deposit?

Solution:

R = Br. 100 A=R

n = 15
r = 12% = 100
m = 12
= 100 (16.096896)
i = r/m = 12%/12 = 1%
= Br. 1609. 69
A=?
Example 3. A person deposits Br. 200 a month for four years into an account that pays 7%
compounded monthly. After the four years, the person leaves the account
untouched for an additional six years. What is the balance after the 10 year
period?
Solution:
R = Br. 200 Amount after
t = 4 years
4 years (A4)= 200
m = 12
= 200 (55.20924)
n = mt = 4 x 12 = 48
= Br. 11, 041.85
r = 7%
i = 7%/12 = 0.07/12

After the end of the fourth year, we calculate compound interest rate taking Br. 11, 041.85 as
principal compounded monthly for the coming 6 years.
p = 11, 041.85 A10 = 11, 041.85 (1 + 0.07/12)72
t = 6 years = 11, 041.85 (1.5201
m = 12 = Br. 16, 784.77
n = 6 x 12 = 72

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 r = 7%
i = r/m = 7%/12 = 0.07/12
A10 = ?
Therefore, the balance after 10 years is Br. 16, 784.77.

4.4.1.2. Present value of an ordinary annuity

The present value of an ordinary annuity is the sum of the present values of all the payments,
each discounted to the beginning of the term of the annuity. It represents the amount that
must be invested now to purchase the payments due in the future.
The present value of an annuity can be computed in two ways:
 Discounting all periodic payments to the present (beginning of the term individually)
or
 Discounting the future value (amount) of an annuity to the beginning of the term

Example 6: What is the present value of an annuity if the size of each payment is Br. 200
payable at the end of each quarter for one year and the interest rate is 8%
compounded quarterly?
Solution:
R = Br. 200
r = 8%, i = 2%
m=4
n=4
p =?
Using the first approach (discounting each payment individually), the present value will be:

0 1 2 3 4 Periods (quarter)
Br. 200 200 200 200

Present value
196.1 = 200(1.02)1
192.23 = 200(1.02)2
188.46 = 200(1.02)3
184.77 = 200(1.02)4

Mathematics for Management (MGMT121) Page 109

761.56 Br = Present value.

Equivalently we may find the future value of the ordinary annuity using the formula and then
discount it to the present taking it as a single future value.

A=R

= 200

= Br. 824.32
P = A (1 + i)-n
= 824.32 (1.02)-4
Br = 761.56
If we multiply the future value of an ordinary annuity by the compounding discounting
factor, we get the present value of an annuity as follows:

P=R ((1 + i)-n)

=R

P=R …………………..* Present value of an ordinary annuity.

Using the formula, the present value of the above example is computed as:
R = Br. 200
r = 8%, i = 2% P=R
m=4
t=4 = 200

= 200 (3.80773)
= Br. 761.55

Mathematics for Management (MGMT121) Page 110

Example 7: What is the present value of an annuity that pays Br. 400 a month for the next
five years if money is worth 12% compounded monthly?

Solution:
R = Br. 400
t = 5 years P=R

m = 12
n = 12 x 5 = 60 = 400

r = 12% = 400 (44.955037)

i = 12%/12 = 1% = 0.01 = Br. 17, 982.01
p =?

4.4.2. Sinking Fund Payment

A sinking fund is a fund into which equal periodic payments are made in order to accumulate
a definite amount of money up on a specific date. Sinking funds are generally established in
order to satisfy some financial obligations or to reach some financial goal.

If the payments are to be made in the form of an ordinary annuity, then the required periodic
payment into the sinking fund can be determined by reference to the formula for the amount
of an ordinary annuity. That is, if:

A=R then,

R=

=A

Example 4: How much will have to be deposited in a fund at the end of each year at 8%
compounded annually, to pay off a debt of Br. 50, 000 in five years?

Mathematics for Management (MGMT121) Page 111

Solution:
A = Br. 50, 000 R=A
t = 5 years
m = 1, n = 5 (5 x 1) = 50, 000
r = 8%
i = r = 8% = 50, 000 (o.174056)

R =? = Br. 8, 522.80

The total amount of deposit over the 5 year period is equal to 5 x 8, 522.80 = Br.42, 614

Example 5: Ato Ayalkebet has a savings goal of Br. 100, 000 which he would like to reach
15 years from now. During the first 5 years he is financially able to deposit only
Br. 1000 each quarter into the savings account. What must his quarterly deposit
over the last 10 (ten) years be if he is to reach his goal? The account pays 10%
interest, compounded quarterly.

Solution:
For the first 5 years A5 = 1, 000
R = Br. 1, 000
= 1000 (22.019)
t = 5 years
= Br. 22019
m=4
n = 20
r = 10 %
i = 2.5%
A5 =?

This sum (Br. 22,019) will continue to draw interest at the rate of 10%; compounded
quarterly, over the next 10 years; and the amount at the end of the 10th year will be:
t = 10 years A10 = 22019 (1.025)40
m=4 = 22019 (1.103813)
n = 40 = Br. 24304.86
i = 2.5%
[

Mathematics for Management (MGMT121) Page 112

To determine the periodic payment for the remaining 10 years, we subtract Br. 24, 304.86
from Br. 100, 000 to obtain the amount of an ordinary annuity for the last 10 years which is
equal to Br. 75695.14 (100, 000 – 24, 304.86)

R = 75695.14

= 75, 695.14 (0.014836)

= Br. 1, 123.03
Thus, if Ayalkebete makes quarterly payments of Br. 1000 into a savings account over the
first five years and then quarterly payments of Br. 1, 123.03 over the next 10 years, he will
reach his savings goal of Br. 100, 000 at the end of 15 years.
4.4.3. Amortization

Amortization means retiring a debt in a given length of time by equal periodic payments that
include compound interest. After the last payment, the obligation ceases to exist it is dead
and it is side to have been amortized by the periodic payments. Prominent examples of
amortization are loans taken to buy a car or a home amortized over periods such as 5, 10, 20
or 30 years.

