Difference Equations

Example: In a school, the number of students gets doubled every year.

If 𝑆𝑡 be the number of the students in nth year, then above information can be written
in mathematical form as: 𝑠𝑛 = 2. 𝑠𝑛−1
Definition: An equation that relates the independent variable, usually t, and
dependent variable y which changes at equal interval of time is known as difference
equation.
Homogeneous difference equation
No separate constant term appears in the equation. e.g. 𝑦𝑡 = 𝑎. 𝑦𝑡−1
Non homogeneous difference equation
At least one separate constant term appears in the equation. e.g. 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑏

Diff. Equation Complete solution How to find D (and E)

Value of A is obtained using
𝑦𝑡 = 𝑎𝑦𝑡−1 𝑦𝑡 = A. at
initial condition.
Don’t put 𝑦𝑡 = 𝐷 and 𝑦𝑡−1 = 𝐷 as
𝑦𝑡 = 𝑦𝑡−1 + 𝑏. 𝑦𝑡 = A + 𝑏𝑡. below, since it won’t give value of D
here. e.g. D=D+b (absurd)
Putting 𝑦𝑡 = 𝐷 and
𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑏. 𝑦𝑡 = A. at + 𝐷.
𝑦𝑡−1 = 𝐷
Putting 𝑦𝑡 = 𝐷. 𝑏𝑡 and
𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑏𝑡 . 𝑦𝑡 = A. at + 𝐷. 𝑏𝑡 .
𝑦𝑡−1 = 𝐷. 𝑏𝑡−1
Putting 𝑦𝑡 = 𝐷. 𝑒 𝑡 and
𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑒 𝑡 . 𝑦𝑡 = A. at + 𝐷. 𝑒 𝑡 .
𝑦𝑡−1 = 𝐷. 𝑒 𝑡−1
Putting 𝑦𝑡 = 𝐷𝑡 + 𝐸 𝑎𝑛𝑑
𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑏𝑡 + 𝑐. 𝑦𝑡 = A. at + 𝐷𝑡 + 𝐸.
𝑦𝑡−1 = 𝐷 (𝑡 − 1) + 𝐸
Precaution!
❖ Even if the equation is: 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑏𝑡−1 𝑜𝑟, 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑒 𝑡−1
we should take P. S. = 𝐷. 𝑏𝑡 𝑜𝑟 = 𝐷. 𝑒 𝑡 considering
1 1
𝑦𝑡 = 𝑎. 𝑦𝑡−1 + . 𝑏𝑡 𝑎𝑛𝑑 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + . 𝑒 𝑡
𝑏 𝑒
❖ The first/leading coefficient must be equal to 1.
❖ While solving the problem of the exercise, if we are asked to find the first four
terms, we should understand 𝑦𝑜 , 𝑦1 , 𝑦2 , 𝑦3 .
❖ Sometimes, question may appear in the form of 𝑦𝑡 + 𝑎. 𝑦𝑡−1 + 𝑓(𝑡 ) = 0.
In this case, we must shift the terms to get 𝑦𝑡 = − 𝑎. 𝑦𝑡−1 − 𝑓(𝑡 ). Otherwise,
sign of 'a' will be different from the actual one hence may lead to the wrong
result.
❖ If the equation is of the form: 𝑦𝑡+1 = 𝑎. 𝑦𝑡 + 𝑓 (𝑡 ), we should replace t by t −1
so that the equation will be 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑓 (𝑡 ). But f(t) will not get changed.

Interpretation:
❖ If a is negative, time path is oscillatory as 𝑎𝑡 changes sign when t is odd or even.
 ❖ If a is positive, time path is uniform as 𝑎𝑡 has same sign whether t is odd or
even.
❖ If −1 < 𝑎 < 1, the solution is convergent (when 𝑡 → ∞) and the difference
equation is stable.
❖ If 𝑎 ≤ −1, or, 𝑎 ≥ 1, the solution is divergent (when 𝑡 → ∞) and the difference
equation is unstable.

Exercise: 6.1

1. Write down the first four terms of each of the following sequences by using given
initial conditions. Also, write down a formula for the general term 𝑦𝑡 , in terms of t.

a. 𝑦𝑡 = 2𝑦𝑡−1 , 𝑦0 = 3
Solution:
Given relation is 𝑦𝑡 = 2𝑦𝑡−1 … … … . . (𝑖)
And the initial condition is: 𝑦0 = 3
Putting t=1 in (i), we have:
𝑦1 = 2𝑦1−1 .
Or, 𝑦1 = 2𝑦0 = 2.3 = 6
Putting t=2 in (i), we have:
𝑦2 = 2𝑦1 =2.6=12
Putting t=3 in (i), we have:
𝑦3 = 2𝑦2 =24
So, the first four terms are: 3,6,12 and 24.
Secondly,
Putting t=1 in (i), we have:
𝑦1 = 2𝑦1−1 .
Or, 𝑦1 = 2𝑦0 .
Putting t=2 in (i), we have:
𝑦2 = 2𝑦1 .
=2.2𝑦0 .
Putting t=3 in (i), we have:
𝑦3 = 2𝑦2 .
=2.2.2𝑦0
=23 𝑦0
In this way, we get:
𝑦𝑡 = 2𝑡 𝑦0 .
=3.2𝑡 .

