ECON 222: MATHEMATICS FOR BUSINESS

Tutorial # 02 (Week 3)

Topic # 2: Part I  Sequences

Question 1

What is a sequence?

Answer
A sequence
{ sn }={ s1 , s 2 , s3 , s 4 ,… , sn , … }
is the range of a special function, even though it does not look like that. The function in question is

sn=f ( n ) , n=1 , 2 ,3 , 4 , …

The domain D is the set of natural numbers

N= { 1, 2 , 3 , 4 , … }

and the range is ^

D is { s1 , s 2 , s3 , s 4 , … , sn , … }

Question 2

Find the law of formation of the following infinite sequences:

(a) 2, 7, 12, 17, 22, 27, 32, …

(b) 1, 1/2, 1/3, 1/4, 1/5, 1/6, …

(c) 1/5, 3/8, 5/11, 7/14, 9/17, …

(d) 1, 0, 1, 0, 1, 0, 1, …

1 1 1 1 1 1 1
(e) 1 , , , , , , , ,…
2 4 8 16 32 64 128

(f) 1, 2, 4, 8, 16, 32, 64, 128, …

(g) s1 ¿ 2, s2=2.25 , s3 ¿ 2.37037 s 4 =2.4141 , … ,

s10  2.59374, … , s 10,000 2.71815 , …, s1,000,000  2.71828, …

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Answer

(a) sn=2+ 5×(n−1)  No name

1
(b) sn= n  Harmonic sequence
2 n−1
(c) sn= 3 n+2  No name
n
1−(−1)
(d) sn= ,  Alternating
2
1
(e) sn= n−1  Sequence of constant halving
2
(f) sn=2n−1  Sequence of constant doubling

( n+1n )
n
(g) sn=  Euler sequence

Topic # 2: Part II  Convergence and Divergence of Sequences

Question 3

Find nlim
→∞
s n for each sequence in Question 2.

Answer

(a) nlim s n=∞ ← s n is divergent

→∞

(b) nlim s n=0 ← s n ( harmonic ) is convergent

→∞

(c) nlim s n=2 /3 ← s n is convergent

→∞

(d) nlim s n=does not exist ← s n ( alternating ) is divergent

→∞

(e) nlim s n=0 ← s n ( constant halving ) is convergent

→∞

(f) nlim s n=∞ ← s n ( constant doubling ) is divergent

→∞

(g) nlim s n=e(Euler number) ← s n ( Euler sequence ) is convergent

→∞

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Question 4

The limit of the sequence

{ ( )}
n
1
{ sn }= 9+ is s=9
10

Because

( )
n
1
→ 0 when n→ ∞
10

True or false? Explain

Answer

True

( )
n n
1 1 1
=( because of Rule ¿6 )= n = n tends¿ 0 as n → ∞,
10 10 10

and therefore,

[ ( )]
n
1
lim 9+ =9.
n→∞ 10

Critical thinking

Question 5

What is wrong with the following reasoning?

“One would tend to think that a sequence is either convergent or divergent.

However, we have a problem here. According to the definition of divergence
(Definition 5), if lim s n=∞ then the sequence { sn } is divergent. Consequently, a
n→∞

sequence like

{ 1−(−1)n
2 }
= {1 , 0 , 1 ,0 , 1 , 0 , … }

is neither divergent nor convergent because its limit does not exist.”

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Answer

The logical pitfall with the reasoning lies in an incomplete interpretation of the definition of
divergence. The definition of divergence does not say that the only case in which a sequence is
divergent is when the limit of the sequence is infinite. As a reminder, Definition 5 (Divergent
Sequence) says: “A sequence {sn} that does not converge to any real number is said to diverge.”

In particular, it is true that

{ }
n
1−(−1)
2

Is not convergent because it oscillates permanently between 1 and 0, but it is divergent because it
does not converge to any real number.

Topic # 2: Part III  Geometric Sequences

Question 1

What is a geometric sequence?

Answer

A sequence with t terms is represented by

{ s1 , s 2 , s3 , s 4 , s 5 ,… , st } ← sequence with t number of terms

If we say that a sequence is a geometric sequence with first terma and common ratio ρ ,
we mean that each term has a precise mathematical definition:

s1=a

s2=aρ
2
s3=a ρ
3
s4 =a ρ
4
s5=a ρ
5
s6 =a ρ

…
t −1
st =a ρ

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Alternatively, a geometric sequence can be described as follows:
t−1
st =a × ρ (t=1 , 2, 3 , …)

Question 2

Which of the following sequences is a geometric sequence?