In amortization the interest is to determine the periodic payment, R, so as to amortize (retire)

a debt at the end of the last payment. Solving the present value of ordinary annuity formula
for R in terms of the other variable, we obtain the following amortization formula:

R=P
…………………………………** Amortization formula
Where: R = Periodic payment
P = Present value of a loan
i = Rate per period
n = Number of payment periods
Example: 1
Ato Elias borrowed Br. 15, 000 from Commercial Band of Ethiopia and agrees to repay the
loan in 10 equal installments including all interests due. The banks interest charges are 6%
compounded Quarterly. How much should each annual payment be in order to retire the debt
including the interest in 10 years?

Mathematics for Management (MGMT121) Page 113

Solution
Pv = Br. 15, 000 R = 15, 000
t = 10 years n = 10 x 4 = 40
= 15, 000 (0.033427)
m=4
= Br. 501.4
r = 6% i= 6%/4 = 15%
Interest = [501.4 x 40] – 15, 000
R =?
= 20056 – 15,000
= Br. 5056

4.4.4. Mortgage Payment

In a typical home purchase transaction, the home buyer pays part of the cost in cash and
borrows the remaining needed, usually from a bank or savings and loan associations. The
buyer amortizes the indebtedness by periodic payments over a period of time. Typically
payments are monthly and the time period is long such as 30 years, 25 years and 20 years.
Mortgage payment and amortization are similar. The only differences are:
 the time period in which the debt/ loan is amortized /repaid/
 The amount borrowed.

In mortgage payments m is equal to 12 because the loan is repaid from monthly salary or
Income, but in amortization money takes other values. Similarly stated mortgage payments
are of amortization in nature involving the repayment of loan monthly over an extended
period of time. Therefore, in mortgage payments we are interested in the determination of
monthly payments.
Taking:
A = total debt
R = monthly mortgage payments
r = stated nominal rate per annum
n = 12 x number of years (period of the loan)
R can be determined as follows:

R=A or R=A

A=R

Mathematics for Management (MGMT121) Page 114

Example 1: Ato Assefa purchased a house for Br. 115, 000. He made a 20% down payment
with the balance amortized by a 30 year mortgage at an annual interest of 12% compounded
monthly so as to amortize/ retire the debt at the end of the 30th year.
Required:
1. Find the amount of mortgage
2. Find the periodic payment.
3. Find the interest charged.

Solution:
Selling price = Br. 115, 000 r = 12%, i = 0.01
Less: Down payment = 23, 000 (20% x 115,000) m = 12, n = 360
Mortgage (A) = Br. 92, 000 t = 30 years
R=?

R=A = 92, 000

= 92, 000 (0.010286125)

= Br. 946.32

Ato Assefa should pay Br. 946.32 every month to retire the debt within 30 years or
360 monthly payments.
Interest = Actual payment – mortgage (loan)

= (946.32 x 360) – 92, 000

= Br. 340, 675.20 – 92, 000
= Br. 248, 675.20
Throughout the 30 years period the loan earns an interest of Br, 284,675.20

4.5. Summary

The basic concept of mathematics of finance is that money has time value which is
described either as present value or future. Present value is the value of money today;
future value is the value of money at some point in the future. The different between
money now and the same money in the future is called interest. Interest is the price
paid for the use of a sum of money over a period of time. It is a fee paid for the use of

Mathematics for Management (MGMT121) Page 115

 another’s money, just rent is paid for the use of another’s house. Interests are of two
types: simple interest and compound interest.

An annuity is any sequence of equal periodic payments. The time between successive
payments is called payment period for the annuity. If payments are made at the end of
each payment period, the annuity is called an ordinary annuity. If payment is made at
the beginning of the payment period, it is called annuity due.

A sinking fund is a fund into which equal periodic payments are made in order to
accumulate a definite amount of money up on a specific date.

Amortization means retiring a debt in a given length of time by equal periodic

payments that include compound interest. Mortgage payment and amortization are
similar. The only differences are: The time period in which the debt/ loan is
amortized /repaid/, and the amount borrowed.

 Self Test Exercises

1. An employee has contributed with her employer to a retirement plan for 20 years a
certain amount twice a year. The contribution earns an interest rate of 10%
compounded semiannually. At the date of her retirement the total retirement benefit is
Br. 300, 000. The retirement program provides for investment of this amount at an
interest rate of 10% compounded semiannually. Semiannual payments will be made
for 10 years to the employee of her family in the event of her death.
1. What semi - annual payment should she made?
2. What semi - annual payment should be made for her or her family?
3. How much interest will be earned on Br. 300, 000 over the 40 years?