2. Given the difference equation 𝑦𝑡+1 = 1.3𝑦𝑡 .

i. Solve the difference equation by iteration method for the years 2, 3, 4 and 5, given
that the income in year 1 is Rs. 15,000.
ii. Write down the solution of the difference eqn. for t= 1,2,3,4 and 5 in terms of 𝑦𝑡 .
iii. Find the general expression for 𝑦𝑡 in terms of t.
iv. Evaluate 𝑦20 when 𝑦1 = Rs. 15,000
v. Comment on the solution.
Solution:
i. Given relation is: 𝑦𝑡+1 = 1.3𝑦𝑡 .
Also, 𝑦1 = 15000.
Putting t=1 in (i), we have:
𝑦2 = 1.3𝑦1 .
=1.3× 15000
=19500
Putting t=2 in (i), we have:
𝑦3 = 1.3𝑦2 .
=1.3× 19500
=25350.
Putting t=3 in (i), we have:
𝑦4 = 1.3𝑦3 .
=1.3× 25350
= 32955.
Putting t=4 in (i), we have:
𝑦5 = 1.3𝑦4 .
=1.3× 32955
=42841.5
ii. Secondly,
Putting t=1 in (i), we have:
𝑦2 = 1.3𝑦1 .
Putting t=2 in (i), we have:
𝑦3 = 1.3𝑦2 .
=1.3 × 1.3𝑦1 .
Putting t=3 in (i), we have:
𝑦4 = 1.3𝑦3 .
=1.3 × 1.3 × 1.3𝑦1
Putting t=4 in (i), we have:
𝑦5 = 1.3𝑦4 .
=1.3 × 1.3 × 1.3 × 1.3𝑦1
Putting t=5 in (i), we have:
𝑦6 = 1.3𝑦5 .
=1.3 × 1.3 × 1.3 × 1.3 × 1.3𝑦1
= (1.3)5 𝑦1
iii. In this way, we get:
𝑦𝑡 = (1.3)𝑡−1 𝑦1 ………….(ii)
iv. Putting t=20 in (ii),
𝑦20 = (1.3)19 𝑦1
= (1.3)19 × 15000
= 2192880.44
v. Looking at the solution: 𝑦𝑡 = (1.3)𝑡−1 𝑦1 , we find that
a=1.3 which is positive. So, the time path is uniform.
Further, a>1. So, it represents unlimited growth hence the model is unstable.

3. Solve the following difference equations.

a. 𝑦𝑡 = 𝑦𝑡−1 + 5.
Solution: Actually, the solution is:
i. Given relation is: 𝑦𝑡 = 𝑦𝑡−1 + 5 𝑦𝑡 = 𝐶. 𝐹 + 𝑃. 𝑆.
i.e. 𝑦𝑡 = 𝐴(𝑎)𝑡 + 𝑏𝑡
Here, a=1 and b =5.
= 𝐴(1)𝑡 + 5𝑡
So, its solution will be as 𝑦𝑡 = 𝐴 + 𝑏𝑡.
= 𝐴 + 5𝑡
i.e. 𝑦𝑡 = 𝐴 + 5𝑡.

4. Solve the following difference equations by using specified initial conditions.

Hence, comment on the qualitative behavior of the solution in each case.

a. 𝑦𝑡 = 0.5𝑦𝑡−1 , 𝑦0 = 10.
Solution:
i. Given relation is: 𝑦𝑡 = 0.5𝑦𝑡−1
and the initial condition is 𝑦0 = 10.
Comparing with 𝑦𝑡 = a𝑦𝑡−1 , we find a=0.5.
So, its solution will be
𝑦𝑡 = 𝐴𝑎𝑡 [homogenous case]
i.e. 𝑦𝑡 = 𝐴(0.5)𝑡 .
Now, putting t=0 and y=10, we have:
𝑦0 = 𝐴(0.5)0
Or, 10= 𝐴. 1
Or, A=10.
So, the required solution is i.e. 𝑦𝑡 = 10. (0.5)𝑡 .
Further, value of a is 0.5 which is positive and less than 1.
So, the time path is uniform and it represents limited growth hence the model is
stable. i.e. the solution converges.
c. 𝑦𝑡 − 0.75𝑦𝑡−1 = 700 𝑎𝑛𝑑 𝑦0 = 3000.
Solution:
Given relation is: 𝑦𝑡 − 0.75𝑦𝑡−1 = 700
Or, 𝑦𝑡 = 0.75𝑦𝑡−1 + 700………..(i)
and the initial condition is 𝑦0 = 3000.
Comparing with 𝑦𝑡 = a𝑦𝑡−1 + 𝑏, we find a=0.75 and b =700.
Since a≠ 1 and b≠ 0, its solution consists of two parts namely:
yt = C. F. +P. S.
So, its solution will be as 𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷…….(ii)
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.75)𝑡
Further, putting 𝑦𝑡 = 𝐷 and 𝑦𝑡−1 = 𝐷 in (i) we have:
𝐷 = 0.75𝐷 + 700.
Or, 0.25D=700.
Or, D=2800.
So, P.S.= 2800.
Thus, the general solution is:
𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷.
Using initial condition 𝑦0 = 3000,
𝑦0 = 𝐴(0.75)0 + 2800.
Or, 3000= 𝐴(0.75)0 + 2800.
Or, A=200.
So, the specific solution becomes:
𝑦𝑡 = 200. (0.75)𝑡 + 2800.
Convergent, uniform time path and stable.

5. Solve the following difference equations. Hence, comment on stability of the

solutions in each case. Display the solutions graphically for 0≤t≤5.

a. 𝑦𝑡 = 4𝑦𝑡−1 + 15, 𝑦0 = 1.
Solution:
Given relation is: 𝑦𝑡 = 4𝑦𝑡−1 + 15, 𝑦0 = 1………..(i)
and the initial condition is 𝑦0 = 1.
Comparing with 𝑦𝑡 = a𝑦𝑡−1 + 𝑏, we find a=4 and b =15.
Its solution will be as 𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷…….(ii)
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(4)𝑡
Further, putting 𝑦𝑡 = 𝐷 and 𝑦𝑡−1 = 𝐷 in (i) we have:
𝐷 = 4𝐷 + 15. Or, D=−5
So, P.S.= −5.
Thus, the general solution is:
𝑦𝑡 = 𝐴(4)𝑡 − 5.
Using initial condition 𝑦0 = 1,

𝑦𝑡
6000

5000

4000
𝑦0 = 𝐴(4)0 − 5.
Or, 1= 𝐴. 1 − 5.
Or, A=6. It is (0,1) and
not (0,0).
So, the specific solution becomes:
𝑦𝑡 = 6. (4)𝑡 − 5.