(a) Sequence of constant halving

1 1 1 1 1 1
1, , , , , , , …
2 4 8 16 32 64

(b) Sequence of constant doubling

1, 2, 4, 8, 16, 32, 64, …

(c)

35, 36, 37, 38, 39, 310, 311, …

(d)

0 , 0 , 0 , 0 , 0 ,0 , 0 , … ←Constant sequence

(e)

1 ,1 , 1 ,1 , 1 ,1 , 1 ,… ← Constant sequence

(f)

()
t
1
f ( t )=1− t=0 , 1 , 2, 3 , 4 ,…
2

(g)

()
t
1
f ( t )=1+ t=0 , 1 ,2 , 3 , 4 , …
2

For the sequences that are geometric identify the common ratio .

Answer

(a)

1 1 1 1 1 1
1, , , , , , , …
2 4 8 16 32 42

is a geometric sequence with a = 1 and common ratio  = 1/2.

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 (b)

1, 2, 4, 8, 16, 32, 64, …

is a geometric sequence with a = 1 and common ratio  = 2.

(c)

35, 36, 37, 38, 39, 310, 311, …

is a geometric sequence with a = 35 and common ratio  = 3.

(d)

0, 0, 0, 0, 0, 0, 0, …

is a geometric sequence with a=0and the common ratio ρ can be any real number.

(e)

1, 1, 1, 1, 1, 1, 1, …

is a geometric sequence with a=1and common ratio ρ=1

(f)

()
t
1
f ( t )=1− t=1 , 2 ,3 , 4 , …
2

Not geometric.

(g)

()
t
1
f ( t )=1+ t=1 ,2 , 3 , 4 , …
2

Not geometric.

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 Convergence and divergence of geometric sequences

Question 3

Specify the common ratio interval in which a geometric sequence is convergent.

Answer

A geometric sequence
t−1
st =a × ρ (t=1 , 2, 3 , …)

is convergent if −1< ρ<+1

Question 4

Which of the following geometric sequences is convergent?

Answer

(a) Sequence of constant halving

1 1 1 1 1
1, , , , , ,
2 4 8 16 32
1
42 , … ( ρ= 12 )
Convergent, lim s t=0
t →∞

(b) Sequence of constant doubling

1, 2, 4, 8, 16, 32, 64, … ( ρ=2 )

Divergent, lim s t=¿+∞ ¿

t →∞

(c) 35, 36, 37, 38, 39, 310, 311, … ( ρ=3 )

Divergent, lim s t=¿+∞ ¿

t →∞

(d) 0, 0, 0, 0, 0, 0, 0, …

Convergent, lim s t=0

t →∞

(e) 1, 1, 1, 1, 1, 1, 1, …

Convergent, lim s t=1

t →∞

Question 5

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Thomas Malthus (1766 – 1834) saw population expanding more rapidly than the capacity
of the economy to support it. Malthus’s most important book –Essay on the Principles of
Population– was published anonymously in 1798. Malthus theorized that human
population increased in geometric progression and food production increased in
arithmetic progression. What is the difference between a geometric progression and an
arithmetic progression?

Answer

Geometric progression

In a geometric progression (or geometric sequence), the terms are calculated by

multiplying their predecessor by a fixed number  (common ratio). The general expression
of a geometric sequence is
t−1
st =a × ρ (t=1 , 2, 3 , …)

where a is the first term of the sequence and  is the common ratio. For example, in the
sequence 2 , 6 ,18 ,54 ,162 , 486 , … the common ratio is ¿ 3.

Arithmetic Progression

In an arithmetic progression (or arithmetic sequence), the difference between two

consecutive terms is always constant. The general expression of an arithmetic sequence is

st =a+ ( t−1 ) × τ (t=1 , 2, 3 , …)

where a is the first term of the sequence andτ is the common difference between terms.
For example, in the sequence 2 , 5 ,8 , 11, 14 , 17 , … the common difference is ¿ 3.

Malthus did not provide estimations of  and τ . Someday his dire prediction may come
true. But for now the prospects do not appear to be preoccupying.

Digression (Arithmetic progressions)

Note that

st +1=a+ ( t+1−1 ) × τ =a+t × τ ,

so that the difference between the two consecutive terms st +1∧st is

st +1−st =a+t × τ−[ a + ( t−1 ) × τ ]

¿ a+ t × τ−[ a+t ×τ −τ ]=τ

Therefore,

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 st +1−st =τ  Common difference
Topic # 2: Appendix I  The Euler Number e

Question 6

Prove that the Euler Sequence

{( ) } {( ) }
n n
n+1 1
{ sn }= = 1+
n n

has a limit using the practical rule “any increasing sequence of real numbers that has an
upper bound is convergent.

Answer

We use the practical rule: “Any strictly increasing sequence of real numbers that has an
upper bound is convergent.”

We have to prove two things:

(1) the sequence is strictly increasing; and

(2) it has an upper bound.