2. Ato Amare purchased a house for Br. 50, 000. He made an amount of down payment
and pay monthly Br. 600 to retire the mortgage for 20 years at an annual interest rate
of 24% compounded monthly.
Required:

Mathematics for Management (MGMT121) Page 116

 Find the mortgage, down payment, interest charged and percentage of the down
payment to the selling price.
3. If you borrow Br. 1, 000 from Commercial Bank of Ethiopia for 1 year to pay at 6%
interest rate your tuition fee. Find the simple interest and the maturity value of the
loan.
4. What is the present value of a loan that will amount to Br. 5, 000 in 5 years if money
is worth 3% compounded semi-annually?
5. A small boy at the age of 10 drops 0.25 cents into a Jar each day. At the end of each
month (30 days months) he deposits this amount at Dashen Bank that pays 5%
interest compounded quarterly. If he makes the deposit without interruption, how
much will the boy have at the age of 20?
6. Hiwot deposits Br. 1, 000 at the end of every 3 months period in to an account for 5
years which earn 10% interest compounded quarterly and then her deposits are
changed to Br. 500 monthly for the next 5 years which earn 12% interest
compounded monthly. How much is the account by the end of the time period
considered?
7. NTT Company purchased a delivery truck on credit from AMCE which requires a
payment of Br. 400, 000 plus 5% interest compounded annually at the end of 5 years.
The Company plans to set up a sinking fund to accumulate the amount required to
settle the debt.
Required:
1. Find the total debt at the end of the 5 year.
2. What should be the monthly deposit into the fund be if the account pays 15% interest,
compounded monthly?

8. If Br. 10, 000 is invested at 8% compounded:

1. Annually
2. Semi Annually
3. Quarterly
4. What can you observe from your answers in A, B and C
What is the amount after 5 years?

Mathematics for Management (MGMT121) Page 117

 9. Assume you won a lottery and you want to deposit/ invest your money in the
following to investment alternatives. Investment A which pays 15% compounded
monthly and B that pays 14% compounded semi annually, which is the better
investment, assuming other things are the same.

 Answer Key to Self Test Exercises

1. Retirement plan
Employment period Retirement period
Time
0 Pay 20 Receive 40 yrs
m=2
A20= 300, 000 Br. R2 = ?
t= 20yrs Pv = 300, 000
m= 2, n = 40 t = 20 yrs,
r= 10%, i = 5% m = 2, n = 40
R1 = ? r = 10%, I = 5%

x 300, 000
R1 = 300, 000 R2 =

= Br. 2483.45 = 17483.45

2.
Selling price = Br. 50, 000
Down payment = ?
Mortgage (A) = ?
R = Br. 600
r = 24%, i = 2%
m = 12, n = 240
t = 20 years

* Mortgage (A) = R

Mathematics for Management (MGMT121) Page 118

 = 600

= 600 (49.56855)
= Br. 29, 741.13
* Down payment = Selling price – mortgage.
= 50, 000 – 29741.13
= Br. 20, 288.87
* Interest charged = Actual payment – mortgage]
= 600 x 240 – 29, 741.13
= 144000 – 29741.13
= Br. 114, 258.87

* Percentage of down payment =

= 100%

= 40.52 %

3. Given: Solution
P = 1, 000 Br. I = PRT
T = 1year = 1, 000 x 0.06 x 1
R = 6% / year = Br. 60
I=? A=P+I or A = P (1 + rt)
A=? = 1, 000 + 60 = 1, 000 (1 + 0.06 x 1)
= Br. 1060 = 1, 000 (1.06)
= Br. 1, 060

4. Given: Solution:
A = Br. 5, 000 p = A (1 + i)-n
t = 5 years = 5, 000 (1.0015)-10
r = 3% / year = 5, 000 (0.985123)
m = 2 time = Br. 4925.62
n = mt = 2 x 5 = 10
i = r/m = 3%/2 = 1.5%

Mathematics for Management (MGMT121) Page 119

 p =?
A =?

5. Amount of money at the end of every month the boy will have Br. 7.50 (0.25 x 30) to be
deposited at Dashen Bank.
Therefore, R = 7.50
t = 10 years
A = 7.5
r = 5%
m = 4, n = 40 = 7.5 x 514.89557
i = 5%/4= 0.00125 = Br. 3861.72

If the small boy saves 0.25 cents every day and deposits if monthly in a bank account that
pays 5% compounded quarterly, he will have Br. 3,861.72 at after 10 years.

6.
First 5 years A1 = 1,000
R1 = 1000
= 1,000 (25.54466)
r = 10%
= Br. 25544.66
m=4
This amount will be compounded quantity at a
i = 2.5%
12% interest rate. Therefore, The amount at the
t=5
end of the next 5 years will be calculated as
n = 20
follows.
A5 =?

7. a) A =?
t = 5 years
p = 400, 000 Br.
m = 1,
r = 5%, n = 5
A = P (1 + i )n

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 = 400, 000 (1.05)5
= 510512.625 Br.

b) Given
A = 510512.625 Br.
t = 5 years
m = 12
n = 5 x 12 = 60
r = 12%
i= 1%
R =?

R=A = 510512.625 X

= 510512.625 x

= 5150512.625 x 0.0122444
= Br. 6250.95

The company should deposit Br. 6250.95 every month for 5 years or 60 periods to a stinking
fund in order to settle its debt of 510512.625
8.
A) A =Br. 14693.28
B) A = Br. 14862.44
C) A = Br. 14859.47
9. : Nominal rates with amount compounding periods in this case (quarterly and
monthly) cannot be compared directly. You have to find the effective rate of each
nominal rate and then compare the effective rates to determine which investment
will yield the return
Effective rate for A =

Effective rate for Investment A: Effective rate for Investment B:

reA = (1 + i)M – 1 reB = (1 + 0.07)2 – 1
= (1 + 0.0125)12 – 1 = (1.07)2 – 1

Mathematics for Management (MGMT121) Page 121

 = 0.16075 = 16.075% = 0.1449 = 14.5%
Therefore, investment A is a better alternative
P = 25,544.66 A10 = (25544.66 (1.01)60
r = 12% = Br. 46406.895
m = 12
i = 1%
t=5
n = 5 x 12 = 60

Since Hiwot continues her payment for the second 5 years of Br. 500, the amount will be
calculated using an annuity formal as:

A2 = 500

= 500 (81.66966)
= Br. 40834.845

At the end of the 10 years Hiwot will have a total amount of Br. 87,241.73 (Br. 46,406.9 +
Br. 40834.84).