𝑡 0 1 2 3 4 5
𝑦𝑡 1 19 91 379 1531 6139
Now, value of a is 4 which is positive and greater
than 1. So, the time path is uniform and it repre-
sents unlimited growth hence the model
is unstable. i.e. the solution diverges.

c. 𝑦𝑡 = −0.5𝑦𝑡−1 + 12 𝑎𝑛𝑑 𝑦0 = 5.
Solution:
Given relation is: 𝑦𝑡 = −0.5𝑦𝑡−1 + 12 ………………(i)
and the initial condition is 𝑦0 = 5.
Comparing with 𝑦𝑡 = a𝑦𝑡−1 + 𝑏, we find a=−0.5 and b =12.
Since a≠ 1 and b≠ 0, its solution consists of two parts namely:
yt = C. F. +P. S.
So, its solution will be as 𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷…….(ii)
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(−0.5)𝑡
Further, putting 𝑦𝑡 = 𝐷 and 𝑦𝑡−1 = 𝐷 in (i), 12 𝑦𝑡
𝐷 = −0.5𝐷 + 12.
Or, 1.5D=12. 10
Or, D=8. 8
So, P.S.= 8.
Thus, the general solution is: 6
𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷. 4
Using initial condition 𝑦0 = 5,
𝑦0 = 𝐴(−0.5)𝑡 + 8. 2
0
Or, 5= 𝐴(−0.5) + 8.
Or, A=−3. 0 1 2 3 4 5 𝑡
So, the specific solution becomes:
𝑦𝑡 = −3. (−0.5)𝑡 + 8.
Convergent, oscillatory time path and stable.
𝑡 0 1 2 3 4 5
𝑦𝑡 5 9.5 7.25 8.375 7.8125 8.09375
6. a. Consider the difference equation: 𝑦𝑡 = 0.3𝑦𝑡−1 + 7(0.2)𝑡
i Find the complementary functions.
ii. By substituting y=7(0.2)𝑡 into this equation, find particular solution.
iii. Find the general solution and find the specific solution that specifies the initial
condition, 𝑦0 = 16.
Solution:
Given relation is: 𝑦𝑡 = 0.3𝑦𝑡−1 + 7(0.2)𝑡 ……….(i)
and the initial condition is 𝑦0 = 16.
Comparing with 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑘. 𝑏𝑡 , we find a=0.3 and b =0.2.
Since a≠ 1 and b≠ 0, its solution consists of two parts namely:
yt = C. F. +P. S.
So, its solution will be as 𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷. 𝑏𝑡 .
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.3)𝑡

For particular solution,

Putting 𝑦𝑡 = 𝐷(0.2)𝑡 and 𝑦𝑡−1 = 𝐷(0.2)𝑡−1 in (i) we have:
𝐷(0.2)𝑡 = 0.3𝐷(0.2)𝑡−1 + 7(0.2)𝑡 .
Now, dividing by (0.2)𝑡−1 .
𝐷(0.2)𝑡 0.3𝐷(0.2)𝑡−1 (0.2)𝑡
= +7 .
(0.2)𝑡−1 (0.2)𝑡−1 (0.2)𝑡−1
Or, D× 0.2 = 0.3𝐷 + 7 × (0.2)
Or, 0.2D = 0.3𝐷 + 1.4
Or, −0.1D=1.4
Or, D=−14
So, P.I. = −14(0.2)𝑡 .
Thus, the general solution is:
𝑦𝑡 = 𝐴(0.3)𝑡 − 14(0.2)𝑡 ……………(ii)
When t=0,
𝑦0 = 𝐴(0.3)0 − 14(0.2)0 .
Or, 16=A−14
Or, A=30.
Therefore, from (ii)
𝑦𝑡 = 30(0.3)𝑡 − 14(0.2)𝑡 .
8
c. 2𝑦𝑡 − 𝑦𝑡−1 = 2𝑡 , 𝑦0 = .
3
Solution:
Given relation is: 2𝑦𝑡 − 𝑦𝑡−1 = 2𝑡
Dividing by 2 on both sides,
1 2𝑡
Or, 𝑦𝑡 − 𝑦𝑡−1 =
2 2
1
Or, 𝑦𝑡 = 0.5𝑦𝑡−1 + . 2𝑡 …………..(i)
2
Comparing with 𝑦𝑡 = 𝑎. 𝑦𝑡−1 + 𝑘. 𝑏𝑡 , we find a=0.5 and b =2.
Its solution will be as 𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷. 2𝑡 …………(ii)
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.5)𝑡
For particular solution,
putting 𝑦𝑡 = 𝐷. 2𝑡 and 𝑦𝑡−1 = 𝐷. 2𝑡−1 in (i) we have:
𝐷. 2𝑡 = 0.5𝐷. 2𝑡−1 + 2𝑡−1 .
Now, dividing by 2𝑡−1
2𝑡 2𝑡−1 2𝑡−1
𝐷 𝑡−1 = 0.5𝐷 𝑡−1 + 𝑡−1.
2 2 2
Or, 2D=0.5D+1
Or, 1.5D=1
2
Or, D= .
3
2
So, P.I. = 𝐷. 2𝑡 = . 2𝑡 .
3
Thus, from (ii), the general solution is:
2
𝑦𝑡 = 𝐴(0.5)𝑡 + . 2𝑡 .
3
When t=0,
2
𝑦0 = 𝐴(0.5)0 + . 20 .
3
8 2
Or, = A+
3 3
Or, A=2.
Therefore, from (ii)
2
𝑦𝑡 = 2(0.5)𝑡 + . 2𝑡 .
3

