CHAPTER TWO

1.1 SYSTEMS OF LINEAR EQUATIONS

2.1 Introduction
Linear algebra is a study of systems of linear equations and attempts to find a simultaneous
solution for the announce of those equations if such a solution exists. Matrix algebra permits the
concise expression of a system of linear equations. Systems of linear equations arise in two ways
in economic theory. Some economics models have a natural linear structure. On the other hand,
when the relationships among the variables under consideration are described by a system of
nonlinear equations, one takes the derivative of these equations to convert them to an
approximating linear system.

Advantages of Matrix Algebra,

 It permits expressions of complicated systems of equations in a compact and simplified

way,
 It provides a means to check whether a solution exists before an attempt,
 It also permits a means of solving the equation system.
Linear Equations: Any straight line in the XY- plane can be represented algebraically by an
equation of the form
a1x + a2y = b,
Where a1, a2, and b are real constants,
a1 and a2 are not both zero.

An equation of this form is called a linear equation in the variables x and y. More generally, we
define a linear equation in the n variables x1, x2, …,xn to be one that can be expressed in the form
a1x1 + a2x2 +…+ anxn = b,
Where a1, a2, …,an, and b are real constants.
The variables in a linear equation are sometimes called unknowns.
Examples of linear equations:
The equations 3x + y = 7, y = 1/2x +3z + 1 and x1 + 2x2 – 3x3 + x4 = 90 are linear equations.

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Observe that a linear equation does not involve any products or roots of variables. All variables
occur only to the first power and do not appear as arguments for trigonometric, logarithmic, or
exponential functions.
The equations x + 3y1/2 = 10, x + 3y – z + xz = 14 and y = sinx are not linear.
A solution of a linear equation a1 x1 + a2 x2 +…+ anxn = b is a sequence of n numbers s1, s2, …,sn
such that the equation is satisfied when we substitute x1 = s1, x2 = s2, …, xn = sn. The set of all
solutions of the equation is called its solution set or sometimes the general solution of the
equation.

Example

Find the solution set of 4x – 2y = 1

Solution:

To find solution, we can assign an arbitrary value to x and solve for y, or choose an arbitrary
value for y and solve for x. If we follow the first approach and assign x an arbitrary value t, we
obtain x = t, y = 2t – ½

These formulas describe the solution set in terms of an arbitrary number t, called a parameter.
Particular numerical solutions can be obtained by substituting specific values for t. For example,
t = 3, yields the solution y = 11/2 and t = -½ yields the solution y = -3/2.
If we follow the second approach and assign y the arbitrary value t, we obtain x = ½t + ¼, y = t
Although these formulas are different from those obtained above, they yield the same solution
set as t varies over all possible real numbers.

Exercise

Find the solution for: x1 – 4x2 + 7x3 =5.

Linear Systems:
A finite set of linear equations in the variables x1, x2, …,xnis called a system of linear equations
or a linear system. A sequence of numbers s1, s2, …,sn is called a solution of the system if x1 = s1,
x2 = s2, …, xn = sn is a solution of every equation in the system. For example, the system

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 4x1 – x2 + 3x3 = -1
3x1 + x2 + 9x3 = -4 has the solution x1 = 1, x2 = 2 and x3 = -1 since these
values satisfy both equations.
However, x1 = 1, x2 = 8, x3 = 1 is not a solution since these values satisfy only the first
equation in the system.Not all systems of linear equations have solutions. For example, if we
multiply the second equation of the system
x+y=4
2x + 2y = 6 by ½, it becomes evident that there are no solutions since the
resulting equivalent system x+y=4
x+y=3 has contradictory equations.
A system of equations that has no solutions is said to be inconsistent; if there is at least one
solution of the system, it is called consistent. To illustrate the possibilities that can occur in
solving systems of linear equations, consider a general system of two linear equations in the
unknowns x andy:
a1x + b1y = c1 (a1, b1 not both zero)
a2x + b2 y = c2 (a2, b2 not both zero)
The graphs of these equations are lines; call them l1and l2. Since a point (x, y) lies on a line if and
only if the numbers x and y satisfy the equation of the line, the solutions of the system of
equations correspond to points of intersection of l1and l2. There arethree possibilities, illustrated
in Figure 2.1:

l2 y YI1l2

l1
x x

1) No solution b) has one solution

l1 and l2
y

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 c. has infinitely many solutions

 The lines l1and l2 may be parallel, in which case there is no intersection and consequently
no solution to the system.
 The lines l1and l2 may intersect at only one point, in which case the system has exactly
one solution.
 The lines l1and l2 may coincide, in which case there are infinitely many points of
intersection and consequently infinitelymany solutions to the system.
Every system of linear equations either has no solutions, or has exactly one solution, or has
infinitely many solutions.