? Review Questions

1. If you have Br. 100,000 in an account that pays 6% compounded monthly and
If you decide to withdraw equal monthly payments for 10 years at the end of
which time the account will have a zero balance, how much should be
withdrawn each month?

2. Ato Liku purchases a house for Br. 250, 000. He makes a 20% down payment,
with a balance amortized by a 30 year mortgage at an annual interest rate of
12% compounded monthly.
a) Determine the amount of the monthly mortgage payment.
b) What is the total amount of interest Ato Liku will pay over the life of the
mortgage?
c) Determine the amount of the mortgage Ato Liku will have paid after 10 years?

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 3. How much should be deposited in an account paying 10% compounded
quarterly in order to have a balance of Br. 10, 000 ten (10) years from now?
What would be the amount of compound interest after 10 years?
4. At what interest rate you should invest Br. 5000, if you want to receive an
amount of Br. 7,000 in 8 years time.

UNIT 5: ELEMENTS AND APPLICATIONS OF CALCULUS

Contents
5.1. Differential Calculus
5.1.1. Concepts
5.1.2. Rules of Differentiation
5.1.3. Higher-Order Derivatives (First and Second Derivative for Extreme)
5.1.4. Business Applications of Differential Calculus
5.1.4.1. Marginal Analysis
5.1.4.1.1. Marginal Cost
5.1.4.1.2. Marginal Revenue
5.1.4.1.3. Marginal Profit
5.1.4.2. Optimization Problems
5.2. Integral Calculus
5.2.1. Indefinite and Definite Integration
5.2.2. Rules of Integration
5.2.3. Business application of Integral Calculus

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 5.2.3.1. Finding Total Functions
5.2.3.2. Areas Problems
5.3. Summary

Unit Objectives
After reading this unit students must be able to:
 Explain the concepts of limits and continuity
 Provide an understanding of average rate of change
 Provide an understanding of derivative
 Illustrate a wide variety of applications of optimization procedures
 Understand skills in problem formulation
 Reinforce skills of interpretation of mathematical skills

 Introduction

This unit examines the calculus and its application to business, economics and other
areas of problem solving. The major areas of study within the calculus are differential
calculus and integral calculus. Differential calculus focuses on rates of change in
analyzing a situation.

Integral calculus involves summation of a special type. Graphically the concepts of

area in two dimensions or volume in three dimensions are important in integral
calculus. The goal in this chapter is to provide an appreciation for what the calculus is
and where it can be applied. Though it would take several semester of intensive study
to understand most of the finer points of the calculus, your coverage will enable you to
understand the tools for conducting analysis at an elementary level.

Calculus is a mathematical tool used to solve problems in business, Economics and

other areas.

 differential calculus and

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  integral calculus

5.1. Differential Calculus

5.1.1. Concepts
Differential calculus focuses on rates of change in analyzing a situation. It broadens the
concept of slope.

- Limits
- Continuity
- Derivatives

Application areas:
- Optimization problems i.e minimizing cost and /or maximizing profit, revenue---
1) Integral calculus involves summation of a special type, total change -------
It is the inverse of Differential calculus or vice versa like that of log and antilog.

5.1.2. Rules of differentiation:

differentiation:

The rules of differentiation have been developed using the limit approach. The mathematics
involved in providing these rules can be finally complicated. For our purposes it will suffice
the rules without proof.

The rules of differentiation apply to functions, which have specific structural characteristics.
A rule will state that if a function has specific characteristics, then the derivative of the
function will have resulting form.
 Each function can be graphed and that the derivative is a general expression for
the slope of the function.

Notation:  “which read the derivative of Y with respect to X”

: This notation can be used interchangeably with the notation “ F’ (X) –read f prime
of X” – which represent the derivative of the function f at X. That is given f(X)

= (X)

 Differentiation by direct application of the limit formula is time consuming and

difficult, there fore, functions should be classified into certain groups according to

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 their behavior so that the process of finding a derivative when applied to these groups
follows a definite pattern (formula)

1. Derivative of a constant function.

function.
If f(x) = K Eg. F(x) = 10,
(x) = 0 (x) = 0 slop = 0
If you consider what the function (f(x) = 10) looks like graphically, this result
seems reasonable. The function f(x) = 10 is horizontal line intersecting the Y axis
at (x,10). The slope at all points along such function equals 0.

2. Power functions
If f(x) = Xn, where n is a real number (X) = nxn-1
Example
1) If (X) = X = X1 where, n = 1
(X) = nxn-1
= 1X1-1
=1
This implies that for the function f(X) = X, the slope equals 1 at all points. You should
recognize that f(X) = X is a linear function with slope 1.

2) f(X) = X5 4) f(X) =
(X) = 5x4 = X 2/3

3) f(X) = (X) = 2/3 X –1/3

= X-3 =

(X) = -3X-4 =

=
=
3. A constant times a function
If f (X) = K. g(X), where K is a constant and g is a differentiable function,

(X) = K. (X)

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 a) f(X) = 5X3 b) f(X) = X2 – 5X

(X) = 15X2 f(X) can be expressed as

f(X) = g(X) – h(X), where g(X) = X2

h(X) = 5x

(X) = (X) - (X)

= 2x – 5

4. Sum or differences of functions.

This implies that the derivative of function formed by the sum (difference) of two
or more component functions is the sum (difference) of the derivatives of the
component functions.