d. 𝑦𝑡 = 𝑦𝑡−1 + 𝑒 𝑡−1 , 𝑦0 = 5.
Solution:
Given relation is: 𝑦𝑡 = 𝑦𝑡−1 + 𝑒 𝑡−1 ……….(i)
and the initial condition is 𝑦0 = 5.
Here, a=1 and b =e.
So, its solution will be as 𝑦𝑡 = 𝐴𝑎𝑡 + 𝐷. 𝑒 𝑡 .
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(1)𝑡 = 𝐴.
For particular solution,
Putting 𝑦𝑡 = 𝐷. 𝑒 𝑡 and 𝑦𝑡−1 = 𝐷. 𝑒 𝑡−1 in (i) we have:
𝐷. 𝑒 𝑡 = 𝐷. 𝑒 𝑡−1 + 𝑒 𝑡−1 .
Now, dividing by 𝑒 𝑡−1 .
𝑒𝑡 𝑒 𝑡−1 𝑒 𝑡−1
𝐷 𝑡−1 = 𝐷 𝑡−1 + 𝑡−1.
𝑒 𝑒 𝑒
Or, D.e = 𝐷 + 1
Or, 𝐷(𝑒 − 1)=1.
1
Or, D= .
𝑒−1
1
So, P.I. = 𝑒𝑡.
𝑒−1
Thus, the general solution is:
𝑒𝑡
𝑦𝑡 = 𝐴 + ……………(ii)
𝑒−1
When t=0,
𝑒0
𝑦0 = 𝐴 + .
𝑒−1
1
Or, 5=A+
𝑒−1
1
Or, A=5 − .
𝑒−1
Therefore, from (ii)
1 𝑒𝑡
𝑦𝑡 = 5 − + .
𝑒−1 𝑒−1
𝑒 𝑡 −1
Or, 𝑦𝑡 = 5 + .
𝑒−1

7. a. Solve the difference equation 𝑦𝑡 = 0.2𝑦𝑡−1 + 1.6t+ 5.2. Is the general solution
stable or unstable? Also, find the specific solution that satisfies the initial condition
𝑦0 =10.
Solution:
Given relation is: 𝑦𝑡 = 0.2𝑦𝑡−1 + 1.6𝑡 + 5.2……………….(i)
Here, a= 0.2
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.2)𝑡
For particular solution put 𝑦𝑡 = Dt + E and 𝑦𝑡−1 = D(t−1) + E in (i),
We have:
Dt+E=0.2[D(t −1) +E] +1.6t +5.2
Or, Dt+E=0.2Dt −0.2D +0.2E +1.6t +5.2
Equating the coefficients of 't',
D =0.2D+1.6
Or, 0.8D=1.6
Or, D=2
Equating the constant terms (i.e. the terms not containing 't')
E=−0.2D +0.2E +5.2
Or, E=−0.2× 2 + 0.2E + 5.2
Or, E=4.8+0.2E
Or, 0.8E=4.8
Or, E=6.
Thus, P.S.= Dt+E=2t+6
General solution of difference equation is 𝑦𝑡 = C.F. + P.S.
Or, 𝑦𝑡 = 𝐴(0.2)𝑡 +2t+6…………….(ii)
Since 𝑦0 = 10, putting t=0 in (ii)
𝑦0 = 𝐴(0.2)0 +2× 0+6
Or, 10=A+6
Or, A=4.
Or, 𝑦𝑡 = 4(0.2)𝑡 +2t+6
Since, 0<a < 1, so the solution is stable.

8. a. A bank pays interest to its customer at the rate of 8% p.a. compounded annually.
A man deposits Rs. 500000 in the bank. What will be the value of the deposit after 4
years if
i. No further deposits are made?
ii. Rs. 20000 is deposited at the end of each year.
Solution:
i. Let 𝑃𝑡 be the amount after 't' years.
Rate of interest (r)=8%
By the question,
𝑃𝑡 = 𝑃𝑡−1 + 8% × 𝑃𝑡−1 .
8 r t
= 𝑃𝑡−1 (1 + ) [or use the formula Pt = Pt−1 (1 + ) ]
100 100
=𝑃𝑡−1 × 1.08
Or, 𝑃𝑡 =1.08 𝑃𝑡−1 .
Here, a=1.08.
So, the solution is 𝑃𝑡 = 𝐴𝑎𝑡
i.e. 𝑃𝑡 = 𝐴(1.08)𝑡 ……………(i)
Initial deposit =5,00,000 means 𝑃0 = 500000.
So, from (i), we have:
𝑃0 = 𝐴(1.08)0 .
Or, 500000 = 𝐴. 1
Or, A=500000.
So, (i) becomes:
𝑃𝑡 = 500000(1.08)𝑡 .
When t=4,
𝑃4 = 500000(1.08)4 .
= 680244.48
Thus, the deposits accumulated will be Rs. 680244.48

ii. If Rs. 20000 is deposited at the end of each year, the relation becomes
Pt =1.08 Pt−1 + 20000…………..(ii)
As before, C.F.= 𝐴𝑎𝑡 = 𝐴(1.08)𝑡
Now, for particular solution, putting 𝑃𝑡 = 𝐷 and 𝑃𝑡−1 = 𝐷 in (i) we have:
𝐷 = 1.08𝐷 + 20000.
Or, −0.08D=20000.
Or, D=−250000.
So, P.S. =−250000.
Thus, the general solution is:
𝑃𝑡 = 𝐴(1.08)𝑡 − 20000O……………(iii)
Using initial condition 𝑃0 = 500000,
𝑃0 = 𝐴(1.08)0 + 250000.
Or, 500000 = 𝐴. 1 − 250000.
Or, A=750000.
Thus, (iii) gives
𝑃𝑡 = 750000(1.08)𝑡 − 25000O.
When t=4,
𝑃4 = 750000(1.08)4 − 25000O.
=7700366.72
So, value of the deposit after 4 years will be Rs. 7700366.72 if Rs. 20000 is deposited
at the end of each year.

