FUNDAMENTAL METHODS OF MATHEMATICAL ECONOMICS Alpha C. ChiangFUNDAMENTAL METHODS OF MATHEMATICAL ECONOMICS Third Edition Alpha C. Chiang Professor of Economics The University of Connecticut McGraw-Hill, Inc. New York St. Louis San Francisco Auckland Bogota Caracas Lisbon London Madrid Mexico City Milan Montreal New Delhi San Juan Singapore Sydney Tokyo TorontoThis book was set in Times Roman by Science Typographers, Ine The editors were Patricia A. Mitchell and Cail Gavert the production supervisor was Leroy A. Young The cover was designed by Carla Bauer FUNDAMENTAL METHODS OF MATHEMATICAL ECONOMICS Copyright © 1984, 1974, 1967 by McGraw-Hill, Ing. All rights reserved Printed in the United States of America, Ecept as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by un means, or stored in a data base or retrieval system, without the prior wntien permission of the publisher, 24 22 28 24 25 26 27 28 29.30 FGRFGR 99 ISBN 0-O?-010813-? Library of Congress Cataloging in Publication Data Chiang. Alpha C.. date Fundamental methods of mathematical economics, Bibliography: p Includes index i. Economics, Mathematical, 1. Title HBI3S.C47 1984 330,01'St_83-19609 ISBN 0.07-010813-7 This book is printed on acid-free paper.Part | be ow CONTENTS Preface Introduction The Nature of Mathematical Economi Mathematical versus Nonmathematical Economics Mathematical Economics versus Econometrics Economic Models Ingredients of a Mathematical Model The Real-Number System The Concept of Sets Relations and Functions Types of Function Functions of Two or More Independent Variables Levels of Generality Static (or Equilibrium) Analysis Equilibrium Analysis in Economics The Meaning of Equilibrium Partial Market Equilibrium— A Linear Model 10 n 0 B 29 31 35 35 36vi CONTENTS 33 34 3.5 4 4 42 43 44 45 46 5 Sa 52 33 54 55 56 37 58 Part 3 61 62 63 64 65 66 Partial Market Equilibrium-—A Nonlinear Model General Market Equilibrium Equilibrium in National-Income Analysis Linear Models and Matrix Algebra Matrices and Vectors Matrix Operations Notes on Vector Operations Commutative, Associative, and Distributive Laws Identity Matrices and Null Matrices Transposes and Inverses Linear Models and Matrix Algebra (Continued) Conditions for Nonsingularity of a Matrix Test of Nonsingularity by Use of Determinant Basic Properties of Determinants Finding the Inverse Matrix Cramer's Rule Application to Market and National-Income Models Leontief Input-Output Models Limitations of Static Analysis Comparative-Static Analysis Comparative Stati of Derivative The Nature of Comparative Statics Rate of Change and the Derivative The Derivative and the Slope of a Curve The Concept of Limit Digtession on Inequalities and Absolute Values Limit Theorems Continuity and Differentiability of a Function ind the Concept Rules of Differentiation and Their Use in Comparative Statics Rules of Differentiation for a Function of One Variable Rules of Differentiation Involving Two or More Funetions of the Same Variable Rules of Differentiation Involving Functions of Different Variables Partial Differentiation Applications to Comparative-Static Analysis Note on Jacobian Determinants 40 46 52 54 58 58 67 16 19 82 88 88 9 98 103 107 12 ns 124 7 7 128 131 132 141 145 147a1 93 94 95 96 10 10.1 102 103 104 105 106 107 nul Wa 12 13 14 ILS 16 17 CONTENTS vii Comparative-Static Analysis of General-Function Models Differentials Total Differentials Rules of Differentials Total Derivatives Derivatives of Implicit Functions Comparative Statics of General-Function Models Limitations of Comparative Statics Optimization Problems Optimization: A Special Variety of Equilibrium Analysis Optimum Values and Extreme Values Relative Maximum and Minimum: First-Derivative Test ‘Second and Higher Derivatives ‘Second-Derivative Test Digression on Maclaurin and Taylor Series Nth-Derivative Test for Reiative Extremum of a Function of One Variable Exponential and Logarithmic Functions The Nature of Exponential Functions ‘Natural Exponential Functions and the Problem