An arbitrary system of m linear equations in n unknowns can be written as

Where x1, x2,…,xn are the unknowns and the subscripted a's and b's denote constants. For
example, a general system of three linear equations in four unknowns can be written as

2.2. Methods of Solving Simultaneous Linear Equations

In this section we shall develop a systematic procedure for solving systems of linear equations. A
system of linear equations can be solved using any of the following three methods.
i. Inverse method
ii. The Cramer’s rule
iii. Gauss Jordan Elimination Method

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2.2.1. Inverse Method
Systems of linear algebraic equations and their solutions constitute one of the major topics
studied in “linear algebra.” The solution of linear system of equations can be given by the
product of the inverse of the coefficient matrix A-1 and the column vector of constants C, i.e., if
AX = C and if A is invertible, following the law of conformability we can write in the following
form. AX = C and A-1AX = A-1C, then, X = A-1 C, this is inverse rule.
Considering two linear equations in x and y given by:
a11 x + a12y = b1 ………………..(1)
a21x + a22y = b2
Let A be the coefficient matrix. That is
a11 a12 x b1
A= a21 a22 , X = y and C = b2

Equations (1) above can be written in matrix notation form as follows

AX = C = a11x+a12y =b1
a21x+a22y=b2
The above system of equations is said to be consistent if it has at least one solution. If the system
has no solution, then it is said to be inconsistent (i.e, not consistent). The system with exactly one
solution is said to be consistent and independent.

Example

2x+3y = 8
x+2y =5 has exactly one solution and thus, consistent and independent.

We can see, A = 2 3 and A = 4 – 3 = 1 ≠ 0

1 2

and the system x+3y = 5 has no solution and the two equations are
2x+6y = 7 inconsistent. Determinant of A is exactly zero.

That is, A= 1 3
2 6 andA =0

Furthermore, the system x+3y = 5 has an infinite solutions, in

2x+6y =10 this case, the two equations are consistent but
dependent.

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In general,
i. If the determinant of the coefficient matrix is different from zero, the system has exactly
one solution (has a unique solution). Therefore, the system of equations is consistent and
independent.
ii. If the determinant of coefficient matrix is exactly zero, then the system of equations is
inconsistent. Let ≠ 0, then, A-1 exists. From AX=C we get
X = A-1 C
IX = A-1 C, then,
X = A-1 C
Thus, to find the solution of a linear system of equations using the inverse method, first obtain
the inverse of the coefficient matrix and then, multiply it by the constant matrix, which gives the
required solution.

Example

The equilibrium condition for three related markets is given by the following systems of
equations.
11P1 – P2 – P3 = 31
-P1 + 6P2 – 2P3 = 26
-P1- 2P2 + 7P3 = 24
Find the equilibrium prices by using the inverse method.
Solution:
11 -1 -1
Let A = Coefficient matrix = -1 6 -2
-1 -2 7
P1 31
P = variable matrix = P2 and C = Constant matrix = 26
P3 24

AP = C, then, P = A-1 C
A = 11(42 – 4) + 1( -7-2) – 1(2 + 6)
= 11(38) – 9 – 8 = 418 – 17 = 401, thus, determinant of the coefficient matrix A is nonzero
implying there is no linear dependence among rows and columns.

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 P = A-1 C;
A-1 = 1/( A )AdjointA
ǀ
c11 c12 c13
Adj.A = Cǀ = c21 c22 c23 ,
c31 c32 c33

But, c11 = M11 = c11(c22c33 - c23c32)

Likewise for, 11 -1 -1 P1 31
-1 6 -2 P2 = 26
-1 -2 7 P3 24

c11 = M11 = 42 – 4 = 38
c12 = -M12 = -(- 7– 2) = 9
c13 = M13 = 8
c21 = -M21 = -(-9) = 9 and c33 = M33 = 66 – 1 = 65
, 38 9 8 38 9 8
C = 9 76 23 , A-1= 1/401 9 76 23
8 23 65 8 23 65

Therefore, P1 38 9 8
-1
P = P2 A C= 9 76 23
P3 8 23 65

P1 = 1/401[38(31) + 9(26) + 8(24)] = 1/401[1178 + 234 + 192] = 4

P2 = 1/401[9(31) + 76(26) + 23(24)] = 1/401[279 + 1976 + 552] = 7
P3 = 1/401[8(31) + 23(26) + 65(24)] = 1/401[248 + 598 + 1560] = 6
P1 4
Thus, P= P2 = 7 , these are the equilibrium prices.
P3 6

Exercises

i. Given a system of linear equations:

4x1 – 5x3 + x2 = 8

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 3x2 – x3 – 2x1 = 12
-x2 + 3x1 + 4x3 = 5 solve for unknowns using inverse method.
ii. Given the following system
Q2 + 10K = 0
Q1 + 2K = 0
10Q1 + 2Q2 - 240 = 0
Find the values of Q1, Q2 and K using inverse method
iii. Using inverse method, solve the equations.
x+y+z = 6
x+2y+3z = 16
-x+y-z = -2
2.2.2. The Cramer’s Rule
The rule provides a simplified method of solving a system of linear equations through the use of
determinants. The rule states that:
Let a1 x + b1 y = C1
a2 x + b2y = C2
The solution of the system above according to Cramer’s rule is obtained as follows:
Let a1 b1 X= xc1
A= a2 b2 , y and B = c2

Dx = c1 b1 Where coefficient of x is replaced by the

c2 b2 constant matrix

Dy = a1 c1 Where coefficients of y is replaced by the constant matrix.

a2 c2
c1 b1
Thus, x= c2 b2 = c1 b2 – b1 c2 Dx
A a1 b2 – b1 a1 A

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Thus, x= a1 c1
a2 c2 = a1 c2 – c1 a2 = Dy
A a1 b2 – b1 a1 |A|

Example

Using the Cramer’s rule, solve the following systems of equations

2x -3y = 1
X+5y = 7
Solution:
Let A = 2 -3 x= x &B= 1
1 5 y 7

Dx = 1 -3
7 5 = 5-(-21) =26

Dy = 2 1
1 7 = 14-1 = 13

A = 2 -3
1 5 = 10 – (-3) = 13

Dx 26
X= = =2
A 13

Dy 13
Y= =1
A 13

Hence, x = 2 and y = 1

Example

Solve with the help of determinants (Cramer’s rule)

5x- 6y +4z = 15
7x +4y – 3z = 19

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 2x +y +6z = 46
Solution : Remember how to find a determinant of order three.
Let A = 5 -6 4 x 15
7 4 -3 ,x= y and B = 19
2 1 6 z 46

Dx = 15 -6 4
19 4 -3 = 1257
46 1 6

Dy = 5 15 4
7 19 -3 = 1676
2 46 6

5 -6 15
Dz = 7 4 19 = 2514
2 1 46

5 -6 4
A = 2 4 -3 = 419
2 1 6
Dx 1257
Now x= = = 3
A 419

Dy 1676
y= = =4
A 419

Dz 2514
and z= = =6
A 419

Hence, x = 3, y = 4 and z = 6

2.2.3. Gauss Elimination Method

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In this section, we will show how to use the Gauss – Jordan method to solve m by n linear
systems of equations where mxn. For ease of understanding, we present the case where the
number of rows (number of equations) m is greater than the number of columns (number of
variables), i.e., m >n.
Consider the following 3 by 2 system.
4x1 +5x2 = 30
3x1 + 2x2 = 19
2x1 + 5x2 = 20
Proceeding in the usual manner, we start with the augmented matrix
4 5 30
3 2 19
2 5 20
Convert the main diagonal entries (aij = aji ) to unity and the remaining entries of the coefficient
matrix to zero (0) using row operations. Then, we divide the first row by 4 to obtain 1 in a11
5 15
1 /4 /2 R1 = ¼ R1
3 2 19
2 5 20
Next we add – 3 times row 1 to row 2 and -2 times row 1 to row 3.
5 15
1 /4 /2
-7 -7
0 /4 /2 R2 = -3R1+R2
5
0 /2 5 R3 = -2R1+R3

Now we divide row 2 by -7/4

5 15
1 /4 /2 R2 = -7R2 1 0 5
0 1 2 0 1 2
5 -5
0 /2 5 0 /4 5

-5
Then add /4 times row 2 to row 1 and -5/2times row 2 to row 3. At this point, the method
terminates since this satisfies the condition. The first, second and third row tells us
x1 +0x2 = 5 then, x1 = 5

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 x1 +1x2 = 2 then, x2 = 2
0x1 +0x2 = 0 then, 0 = 0
Thus, our solution is given by x1= 5 and x2 =2

Exercises

Inverses and solutions of linear equations

1. Find the adjoint and inverse of the following matrices

A= 3 8 3 1 0 1 2
2 1 , B= 4 0 , C= 1 2 3
3 1 1
2. Solve the following systems using the four methods of finding a solution.
i. 4x – 3y = 5 ii. 3x+ 2y = 6 iii. x – y = 3
3x – 5y = 1 5x + 4y = 8 2x + 3y – 4z = 17
y+2z=7
vi.x + 2y +3z = 6 v. x +y + z = 3
3x – 2y +3z = 2 2x – y +z = 2
4x +2y +z = 7 x – 2y +3z = 2