(X) = [g(X) h(X)]

(X) = [ (X) (X)]

f(X) = 6X4 – 5X2 g(X) = 6X4 (X) = 24X3

(X) = 24X3 – 10x h(X) = 5x2 (X) = 10x

(X) - (X) = 24x3 – 10x

f(X) = 3x2 + 2x + 1

(X) = 6x + 2

5. Product of functions
If h(X) = f(X) . g(X)

(X) = f(X) . (X) + g(X) . (X)

h(X) = (2x2 – 5) (x + 3) f(X) = 2x2 - 5

= (2x2 – 5) x 1 + (X + 3) (4x) g(X) = X + 3

= 6x2 + 12x – 5 (X) = 4x

(X) = 1

(X) = f(X) . (X) + g(X) . (X)

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 2x2 – 5 x 1 (X + 3) (4x)

Eg. 2. f(X) = (x2 – 5) (X – X3)

g(X) = X2 – 5 (X) = 2x

h(X) = X – X3 (X) = 1 – 3X2

(X) = g(X) . (X) + h(X) . (X)

= (x2 – 5) (1 – 3x2) + (X – X3) (2x)

= -5x4 + 18x2 – 5

6. Derivative of the Quotient of function

h(X) =

(X) =

Eg. 1. h(X) =

(X) =

= =

Eg. 2. f(X) = (X) =

3. F(X) = (3X2 – 5) 1 – X3 (X) =

5.1.3. Higher –Order Derivative (First and Second Derivative for Extreme)

The process of finding a derivative is called differentiation. A set of rules of differentiation

exists for finding the derivatives of many common functions.

If a function F has a derivative for each value of X in some specified interval, then the
derivative function is defined for that interval. If in turn the derivative function itself has a

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derivative for points in that interval this new derivative function is called the second
derivative of the original function or the first derivative of .

 The first derivative test

* Locate all critical values X* (X) = 0
* For any critical value X*, determine the value of X and right

Second derivative test

For critical points, where (X) = 0, the most expedient test is the second –derivative test.
Intuitively the 2nd derivative test attempts to determine the concavity of the function at a
critical point.

Eg.

(X) = X3 – 9x  (X) = -ve

Concave upward
(X) = 0
Concave downward
X3 – 9x = 0
 (X) = +ve
X (X2 – 9) = 0
X (X + 3) (X – 3) = 0
X = 0, X + 3 = 0 or X – 3 = 0
X = 0, X = -3, or X = 3

(0, -3, or 3)  (0,0), (-3, - ), (-3, - )

(X) = 3x2 – 9 max min min

Rule
1  find (X), set it equal to zero, and solve for candidate values, X.
2. Find (X) and evaluate (X)
a) If (X) is negative, a local maximum occurs at X
b) If (X) is positive, a local minimum occurs at X.
c) If (X) is zero; the test fails to determine what happens at X.

* (X) = 0 is called stationary points. The slope of the line is tangent to a curve.
g. (X) = 3x3 + 5x2 + 2x +
(X) = 9x2 + 10x + 2

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 (X) = 18x + 10
(X) = 18
(X) = 0
Given :
If (X) > 0 is increasing
If (X) < 0 is decreasing
If (X) = 0 is constant

Where:
If (X) > 0 is increasing
= The original function
(X) < 0 is increasing
= Relates information about the
(X) =0 is constant
behavior of
= Relates information about
5.1.4. Business Applications of Differential Calculus

5.1.4.1. Marginal analysis

Examines Incremental Effects

C(X) = total cost function  (X) = marginal Cost

R(X) = total Revenue function  (X) = Marginal revenue

P(X) = R(X) – (C(X)) = Profit  (X) = marginal Profit

(X) = (X) - (X)

5.1.4.1.1. Marginal Cost

Marginal Cost is the additional cost incurred as a result of producing and selling one
more unit of a product or service. Linear cost functions assume that the variable cost per
unit is constant for such functions the marginal cost is the same at any level of output.

 A non-linear cost function is characterized by variable marginal costs.

 For the total cost function C(X), the derivative C’(X) represents
i) The instantaneous rate of change in TC given a change in the number of units
produced.

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 ii) A general expression for the slope of the graph of the TC function
iii) The marginal cost, MC = (X)
(X) Can be used to approximate the marginal cost associated with
producing the next unit.

 It is the rate of change in total cost per unit change in production at an out put
level of X unit. It is also an optimization to the actual cost of making one more
unit at any production level X (non-linear functions).

Example: Suppose the total cost C(X) in thousands of dollars for manufacturing X unit is
given by the function

C(X) = 575 + 25x ;0<X 50

[0 50]

Required:

1) Find the MC at a production level of X units

2) Find the MC at a production level of 40 unit and interpret the result
3) Find the actual cost of producing the 41 st unit and compare this cost with the result
found in question number 2

Solution

1) (X) = 25 – x/2

2) (40) = 25 – 40/2

= 5 Br. = 5, 000Br.  marginal cost of 41st unit.

3) C(41) – C(40) = ?

C(41) = 575 + 25(41) – (41)2/4

= 1179.75

C(40) = 575 + 25(40) – (40) – (40) 2/4 = 1175

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 C(41) – C(40) = 4750Br.  1179.75 – 1175 = 4.75 x 1000

At a production level of 40 unit the rate of change of TC relative to production is Br. 5,000.
In Other words, the cost of producing 1 more unit at this level of production (40) is
approximately 5, 000Br.