First, the sequence is strictly increasing.

By writing some terms of the sequence

{( ) }
n
{ sn }= n+1
n

and comparing them say,

s1 = 2 s2 = 2.25 s3  2.37037 s4  2.44141 s5 = 2.48832,

we may guess that this sequence is strictly increasing.

Second, the sequence has an upper bound M

We may also guess that the sequence is bounded above and has an upper bound 3:

( )
n
n+1
sn= ≤ 3(M =3)
n

Therefore, the sequence

{( ) } {( ) }
n n
n+1 1
{ sn }= = 1+
n n

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is convergent, that is,

lim s n ∃
n→∞

Note that this proves that the limit exists, but we do not know the value of the limit. It can
be shown that the Euler sequence converges to the irrational number 2.71828 …, denoted
by e.

Keep in mind from now on:

( ) ( )
n n
n+1 1
lim =lim 1+ =e ← Euler number
n →↑ ∞ n n →∞ n

Topic # 2: Appendix II  Stability of the equilibrium

No questions

Topic # 3: Compound Interest: Discrete Compounding

 Formula for the compound amount

Assumption: annual rate r compounded once a year

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Question 1

Find the value of $100 at ten percent interest for two years compounded annually.

Answer

The first thing to do is to establish the formula to be used. In the present problem, the
relevant formula is provided by Proposition B:

t p
S=P ×(1+r ) , where r=
100

Next, we have to identify the “ingredients” in the formula: the principal P , the annual
interest rate r (calculation needed because we are given p, notr ), and the number of years t
. We have

 P = 100,  Principal
 p = 10  Percentage rate
p 10
 r = 100 = 100 =0.10  Decimal rate
 t=2  Number of years

Therefore, the required “value” is the compound amount:

S = 100  (1 + 0.10)2 = 100  (1.10)2≈ $121

Question 2

Find the value, in four years’ time, of $10,000 invested at 5% interest compounded
annually. What is the value of the compound interest?

Answer

It is easy to see that the “ingredients” are:

 P = 10,000  Principal
 p=5
p 5
 r = 100 = 100 =0.05
 t=4

Therefore, the required “value” is the compound amount:

S = 10,000  (1 + 0.05)4 = 10,000  (1.05)4≈ $12,155.06

The difference between compound amount and the principal gives the value of the
compound interest:

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 Compound interest=S−P=$ 12,155.06−$ 10,000 ≈ $ 2,155.06

Question 3

Find the value, in ten years’ time of $1,000 invested at 6% interest compounded annually.
What is the value of the compound interest?

Answer

In the present case, we have:

 P = 1,000  Principal
 p=6
p 6
 r = 100 = 100 =0.06
 t = 10

Therefore, the required “value” is the compound amount:

S = 1,000  (1 + 0.06)10 = 1,000  (1.06)10 ≈ $1,790.85

The value of the compound interest is

S −P = $1,790.85 −$ 1,000 = $790.85

Critical Thinking

Question 4

At what nominal interest rate r , compounded annually, will money double in 8 years?

Answer

We use the fundamental formula

S= P  ( 1+r )8

We want S = 2P. Consequently,

2P = P  ( 1+r )8 → 2 ( 1+r )8 =2This is one equation for one unkown
Solving,

( 1+r )8 =2→ 1+r= √8 2

r =√2−1≈ 0.09005
8

Hence, the required rate is 9.005%

12
 Formula for the compound amount
Assumption: annual rate r compounded k times a year

Question 1

Fill in the blanks in Table 1.

Interest compounded Number of interest periods Interest rate per conversion

within a year period
(Annual frequency k) (r/k)
Annually
Semi-annually
Quarterly
Monthly
Weekly
Daily
Every minute
Table 1 (Incomplete)

Answer

Interest compounded Number of interest periods Interest rate per conversion

within a year period
(Annual frequency k) (r/k)
Annually 1 r
1
Semi-annually 2 r
2
Quarterly 4 r
4
Monthly 12 r
12
Weekly 52 r
52
Daily 365 r
365
Every minute 525600 r
525600
Table 1 (Completed)

Question 2

Calculate the compound amount when $1,000 is invested for five years at the nominal
rate of 8% compounded quarterly.

Answer

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Attention! Here we have to use the formula provided by Proposition C, which is a
generalization of the formula given by Proposition B. Thus, the relevant formula for this
problem is

( )
k× t
r
S= P 1+
k

where P is the principal; r is the annual interest rate; k is the number of interest periods
within a year; r/k is the interest rate per conversion period; and t identifies the number of
years.