9. b. A man borrows Rs. 1500000 at the rate of 6% p.a. compounding monthly on the
outstanding balance. He can repay (i.e. pay back) Rs. 60000 each month.
i. What payment made at the end of 20th month will clear the loan?
ii. How much should he pay after 2 years to clear the loan?
iii. How long will it take to clear the loan?
Solution:
i. Let 𝑃𝑡 be the amount left to be paid after 't' months.
Rate of interest (r) = 6% per year
= 0.5 % per month.
By the question,
Pt = Pt−1 + 0.5% × Pt−1 − 60000.
0.5
= 𝑃𝑡−1 (1 + ) − 60000.
100
Or, 𝑃𝑡 =1.005 𝑃𝑡−1 − 60000……………(i)
Here, a=1.005 and b=−60000.
Thus, C.F.= Aat = A(1.005)𝑡 and P.I. =D.
So, the solution is
𝑃𝑡 = 𝐴(1.005)𝑡 .
Now, for particular solution, putting 𝑃𝑡 = 𝐷 and 𝑃𝑡−1 = 𝐷 in (i) we have:
𝐷 = 1.005𝐷 − 60000.
Or, 0.005D=60000.
Or, D=12000000
So, P.S. =12000000.
Thus, the general solution is:
𝑃𝑡 = 𝐴(1.005)𝑡 + 12000000……………(iii)
Using initial condition 𝑃0 = 1500000,
𝑃0 = 𝐴(1.08)0 + 12000000.
Or, 1500000 = 𝐴. 1 + 12000000.
Or, A=−10500000.
Thus, (iii) gives
𝑃𝑡 = −1050000O(1.005)𝑡 + 12000000.
When t=20,
𝑃20 = −1050000O(1.005)20 + 12000000.
=398596.44
So, payment equal to the sum of Rs. 398596.44 at the end of 20th month will clear the
loan.

ii. When t=24 (i.e. 2 years)

𝑃24 = −1050000O(1.005)24 + 12000000.
=164822.349
So, payment equal to the sum of Rs. 164822.349 at the end of 2 years will clear the
loan.

iii. Now, in order to clear the total loan, 𝑃𝑡 must be equal to 0.

So, 0 = −1050000O(1.005)𝑡 + 12000000.
Or, −1050000O(1.005)𝑡 = −12000000
120
Or, (1.005)𝑡 =
105
8
Or, (1.005 )𝑡 =
7
8
Or, 𝑙𝑛 (1.005)𝑡 = 𝑙𝑛
7
8
Or, 𝑡. 𝑙𝑛 (1.005) = 𝑙𝑛 .
7
8
𝑙𝑛
7
Or, 𝑡 = .
𝑙𝑛 (1.005)
Or, t= 26.77
So, it takes 26.77 months to clear the loan.
Exercise 6.2 (The Cobweb Model)

1. The demand and supply functions of a good are given by 𝑄𝑑,𝑡 = −4𝑃𝑡 +
18 and 𝑄𝑠,𝑡 = 3𝑃𝑡−1 − 10 respectively. Solve the relevant difference equation by
assuming equilibrium. Also, state the equilibrium value.
Solution:
Given equations are:
𝑄𝑑,𝑡 = −4𝑃𝑡 + 18……………(i)
𝑄𝑠,𝑡 = 3𝑃𝑡−1 − 10…………….(ii)
For equilibrium, quantity demanded = quantity supplied.
i.e. 𝑄𝑑,𝑡 = 𝑄𝑠,𝑡
Or, −4𝑃𝑡 + 18 = 3𝑃𝑡−1 − 10
Or, −4𝑃𝑡 = 3𝑃𝑡−1 − 28.
1
Or, 𝑃𝑡 = − (3𝑃𝑡−1 − 28).
4
Or, 𝑃𝑡 = −0.75𝑃𝑡−1 + 7………..(iii)
So, C.F.= Aat = A(−0.75)𝑡 and P.I. =D.
Now, for particular solution, putting 𝑃𝑡 = 𝐷 and 𝑃𝑡−1 = 𝐷 in (iii) we have:
𝐷 = −0.75𝐷 + 7.
Or, 1.75D=7.
Or, D=4
So, P.S. =4.
Thus, the general solution is:
𝑃𝑡 = 𝐴(−0.75)𝑡 + 4……………(iv)
As 𝑡 → ∞, (−0.75)𝑡 → 0 since |−0.75| < 1.
So, equilibrium value = 4 [which means that the price stabilizes at 4]