5.1.4.1.2. Marginal Revenue

Marginal revenue (MR) is the additional revenue derived from selling one more unit of a
product or service. If each unit of a product sells at the same price, the MR is always
equal to the price. Eg. R = 10x MR= 10Br.

Marginal revenue for non-linear total revenue function is not constant.

For a total revenue function R (X), the derivative (X) represents the instantaneous rate of
change in total revenue given a change in the number of units sold. For the purpose of
marginal analysis, the derivative is used to represent the

Marginal revenue or MR = (X) P

Max

It represent / approximately the marginal revenue from selling the next unit
Eg. R(X) = 500x – 0.005x2 X = number of units
(X) = 500 – 0.005X
Marginal Profit= Marginal revenue –Marginal cost
(X) = (X) - (X)
 Marginal revenue (Profit) analysis is concerned with the effect on profit if
one-additional unit of a product is produced and sold. As long as the
additional revenue brought in by the next unit exceeds the cost of producing
and selling that unit, there is a net profit from producing and selling that unit
and total profit increases.
I. If MR > MC,
MC, produce the next unit

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 II. If MR < MC,
MC, do not produce the next unit.

5.2.4.1.3. Marginal Profit

Profit maximization criterion

If MR = MC, for the last unit produced and sold, total profit will be maximized.
P(X) = R(X) – C(X) = 0
(X) = (X) - (X) = 0
(X) = 0
(X) = (X)

Example:
Example: The market research department of a Company recommends that the Company to
manufacture and market a new transistor radio after suitable test. The marketing
department also presents the following demand equation.
X=10,000-1000P i.e. P=10-X/1000
Furthermore, the financial department provides the following cost equation:
C(X) = 7, 000 + 2x
Conduct a marginal analysis for the company.
1) (X) = 2

2) TR = P.X = 10x -

(X) = 10 -

3) P(X) = R(X) – C(X)

= (10x - ) – (7, 000 + 2x)

= 8x - - 7, 000

=8- or

= (X) - (X)

= 10 - -2

=8-

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Average cost,
cost, Average revenue,
revenue, Average profit

 Average Cost = (X) =  Cost per unit

Marginal Average cost = (X)  the rate of change of average cost

 Average revenue = (X) =  Revenue/unit

Marginal Average revenue = (X)  R’(X)\X

 Average Profit = (X) =

Marginal Average profit = (X)

Suppose: C(X) = 1, 000 + 25x -

(X) = 25 -

(X) = + 25 -

(X) = - 1/10

(10) =

= Br. –10.10  Shows that a unit increase in production will decrease the average cost
by approximately Br. 10.10 at a production level of 10 units.

If set equal to zero

(X) = + 25 - =0

X = represents the minimum value of f, If (X) > 0 i.e.-Cost

(X) < 0 i.e. –Profit

5.1.4.2. Optimization Problems

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 Ex. 1. A company manufactures and sales X units of transistor radios per week. If the
weekly cost and demand equations are:

C(X) = 5, 000 + 2x

P = 10 - [0, 8000]

Finding for each week

a) The production level that leads to maximum revenue and the maximum revenue.
b) The production levels that leads to maximum profit and the maximum profit.
c) The production level that leads to minimum cost and the minimum cost.

Solution

1) R(X) = 10x - = (10 - ) . (X)

(X) = 10 - (X) = 0

= 10 - =0

X = 5, 000 units

(X) = = -0.02, so X = 5, 000 units leads to maximum revenue

TR = XP = 5, 000 x 5 (5, 000 25, 000)

= 25, 000 Br R(5, 000) = 10 x 5, 000 -

= 25, 000

2) P(X) = 10x - - 5, 000 – 2x

(X) =
= 8x - - 500
Negative, so it is an optimal solution
(X) = 8 (4, 000 unit Br. 21, 000)

(X) = 0 P(4, 000) = 4, 000 x 8 -

8- =0

= 21, 000

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 4, 000 = X

3) Cost is minimum at zero production level. If there is non-linear function, we can use the
2nd derivative test.
C(X) = 5, 000 + 2x
(X) = 2
(X) = 0 2

5.2. Integral Calculus

5.2.1. Concepts

Integration is a way of adding slices to find the whole.

Integration can be used to find areas, volumes, central points and many useful things. But it
is easiest to start with finding the area under the curve of a function like this:

What is the area under y = f(x) ?

Slices

We could calculate the function at a few points and add up

slices of width Δx like this (but the answer won't be very
accurate):

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We can make Δx a lot smaller and add up many small
slices (answer is getting better):

And as the slices approach zero in width, the answer

approaches the true answer.
We now write dx to mean the Δx slices are approaching zero
in width.

That is a lot of adding up!

But we don't have to add them up, as there is a "shortcut". Because ... finding an Integral is
the reverse of finding a Derivative.
Example: What is an integral of 2x?

You know that the derivative of x2 is 2x ..

... so an integral of 2x is x2

Notation

The symbol for "Integral" is a stylish "S"

(for "Sum", the idea of summing slices):

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It is the "Constant of Integration", and is there because of all the functions whose derivative
is 2x:

The derivative of a constant is zero, so when we reverse the operation (to find the integral)
there could have been a constant of any value.
So we wrap up the idea by just writing + C at the end.