In the present case, we have:

 P = 1,000,
 p=8
p 8
 r= =
100 100
=0.08

 t=5

 k =4  Number of interest periods

 r/k = r / 4=0.02  Interest rate per conversion period
 k  t = 20  Total number of interest periods

so that

( )
4 ×5
0.08 20
S = 1,000  1+ =1,000 × ( 1+ 0.02 ) ≈ $ 1,485.95
4

Question 3

What is the value of one dollar invested for one year at a nominal rate of 100 percent
compounded daily?

Answer

In the present case, we have:

 P=1
 p = 100

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 p 100
 r= =
100 100
=1.00

 t=1

 k =365  Number of interest periods

 r/k= r /365 ≈ 0.03  Interest rate per conversion period
 k  t = 365 1 = 365
Therefore,

( )
365
1.0 365
S=1× 1+ =(1+ 0.03) ≈ 2.7147
365

Question 4

Find the value of $100 at ten percent interest for two years compounded semi-annually.

Answer

The relevant formula for this problem is

( )
k× t
r
S= P 1+
k

where P is the principal; r is the annual interest rate; k is the number of interest periods
within a year; and t identifies the number of years.

In the present case, we have:

 P = 100,
 p = 10
p 10
 r= =
100 100
=0.10

 t=2
 k =2  Number of interest periods within a year
r 0.10
 k
=
2
=0.05  Interest rate per conversion period

 kt = 4 Total number of interest periods

so that plugging these “ingredients” in the relevant formula yields:

( )
2×2
0.10 4
S = 100  1+ =100 × ( 1+0.05 ) ≈ $ 121.6
2

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Question 5

Given a principal of $1,000 at 6 percent for three years, find the compound interest when
the principal is compounded annually, semi-annually, and quarterly.

Answer

We have to use the formula:

( )
k× t
r
Compound Interest = P  1+
k –P

We start by computing the compound amount.

Annually

 P = 1,000  Principal
 p=6
6 6
 r= =
100 100
=0.06

 t=3
 k =1  Number of interest periods
 r/k= r /1=0.06  Interest rate per conversion period
 kt = 3  Total number of interest periods

Therefore, S ≈ $1,191

Semi-annually

 P = 1,000
 p=6
6 6
 r= =
100 100
=0.06

 t=3
 k =2  Number of interest periods
 r/k= r /2=0.03  Interest rate per conversion period
 kt = 6  Total number of interest periods

S ≈ $1,194

Quarterly

16
  P = 1,000,
 p=6
6 6
 r= =
100 100
=0.06

 t=3
 k =4  Number of interest periods
 r/k= r / 4=0.015  Interest rate per conversion period
 kt = 12  Total number of interest periods

S ≈ $1,196

The answer to Question 5 is presented in tabular form (See Table 2).

Interest Compound Amount Principal Compound Interest

compounded S P S−P
Annually $1,191 $1,000 $191
Semi-annually $1,194 $1,000 $194
Quarterly $1,196 $1,000 $196

Table 2

Critical Thinking

Question 6

According to the legend, in 1624 the Dutch purchased the island of Manhattan from an
Indian named Minnehaha for $24. Had Minnehaha deposit the proceeds of the sale in a
savings account paying 9 per cent annually, what would he be in 2020?

a. $600 million richer

b. $600 billion richer
c. $600 trillion richer
d. $600 quadrillion richer
e. $600 quintillion richer

Answer

The correct answer is c.

396
$ 24 ×(1+0.09) =6.6205365 e+14

Topic # 3: Appendix  Negative Interest Rates

Question 7

17
Suppose that $100 is invested at a negative interest rate r = – 0.05 compounded annually.
Compute the compound amount after one interest period, two interest periods, and three
interest periods.

Answer

From S = 100  (0.95)t it follows that

S = 100  (0.95)1 = $95.00  after one interest period

S= 100  (0.95)2 = $90.25  after two interest periods

S = 100  (0.95)3 = $85.7375  after two interest periods

Critical Thinking

Question 8

What is wrong in the following reasoning?

“Zero interest rates are an impossibility because at zero interest rates there is no limit to
borrowing by both individuals and governments. All sort of investment projects will be
undertaken at zero interest rates because people would just borrow, invest, and consume
and satisfy all their wants. For example, roads would be levelled and straightened
regardless of cost.”

Answer

Even if the interest rate is zero, the principal does need to be repaid. And this means that
projects undertaken with borrowed money still need to generate a return that is sufficient
to repay the principal and also compensate for risk.

Question 9

If (for whatever reason) the central bank imposes negative interest rates on bank
deposits, the public will necessarily withdraw all the money from the bank accounts to
avoid losing money. This monetary policy is unworkable. True or false? Explain.

Answer

Not necessarily true. The government can introduce a law making illegal to pay in cash more
than, say $10,000. As a result, the public will have to make deposits to pay debts greater than
$10,000 even if the banks charge negative rates on deposits.

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