3. The demand and supply functions for a good at time t are given as 𝑄𝑑,𝑡 = 125 − 2𝑃𝑡 ,
and 𝑄𝑠,𝑡 = −50 + 1.5𝑃𝑡−1 respectively.
i. Deduce a difference equation in P by assuming equilibrium.
ii. Solve the difference equation to find the equilibrium price and quantity.
iii. Find the specific solution when P = 60 at t = 0. Describe the solution for the time
path to stability.
Solution:
i. Here, 𝑄𝑑,𝑡 = 125 − 2𝑃𝑡 , and 𝑄𝑠,𝑡 = −50 + 1.5𝑃𝑡−1
For equilibrium, quantity demanded = quantity supplied.
i.e. 𝑄𝑑,𝑡 = 𝑄𝑠,𝑡
125 − 2𝑃𝑡 = −50 + 1.5𝑃𝑡−1 .
Or, −2𝑃𝑡 = −175 + 1.5𝑃𝑡−1 .
 1
Or, 𝑃𝑡 = − (−175 + 1.5𝑃𝑡−1 ).
2
Or, 𝑃𝑡 = −0.75𝑃𝑡−1 + 87.5…………..(i)
So, C.F.= Aat = A(−0.75)𝑡 and P.I. =D.
Now, for particular solution, putting 𝑃𝑡 = 𝐷 and 𝑃𝑡−1 = 𝐷 in (i) we have:
𝐷 = −0.75𝐷 + 87.5
Or, 1.75D=87.5
Or, D=50
So, P.S. =50.
Thus, the general solution is:
𝑃𝑡 = 𝐴(−0.75)𝑡 + 50……………(ii)
ii. As 𝑡 → ∞, (−0.75)𝑡 → 0 since |−0.75| < 1.
So, equilibrium price (Pe ) = 50.
Equilibrium quantity (Qe) = 25. [using demand equation]
iii. Given P0 = 60 when t=0.
Now, using (ii),
𝑃0 = 𝐴(−0.75)0 + 50.
Or, 60 = 𝐴. 1 + 50.
Or, A=10.
So, (ii) becomes 𝑃𝑡 = 10(−0.75)𝑡 + 50 which is the required specific solution.
Now, a=−0.75 which is negative. So, the time path is oscillatory.
Further, | −0.75| < 1. So, it represents stable solution.

5. The supply and demand functions for a good at time t are given by the equations
𝑄𝑑,𝑡 = 0.1𝑃𝑡 − 30 and 𝑄𝑠,𝑡 = 150 − 0.3𝑃𝑡 . The price in any season depends on the
excess supplied during the previous season as described by the equation 𝑃𝑡+1 = 𝑃𝑡 −
0.3(𝑄𝑠,𝑡 − 𝑄𝑑,𝑡 ).
i. Deduce a difference equation which relates the present price to the price in the
previous season.
ii. Solve for an expression for the price at any time in terms of t.
iii. Hence, determine whether prices will stabilize.
Solution:
i. Given condition is: 𝑃𝑡+1 = 𝑃𝑡 − 0.3(𝑄𝑠,𝑡 − 𝑄𝑑,𝑡 )……….(M)
Also, demand and supply eqns. are𝑄𝑑,𝑡 = 0.1𝑃𝑡 − 30 and 𝑄𝑠,𝑡 = 150 − 0.3𝑃𝑡 .
So, (M) becomes:
𝑃𝑡+1 = 𝑃𝑡 − 0.3(150 − 0.3𝑃𝑡 − 0.1𝑃𝑡 + 30 ).
Or, 𝑃𝑡+1 = 𝑃𝑡 − 0.12𝑃𝑡 + 54
Or, 𝑃𝑡+1 = 0.88𝑃𝑡 + 54
Replacing ′𝑡′ by '𝑡 − 1', we have:
Or, 𝑃𝑡 = 0.88𝑃𝑡−1 + 54 …………………(N)
which is required differential equation.
ii. Here, C.F.= 𝐴𝑎𝑡 = 𝐴(0.88)𝑡
Now, for particular solution, putting 𝑃𝑡 = 𝐷 and 𝑃𝑡−1 = 𝐷 in (N) we have:
𝐷 = 0.88𝐷 + 54.
Or, D=450.
So, P.S. =450.
Thus, the general solution is:
𝑃𝑡 = 𝐴(0.88)𝑡 + 450……………(R)
iii. Now, a=0.88. Further, 0.88< 1. So, it represents stable solution.
i.e. the price will stabilize uniformly to 450.

The Lagged Keynesian Macroeconomic Model

Points to be noted:
❖ 𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡 where the values belong to the period 't'.
❖ This model assumes that investment is constant in all time periods.
i.e. 𝐼𝑡 = 𝐼0 .
❖ 𝐶𝑡 = 𝐶0 + 𝑏𝑌𝑡−1 which means that the consumption Ct in period t depends on
the national income of the just previous period.
❖ Combining above three, 𝑌𝑡 = 𝐶0 + 𝑏𝑌𝑡−1 + 𝐼0 .
i.e. 𝑌𝑡 = 𝑏𝑌𝑡−1 + (𝐶0 + 𝐼0 ).
It is a non-homogeneous difference equation in Y.

Exercise 6.3
1. In a basic Keynesian macroeconomic model, it is assumed that 𝑦𝑡 = 𝐶𝑡 + 𝐼𝑡 , where
𝐶𝑡 = 5000 + 0.8𝑦𝑡−1 and I = 5000. Find the expression for 𝑦𝑡 when 𝑦0 =100,000.
Solution:
Given relations are: 𝑦𝑡 = 𝐶𝑡 + 𝐼𝑡 ……………(i)
and 𝐶𝑡 = 5000 + 0.8𝑦𝑡−1 ……………………….(ii)
From (i) and (ii),
𝑦𝑡 = 5000 + 0.8𝑦𝑡−1 + 𝐼
Or, 𝑦𝑡 = 5000 + 0.8𝑦𝑡−1 + 5000
Or, 𝑦𝑡 = 0.8𝑦𝑡−1 + 10000…………………….(iii)
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.8)𝑡
Further, putting 𝑦𝑡 = 𝐷 and 𝑦𝑡−1 = 𝐷 in (iii) we have:
𝐷 = 0.8𝐷 + 10000.
Or, D=50000.
So, P.S.= 50000.
Thus, the general solution is
𝑦𝑡 = 𝐴(0.08)𝑡 + 50000.
Using initial condition 𝑦0 = 100000,
𝑦0 = 𝐴(0.08)0 + 50000.
Or, 100000= 𝐴. 1 + 50000.
Or, A=50000.
So, the specific solution becomes:
𝑦𝑡 = 50000(0.08)𝑡 + 50000.