5.2.2. Indefinite and Definite Integration

A Definite Integral has start and end values: in other words there is an interval (a to b).
The values are put at the bottom and top of the "S", like this:

Indefinite Integral Definite Integral

(no specific values) (from a to b)
We can find the Definite Integral by calculating the Indefinite Integral at points a and b, then
subtracting:
Example: The Definite Integral, from 1 to 2, of 2x dx
The Indefinite Integral is: ∫2x dx = x2 + C
 At x=1: ∫2x dx = 12 + C
 At x=2: ∫2x dx = 22 + C
Subtract:

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 (22 + C) - (12 + C)
22 + C - 12 – C
4-1+C-C=3
And "C" gets cancelled out ... so with Definite Integrals we can ignore C.
In fact we can give the answer directly like this:

5.2.3. Rules of Integration

Rules Function Integral

Multiplication by constant ∫cf(x) dx c∫f(x) dx

Power Rule (n≠-1) ∫xn dx xn+1/(n+1) + C

Sum Rule ∫(f + g) dx ∫f dx + ∫g dx

Difference Rule ∫(f - g) dx ∫f dx - ∫g dx

Examples
Example: what is the integral of sin(x)?
From the table above it is listed as being -cos(x) + C
It is written as:
∫sin(x) dx = -cos(x) + C
1. Power Rule
Example: What is ∫x3 dx ?
The question is asking "what is the integral of x3 ?"
We can use the Power Rule, where n=3:
∫xn dx = xn+1/(n+1) + C
∫x3 dx = x4/4 + C
Example: What is ∫√x dx ?
√x is also x0.5
We can use the Power Rule, where n=½:
∫xn dx = xn+1/(n+1) + C
∫x0.5 dx = x1.5/1.5 + C

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 2. Multiplication by constant
Example: What is ∫6x2 dx ?
We can move the 6 outside the integral:
∫6x2 dx = 6∫x2 dx
And now use the Power Rule on x2:
= 6 x3/3 + C
Simplify:
= 2x3 + C
3. Sum Rule
Example: What is ∫cos x + x dx ?
Use the Sum Rule:
∫cos x + x dx = ∫cos x dx + ∫x dx
Work out the integral of each (using table above):
= sin x + x2/2 + C
4. Difference Rule
Example: What is ∫ew - 3 dw ?
Use the Difference Rule:
∫ew - 3 dw =∫ew dw - ∫3 dw
Work out the integral of each (using table above):
= ew - 3w + C
5.2.4. Business Application of Integral Calculus

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 5.2. Summary

Calculus is a mathematical tool used to solve problems in business, Economics and other
areas. Differential calculus and integral calculus
The following are the rules of differentiation: Derivative of a constant function, Power
functions, constant times a function, Sum or differences of functions, Product of functions,
Derivative of the Quotient of function

Business Applications of Differential Calculus are Marginal analysis (Marginal Cost,

Marginal Revenue, and Marginal Profit) and Optimization Problems

Integration is a way of adding slices to find the whole. Integration can be used to find areas,
volumes, central points and many useful things. Some of the rules of integration are: Power
Rule, Multiplication by constant, Sum Rule and Difference Rule

 Self Test Exercises

1. When X gallons of alcohol are produced, the average cost per gallons is given by
the following function.

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 C(X) = ,X>0

Required:
1) Find the gallon of alcohol production level that leads to minimum cost.
2) Prove that this value (1) of X occurs at a local minimum of C(X)
3) Compute the minimum average cost per gallon.

2. A rectangular warehouse with a flat roof is to have a floor area of 9600 square feet.
The interior is to be divided into storeroom and office space by an interior wall
parallel to one pair of the sickles of the building (as shown below). The roof and floor
areas will be of 600 square feet for any building, but the total wall length will vary for
different dimensions.

Required:
Find the dimensions that minimize the total amount of wall.
1. Fence is required on three sickles of a rectangular plot. Fence for the two ends costs Br.
1.25 per running foot; fence for the third side costs Br. 2 per running foot. Find the
maximum area that can be enclosed with Br. 100 worth of fence.

 Answer Key to Self Test Exercise

1.
1. We can rewrite C(X) as
C(X) = 200 (0.1x + 5)-1 + 0.05X
(X) = -200 (0.1x + 5)-2(0.1) + 0.05
= -20 (0.1x + 5)-2 + 0.05
(X) = 0
-20 (0.1x + 5)-2 + 0.05 = 0

+ 0.05 = 0

0.1x + 5 =  200
X = 150 or X = -250

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 We discard X = -250 since it is negative.

2. To show X = 150 yields a minimum cost, we start with,

(X) = -20 (0.1x + 5)-2 + 0.05
Find (X)
(X) = -20 (-2) (0.1x + 5)-3 (0.1)

= Minimum point.

(150) = Positive

3. Minimum average cost / gallon

C(X) = + 0.05x

C(150) =

= 17.5 Br/ gallon

2.

X
X
X Y
A = 9600 sq. Ft. XY = 9600 Sq.ft

X Y=

W = 3X + 2Y i.e total wall

W(X) = 3X + 2

= 3X +

Set (X) equal to zero.

3- =0

3X2 – 19200 = 0

X2 =

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 X=
=  80
Y = 120

X = 80 X = -80 is discarded because X must be positive

in this problem.

Y= = 120

 Note that the second derivative

W (X) = 3 – 19200 X-2
= -2 (-19200) X-3

* (80) > 0+ positive. So we have a minimum value.

* The minimum length is
W = 3X + 2Y = 3(80) + 2 (120)
= 240 + 240
= 486 feet.