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 CHAPTERTHREE

3.0 SPECIAL DETERMINANTS AND MATRICES IN ECONOMICS

3.1. A Jacobian Determinant

A Jacobian determinant is special types of matrix used to test functional dependency between
linear & non – linear functions. A Jacobian determinant is composed of all the first order partial
derivatives of a system of equations arranged in ordered sequence. It is denoted by J
.
If Jacobian determinant becomes zero then it is to mean that there is linear or non – linear
functional dependency between two or more equations. The reverse is true if the determinant
different from zero.
Example given y1 = f1 (x1 , x2 , x3 )

y2 = f 2 (x1 , x2 , x3 )

y3 = f 3 (x1 , x2 , x3 )

∂y1 ∂y1 ∂y1

∂x1 ∂x2 ∂x3
∂y2 ∂
y2 ∂y2
J =
∂x1 ∂x2 ∂x3
∂y3 ∂y3 ∂y3
∂x1 ∂x2 ∂x3

- If J = 0, then there is functional dependency among equations and hence no unique

solution exists.

Example

∂y1 ∂y
y1 = 4 x1 x2 ⇒ y11 = 4 & y12 = 1 y 12 means and y11 means 1
∂
x2 ∂x1
∂
y2
y 2 = 16 x12 + 8 x1 x2 + x22 ⇒ = 32 x1 + 8 x2
∂x1

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 ∂
y2
= 8 x1 + 2 x2
∂
x2

4 1
J   64 x1  16 x2 ≠0,
32 x1  8 x2 8 x1 2 x 2

Thus, the system has a solution because the value of the Jacobian determinant is non-singular,
i.e., different from zero.

As stated in the preceding paragraphs, partial derivatives can provide a means of testing whether
there exists functional (linear or nonlinear) dependence among a set of n functions in n variables.
This is related to the notion of Jacobian determinant.

Exercises

Use Jacobian determinants to test the existence of functional dependence between the functions
paired below:

(a) 3 (b) 3
9 5

3.2. Hessian Determinant

It is special types of matrix which is denoted H

. The economic importance of hessian matrix
determinant is characterization of the free/unconstrained optimization problem whether it has
relative maximum value or relative minimum value or neither of the two (inflection value).

A Hessian determinant is composed of all the second order partial and cross partial derivatives
objective function arranged in ordered sequence.
Hessian Determinant Test:
a) n-variable case

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z  f ( x1 , x2 , , xn )
dz  f1dx1  f 2 dx2   f n dxn
f11 f12 f1n
f 21 f 22 f2n
H 

f n1 fn2 f nn
Principal minors: H1 , H 2 , , Hn
F.O.C.: f1  f 2   fn  0
S.O.C.: n principal minors must be positive (minimum)
n principal minors must alternate in sign (maximum)

b) Three-variable case
First order condition:
z  f ( x1 , x2 , x3 )

First partials: f1 , f 2 , f3

2 z
Second partials: fij 
xi x j

Young’s theorem: fij  f ji

For max, min, dz  0 (for arbitrary values of dx1, dx2, dx3, not all zero)
dz  f1dx1  f 2dx2  f3dx3  0

 f1  0, f 2  0, f3  0, is the necessary condition for extreme

Second Order Condition:

At stationary value of z, or dz=0,

If d 2 z is positive definite, sufficient condition for minimum

If d 2 z is negative definite, sufficient condition for maximum

Technique: regard dxi as variables that can take on any values, fij as coefficients
We have a symmetric Hessian Determinant.

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 f11 f12 f13
H  f 21 f 22 f 23
f31 f32 f33

Successive principal minors

f11 f12
H1  f11 , H2  , H3  H
f 21 f 22

Rules:

maximum   
 H1  0, H 2  0, H 3  0  d 2 z is negative definite
 
z is a   if   or  2 
minimum   H1  0, H 2  0, H 3  0 
  
d z is positive definite 

Example 1

Optimize the following functions

z = f (x, y ) = 6 x 2 9 x 3xy 7 y + 5 y 2
Solution:
First order condition:
f x = 12 x 9 3 y = 0

f y = 3x 7 +10 y = 0

Solving simultaneously yields the critical values x =1 & y=1

Second order condition:
f xx  12 , f yy  10 and f xy  3

12  3
H 1  12  0, and . H 2   121  0
 3 10

Thus, d 2 z >0 (positive definite).i.e. the equation is minimized at the critical values.

Example 2

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Find the extreme values of

z  2 x12  x1 x2  4 x2 2  x1 x3  x32  2
f1  4 x1  x2  x3  0
f2  x1  8 x2 0
f3  x1  2 x3  0

Solution:
 x1  x1
x2  , x3 
8 2
 x1  x1
4 x1   0
8 2
32 x1  x1  4 x1  0
27 x1  0
x1  0, x2  0, x3  0, z  2

f11 f12 f13 4 1 1

H  f 21 f 22 f 23  1 8 0
f 31 f 32 f 33 1 0 2

H1  f11  4
f11 f12
H2   31
f 21 f 22
H 3  H1  54

H1  0, H 2  0, H 3  0  positive definite, minimum

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