4. Consider a Lagged Keynesian macroeconomic National Income model 𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡 ,

where 𝐶𝑡 = 200 + 0.9𝑌𝑡−1 and It = 400.
a. Write the national income equation as difference equation in 𝑌𝑡 .
b. Solve the difference equation. Hence describe the time path. Will the path stabilize?
c. If 𝑌0 = 8000, find the particular solution and also find 𝑌10 .
Solution:
a. Given relations are: 𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡 ……………(i)
and 𝐶𝑡 = 200 + 0.9𝑌𝑡−1 ……………………….(ii)
From (i) and (ii),
𝑌𝑡 = 200 + 0.9𝑌𝑡−1 + 𝐼𝑡 .
Or, 𝑌𝑡 = 200 + 0.9𝑌𝑡−1 + 400
Or, 𝑌𝑡 = 0.9𝑌𝑡−1 + 600…………………….(iii)

b. Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.9)𝑡

Further, putting 𝑦𝑡 = 𝐷 and 𝑦𝑡−1 = 𝐷 in (iii) we have:
𝐷 = 0.9𝐷 + 600.
Or, D=6000.
So, P.S.= 6000.
Thus, the general solution is
𝑦𝑡 = 𝐴(0.9)𝑡 + 6000.
Since | 0.9| < 1. So, it represents stable solution. In other words, the time path will
get stabilized.

c. Using initial condition 𝑌0 = 8000,

𝑌0 = 𝐴(0.09)0 + 6000.
Or, 8000= 𝐴. 1 + 6000.
Or, A=2000.
So, the specific solution becomes:
𝑦𝑡 = 2000(0.09)𝑡 + 6000.
When t=10,
𝑌10 = 2000(0.09)10 + 6000.
= 6697.36

5. Solve the difference equation given by 𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡 , where 𝐶𝑡 =500(1.05)𝑡 +

0.75𝑌𝑡−1 and I = 0. Is this system stable or unstable? Also, state the stable value if
exists.
Solution:
Given relations are: 𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡
Or, 𝑌𝑡 = 𝐶𝑡 + 0.
Or, 𝑌𝑡 = 𝐶𝑡 … … … … … …(i)
and 𝐶𝑡 = 0.75𝑌𝑡−1 + 500(1.05)𝑡 ……….(ii)
From (i) and (ii),
𝑌𝑡 = 0.75𝑌𝑡−1 + 500(1.05)𝑡
Thus, its solution will be as 𝑌𝑡 = 𝐴𝑎𝑡 + 𝐷. 𝑏𝑡 .
Now, C.F.= 𝐴𝑎𝑡 = 𝐴(0.75)𝑡
For particular solution,
Putting 𝑌𝑡 = 𝐷(1.05)𝑡 and 𝑦𝑡−1 = 𝐷(1.05)𝑡−1 in (i) we have:
𝐷(1.05)𝑡 = 0.75𝐷(1.05)𝑡−1 + 500(1.05)𝑡 .
Now, dividing by (1.05)𝑡−1
𝐷(1.05)𝑡 0.75𝐷(1.05)𝑡−1 (1.05)𝑡
= + 500 .
(1.05)𝑡−1 (1.05)𝑡−1 (1.05)𝑡−1
Or, D× 1.05 = 0.75𝐷 + 500 × (1.05)
Or, 0.3𝐷 = 525.
Or, D=1750.
So, P.S. =𝐷 (1.05)𝑡 = 1750(1.05)𝑡 .
Thus, the general solution is:
Thus, its solution will be as 𝑌𝑡 = 𝐴𝑎𝑡 + 𝐷. 𝑏𝑡 .
Or, 𝑌𝑡 = 𝐴(0.75)𝑡 + 1750(1.05)𝑡
Since in one of the bases in the solution is 1.05 which is greater than 1.
So, the solution is not stable. As a result, no stable value exists.
Duopoly Price Adjustment
A market with only two sellers is known as duopoly. Here, we consider the Bertrand
model in duopoly where two sellers (rival to each other) sell same type and same
quality goods.
Let us consider any two sellers X and Y. Let 𝑃 𝑥 be the price set by X which affects the
quantity 𝑄 𝑥 he sells. Consequently, 𝑄𝑦 (quantity sold by Y) will, in turn, affects price
𝑃𝑦 to be set by Y. This can be illustrated as follows:

Px

Py Qx
𝑄 𝑥 + 𝑄 𝑦 = 100

Qy
This model also assumes that the price 𝑃 𝑥 of the good set by X for the current period
depends on the price 𝑃𝑦 of the previous time period.
𝑦
Mathematically, this is written as: 𝑃𝑡𝑥 = 𝑎 + 𝑏𝑃𝑡−1 .…….……… (i)
Similarly, the price 𝑃𝑦 of the good set by Y for the current period depends on the price
𝑦 𝑥
𝑃 𝑥 of the previous time period. i.e. 𝑃𝑡 = 𝑎 + 𝑏𝑃𝑡−1 ……………(ii)
[a and b being constants]
Equations (i) and (ii) are known as reaction equations/functions.
Now, replacing 𝑡 by 𝑡 − 1 in equation (ii), we get:
𝑦 𝑥
𝑃𝑡−1 = 𝑎 + 𝑏𝑃𝑡−2 ………………….(iii)
Combining (i) and (iii), we have:
𝑃𝑡𝑥 = 𝑎 + 𝑏(𝑎 + 𝑏𝑃𝑡−2
𝑥
)
𝑥 2 𝑥
𝑃𝑡 = 𝑏 𝑃𝑡−2 + 𝑎 + 𝑎𝑏 which is second order non-homogeneous equation in 𝑃.
We can solve this equation to get the desired value.
Exercise 6.4
1. Two duopolists X and Y react to each other prices according to the functions: 𝑃𝑡𝑋 =
𝑌 𝑋
240 + 0.9𝑃𝑡−1 , 𝑃𝑡𝑌 = 240 + 0.9𝑃𝑡−1 . If the assumptions of the Bertrand model hold,
derive a difference equation for 𝑃𝑡𝑋 . What will its price be twelve time periods later
if firm X sets an initial price of 3400? Assume that each firm adjusts price every
alternate time period.
Solution:
𝑌
Given relations are: 𝑃𝑡𝑋 = 240 + 0.9𝑃𝑡−1 ………….(a)
𝑋
and 𝑃𝑡𝑌 = 240 + 0.9𝑃𝑡−1 …………………………..…….(b)
Now, replacing 't′ by t − 1 in equation (b)
𝑌 𝑋
𝑃𝑡−1 = 240 + 0.9𝑃𝑡−2 ………………………..(c)
So, from (a) and (c), we have:
𝑋
𝑃𝑡𝑋 = 240+ 0.9(240 + 0.9𝑃𝑡−2 )
𝑋 ( ) 2 𝑋
Or, 𝑃𝑡 =240+ 216+ 0.9 𝑃𝑡−2
𝑋
Or, 𝑃𝑡𝑋 = (0.9)2 𝑃𝑡−2 +456…………………..(d)
Now, C.F.= 𝐴𝑎 = 𝐴(0.9)𝑡
𝑡

[Note: Here, just the base 0.9 should be considered as value of a and not 0.81]
Further, putting Pt = D and Pt−2 = D in (d) we have:
𝐷 = 0.81𝐷 + 456.
Or, D=2400.
So, P.S. = 2400.
Thus, the general solution will be
PtX = C. F. +P. S.
Or, 𝑃𝑡𝑋 = 𝐴(0.9)𝑡 + 2400.
But by question, 𝑃0𝑋 = 3400.
So, 3400=𝐴. 1 + 2400.
Or, A=1000.
Thus, the specific solution will be
Or, 𝑃𝑡𝑋 = 1000(0.9)𝑡 + 2400……..(e)
Putting t=12 in (e), we get:
𝑋
𝑃12 = 1000(0.9)12 + 2400.
=2682.43
Therefore, the price of X will be 2682.43 twelve time periods later.

5. In a oligopolistic market, the two firms X and Y have the following reaction
𝑌 𝑋
functions. 𝑃𝑡𝑋 = 600 + 0.4𝑃𝑡−1 and 𝑃𝑡𝑌 = 600 + 0.4𝑃𝑡−1 . The usual assumptions of the
Bertrand model hold and price is initially in equilibrium at a level of 1000 for both
firms. Firm X then decides to cut price to 600 to try to steal Y's market share. We know
from the analysis of this model that X's price reduction will be short-lived and price
will creep back towards its equilibrium level. Calculate whether or not 𝑃𝑡𝑋 , will be
back within 2% of its equilibrium value within three time periods. (Note that the
initial value of 𝑃𝑡𝑋 , is below the equilibrium value in this time.)
Some points to be noted in this question
➢ 1000 is not the initial value rather it is the value that gets stabilized.
➢ 600 is to be considered as the price set by firm X initially.
➢ 2% back of equilibrium value means the value =1000−2% × 1000 = 980.
Solution:
𝑌
Given relations are: 𝑃𝑡𝑋 = 600 + 0.4𝑃𝑡−1 ………….(a)
𝑌 𝑋
and 𝑃𝑡 = 600 + 0.4𝑃𝑡−1 …………………………..…….(b)
Now, replacing 't′ by t − 1 in equation (b)
𝑌 𝑋
𝑃𝑡−1 = 600 + 0.4𝑃𝑡−2 ………………………..(c)
So, from (a) and (c), we have:
𝑋
𝑃𝑡𝑋 = 600+ 0.4(600 + 0.4𝑃𝑡−2 )
𝑋
Or, 𝑃𝑡𝑋 =600+ 240+ (0.4)2 𝑃𝑡−2
𝑋
Or, 𝑃𝑡𝑋 = (0.4)2 𝑃𝑡−2 +840…………………..(d)
Now, C.F.= 𝐴𝑎 = 𝐴(0.4)𝑡
𝑡

Further, putting Pt = D and Pt−2 = D in (d) we have:

𝐷 = 0.16𝐷 + 840.
Or, D=1000.
So, P.S. = 1000.
Thus, the general solution will be
PtX = C. F. +P. S.
Or, 𝑃𝑡𝑋 = 𝐴(0.4)𝑡 + 1000…………..(e)
But by question, firm X cuts price to (not by) 600.
So, 𝑃0𝑋 = 600.
So, from (e), 𝑃0𝑋 = 𝐴(0.4)0 + 1000.
600 = 𝐴. 1 + 1000.
Or, A=−400.
Thus, the specific solution will be
𝑃𝑡𝑋 = −400(0.4)𝑡 + 1000.
Taking t=3,
𝑃3𝑋 = −400(0.4)3 + 1000.
Or, 𝑃3𝑋 = 974.4……………...(f)
Further, equilibrium value=1000.
The value resulting after 𝑃3𝑋 gets back within 2% of its initial equilibrium value (i.e.
1000) =1000−2% × 1000 = 980.
But the value of 𝑃3𝑋 = 974.4 as seen from (f) is less than 980.
So, we can conclude that price of X will not be back within 2% of its equilibrium value
within three time periods.