3.
Let
2 (1.25X) + 2Y = 100
1.25X Y X 2.50X + 2Y = 100
2

A(X) = X A = XY

Y=
A(X) = X
2Y = 100 – 2.50X

Y=

(X) = 0
50 – 2.5X = 0
50 = 2.5X A(20) = 500 sq.feet

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 X=

X = 20  leads to max area.

Y = 25
2.5X + 2Y = 100
2.5X = 100 – 2Y
X =

A(Y) =

= 40Y – 0.8Y2
(Y) = 40 – 1.6Y
(Y) = 0
40 – 1.6Y = 0

Y=

= 25

? Review Questions

1. Thomas Private Limited Company is about to start production of new products to sell
to customers. Before the start of the new production, it costs the company $ 200,000
to construct the factory’s building. Once the construction is over, the cost per unit of
production is estimated to be birr 20. Upon selling, the company will incur a 20%
commission expense. Moreover, the price per unit of products is decided to be Birr
50.

Required:
a) Construct the total cost equation in terms of quantity.
b) Determine the break-even quantity (Revenue)

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 2. In its first year, “Helen Trading” had the following experience:
Unit selling price birr 100 Sales 50,000 units
Total fixed cost birr 400,000 TVC birr 3,000,000

Required:
a) Develop TR, TC and profit functions for the company in terms of quantity
b) Find the breakeven point in terms of quantity and sales volume.
c) If profit had been br. 500,000 what would have been the sales volume
(Revenue) and quantity of sales.
d) What would have been the profit if sales are br. 2,000,000

3. ALUMMUNI PLC. Produces three models of tractors: Metakeb, Mewesson,

Metekem Each unit of Metakeb, Mewesson and Metekem requires the following
amounts of time in minumtes in each of the indicated departments.

Machining dep’t Assembly dep’t Inspection dep’t

(in minutes) (in minutes) (in minutes)
Metakeb 1200 2400 600
Mewesson 1800 1200 3000
Metekem 3000 2400 1200
Suppose the total time available per month in machining, assembly and inspection
departments are 1050, 1160 and 830 hours respectively.
Required:
Determine the number of units of each product to be produced in a month to use up all the
available resources (use Gaussaian method.
4. Attendance record indicated that 80,000 South Koreans attended the 2002 world cup
at its opening ceremony. Total ticket receipts were $ 3,500,000. Admission prices
were $ 37.50 for the second class and $ 62.50 for the first class. Determine the
number of South Koreans who attended the opening ceremony at the first and second
class
5. There are two competing brands of toothpastes in a market. The brands are colget and
Akuafresh. A survey was undertaken to determine the extent customers switch over

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 from one brand to another every quarter. The survey has identified that every quarter
1/3 of 45% of customers of Akuafresh in the previous quarter continue to purchase
Akuafresh. And ¾ of 60% customers of colget in the previous quarter become
customers of Akuafresh. Moreover, it was identified that the two brands have a
constant customers of 10,000 and no one stops purchasing one or the other brand.
Currently the number of customers of colget are 6000 persons.

Required:
a. What will be the number of customers of colget and Akuafresh after two
transitions?
b. Find the steady state market share.
6. Abush Manufacturing Company produces two different types of Tractor. These are
Hiwot and Durex. Hiwot requires 9 minutes to assemble and 2 minutes to package.
While Durex requires 12 minutes to assemble and 6 minutes to package. In addition,
each type has an engine. The company has 720 minutes of assembly time available 75
engines and 300 minutes of packaging time. Profits are b. 45 for Hiwot and br. 70 for
Durex both per unit.
Required:
a. Formulate the Linear anagramming model for the problem. (Show all the necessary
steps)
b. Determine how many tractors of each type to make in order to maximize total
profit (use simplex method)
c. Interpret your result
7 . Ato Bekele is thinking of buying a G+2 building 5 years form now on a mortgage
basis. The building will be used for office purpose for his new business that costs
Br. 500, 000. The required down payment is Br. 100, 000,with monthly mortgage
payment for 30 years at a rate of 12% compounded monthly. To cover the down
payment Bekele has established a sinking fund account in Dashen Bank, which
pays 10% interest compounded quarterly.
Required: a) How much Bekele should deposit at the end of every quarter to meet the
objective of the down payment?
b) Determine the amount of monthly mortgage payment to be made to
discharge the mortgage within 30 yrs.

Mathematics for Management (MGMT121) Page 147

 c) What is the amount of total interest paid on the mortgage?
d) What is the total amount paid over the entire period of the mortgage?
8. Find the derivatives of the following
a) f (X) = 25
b) g (X) = X6

c) h (X) =

d) f (X) = 5X3 + 3X4

e) g (X) = (3X2 – 3) (X + 5)

References
1. Bowen Earl K . et. al(1987), Mathematics with applications in Business and
Economics,
2. Barnett Raymond A. and Ziegler Michael R(1989), Essentials of College
Mathematics for business and Economics, life science and social science, 3rd ed.
3. Ann j. Hughes (1983), Applied Mathematics: For Business, Economics, and the
social Science
4. Ronald E. Larson and Bruce H. Edwards(1991), Finite Mathematics with Calculus,
5. Ronald J. Harshbager and James J. Reynolds, Mathematics Applications.
6. Ronald J. Harshbager and James J. Reynolds, Finite Mathematics, 3rd Ed.
7. Hole Poul G. (1974), Finite Mathematics and Calculus with Applications to Business
8. Dexter j Booth and John K Turner(1996), Business mathematics with Statistics
9. Teresa Bradley and Paul Patton, “Essential Mathematics for Economics and Business

Mathematics for Management (MGMT121) Page 148