of Growth Logarithms Logarithmic Functions Derivatives of Exponential and Logarithmic Functions Optimal Timing Further Applications of Exponential and Logarithmic Derivatives The Case of More than One Choice Variable The Differential Version of Optimization Conditions Extreme Values of a Function of Two Variables Quadratic Forms—An Excursion Objective Functions with More than Two Variables Second-Order Conditions in Relation to Concavity and Convexity Economic Applications Comparative-Static Aspects of Optimization Optimization with Equality Constraints Effects of a Constraint Finding the Stationary Values Second-Order Conditions 187 188 194 196 198 204 215 226 231 232 233 239 245 254 263 307 308 310 319 332 337 353 364 369 370 372 379viii CONTENTS 141 142 143 144 145 146 147 15 15.1 152 153 Isa 155 136 157 16 161 16.2 163 164 165 166 Quasiconcavity and Quasiconveaity Utility Maximization and Consumer Demand Homogencous Functions Least-Cost Combination of Inputs ‘Some Concluding Remarks Dynamic Analysis Economic Dynamics and Integral Calculus Dynamics and Integration Indefinite Integrals Definite Integrals Improper Integrals Some Economie Applications of Integrals Domar Growth Model Continuous Time: First-Order Differential Equations First-Order Linear Differential Equations with Constant Coefficient and Constant Term Dynamics of Market Price Variable Coefficient and Variable Term Exact Differential Equations Nonlinear Differential Equations of the First Order and First Degree ‘The Qualitative-Graphic Approach Solow Growth Model Higher-Order Differential Equations Second-Order Linear Differential Equations with Constant Coefficients and Constant Term Complex Numbers and Circular Functions Analysis of the Complex-Root Case ‘A Market Model with Price Expectations The Interaction of Inflation and Unemployment Differential Equations with a Variable Term Higher-Order Linear Differential Equations Discrete Time: First-Order Difference Equations Discrete Time, Differences, and Difference Equations Solving a First-Order Difference Equation The Dynamic Stability of Equilibrium ‘The Cobweb Model ‘A Market Model with Inventory Nonlinear Difference Equations The Qualitative-Graphic Approach 387 400 410 418 41 435 436 437 4a7 454 458, 465 470 470 475 480 483 489 493 496 502 503 sl 523 529 535 S41 544 349) 350 581 557 561 566 569)17 Wi 72 173 4 18 Ig 18.2 183 184 18.5 18.6 18.7 Part 6 19 19.1 19.2 193 194 19.5 196 20 20.1 20.2 20.3 20.4 8 CONTENTS ix Higher-Order Difference Equations Second-Order Linear Difference Equations with Constant Coefficients and Constant Term Samuelson Multiplier-Acceleration Interaction Model Inflation and Unemployment in Discrete Time Generalizations to Variable-Term and Higher-Order Equations Simultaneous Differential Equations and Difference Equations The Genesis of Dynamic Systems Solving Simultaneous Dynamic Equations Dynamic Input-Output Models The Inflation-Unemployment Model Once More Two-Variable Phase Diagrams Linearization of a Nonlinear Differential-Equation System Limitations of Dynamic Analysis Mathematical Programming Linear Programming Simple Examples of Linear Programming General Formulation of Linear Programs Convex Sets and Linear Programming Simplex Method: Finding the Extreme Points Simplex Method: Finding the Optimal Extreme Point Further Notes on the Simplex Method Linear Programming (Continued) Duality Economic Interpretation of a Dual Activity Analysis: Miero Level Activity Analysis: Macro Level Nonlinear Programming ‘The Nature of Nonlinear Programming Kuhn-Tucker Conditions The Constraint Qualification Kuhn-Tucker Sufficiency Theorem: Concave Programming Arrow-Enthoven Sufficiency Theorem: Quasiconcave Programming Economic Applications Limitations of Mathematical Programming The Greek Alphabet Mathematical Symbols A Short Reading List Answers to Selected Exercise Problems Index 516 377 585 591 596 605 605 608 616 623 628 638 646 651 652 661 665 671 676 682 688 688 696 700 709 116 716 72 7 738 744 747 784 756 737 760 163 781