Munich Personal RePEc Archive

Problems Book to Accompany

Mathematics for Economists

Todorova, Tamara

Wiley-Blackwell

May 2010

Online at https://mpra.ub.uni-muenchen.de/117866/
MPRA Paper No. 117866, posted 18 Jul 2023 06:33 UTC
Chapter 1. Matrix Algebra

Matrix algebra is used with economic models that involve linear-equation systems. For models with n
variables systems of n simultaneous linear equations need to be solved. A system of n linear
equations in n variables x1 , x2 ,..., xn can be represented as:

a11 x1 + a12 x2 + ... + a1n xn = d1

a21 x1 + a22 x2 + ... + a2 n xn = d 2
………………………………
an1 x1 + an 2 x2 + ... + ann xn = d n
This system of linear equations can be written in a matrix format:

 a11 a12 ... a1n   x1   d1 

a a22 ... a2 n  x  d 
A =  21 x =  2 d =  2
 ... ... ... ...   ...   ... 
     
 an1 an 2 ... ann   xn  dn 

where the first matrix is the set of coefficients A =  aij  or the coefficient matrix. The second set is
the set of variables x1 , x2 ,..., xn also called the variable term vector. The last set is that of the constant
terms d1 , d 2 ,..., d n or the constant term vector.

Shortly the system of linear equations can be written as

A x = d
( nn ) ( n1) ( n1)

We can apply the concept of inverse matrix to the solution of this simultaneous-equation system,
where the inverse of matrix A , denoted by A−1 is defined only if A is a square matrix such that the
following condition is satisfied:
AA−1 = A−1 A = I
The result of the multiplication (whether pre- or postmultiplication) is the same. It is the identity
matrix. An identity matrix I is a square matrix which has 1 for every element on the principal
diagonal from left to right and 0 for all other elements. The identity matrix is similar to the number 1
in scalar algebra since multiplying any matrix by the identity matrix produces the original matrix. It
should be noted that not every square matrix has an inverse. Later we will show the conditions for the
inverse matrix to exist.

Thus we can solve our system of linear equations through matrix inversion. If the inverse A−1 exists,
we obtain:
A−1 Ax = A−1d or

x = A −1 d

To find the variable term vector or the variables x1 , x2 ,..., xn we can first find the inverse A−1 for the
non-singular matrix A and then multiply it by the constant term vector d .

Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
1
Conditions for Nonsingularity

The squareness of the coefficient matrix A is a necessary but not a sufficient condition for the
nonsingularity of the matrix. What is also necessary is that its rows be linearly independent (or
respectively its columns).

An n  n coefficient matrix A can be considered as an ordered set of row vectors, i.e. a column
vector whose elements are themselves row vectors:

 a11 a12 ... a1n   v1 

a a22 ... a2 n   v2 
A =  21 =
 ... ... ... ...   ... 
   
 an1 an 2 ... ann   vn 

For the row vectors to be linearly independent, none must be a linear combination of the rest. Linear
row independence requires that the only set of scalars k i which can satisfy the vector equation
n

 k v =
i =1
i i 0
(1n )

be ki = 0 for all i .
Intuitive thinking tells us that in order for a system of equations to possess a determinate solution, the
first condition is to have as many equations as there are unknowns. Having fewer equations than
variables does not allow finding a unique set of solutions for those variables. The second condition is
that equations must be functionally independent of one another, in this case linearly independent. This
is to say that no equation should be redundant or should be a repetition of another equation. From
looking at the system of equations we may not be immediately able to tell if linear dependence exists.
Therefore, we resort to the determinant test of nonsingularity of a matrix.

Determinants and Nonsingularity

The determinant of a square matrix A is a uniquely defined number (scalar) associated with that
matrix. For a 2  2 matrix the determinant is defined as:
a11 a12
A= = a11a22 − a12 a21
a21 a22
Given its dimension, A is called a second-order determinant. We can easily illustrate the condition
for nonsingularity with the help of the determinant. Consider a determinant where the elements of the
second row are a multiple of the elements of the first row respectively. For example,
a b
A= = kab − kab = 0
ka kb
We find that the determinant to a matrix of linear dependence is zero.

Laplace Expansion

A 3  3 matrix has a third-order determinant the value of which is:

a11 a12 a13
a a23 a a23 a a22
A = a21 a22 a23 = a11 22 − a12 21 + a13 21 =
a32 a33 a31 a33 a31 a32
a31 a32 a33
= a11a22 a33 − a11a23 a32 − a12 a21a33 + a12 a23a31 + a13a21a32 − a13a22 a31

2
Each second-order determinant represents a minor M ij which is a determinant of the submatrix
obtained by deleting the i -th row and the j -th column of the matrix. A cofactor is a minor with a
prescribed algebraic sign attached to it such that

Cij = (−1)i + j M ij

For odd-number elements for which the sum i + j is an odd number we get that their cofactor will
have a different sign from that of their minor. We can use the Laplace expansion process to express a
third-order determinant:
3
A = a11 M11 − a12 M12 + a13 M13 = a11 C11 + a12 C12 + a13 C13 = a
j =1
1j C1 j

The value of the determinant of any order n can be found by the Laplace expansion of any row or
column:
n
A= a
i =1
ij Cij (expansion by the i th row)

Properties of Determinants

Property 1. The interchange of rows and columns does not change the value of the determinant:
a b a c
= = ad − bc
c d b d

Alternatively, this property implies that the determinants of an original matrix A and its transpose A
are the same. Recall that a transpose to a matrix is a matrix in which the rows of the original matrix
are converted into columns and the columns into rows.

Property 2. The interchange of two rows or columns will alter the sign but not the numerical value of
the determinant.
a b c d
= ad − bc = bc − ad = −(ad − bc)
c d a b
Property 3. The multiplication of any one row or column by a scalar k will change the value of the
determinant k times.
a b
= kad − kbc = k (ad − bc)
kc kd
As opposed to determinants the factoring of a matrix requires the presence of a common divisor for all
elements, not just for one row or one column, for example:
 ka kb  a b 
 kc kd  = k  c d 
   
Property 4. The addition (subtraction) of a multiple of any row (or column) to (from) another row (or
column) leaves the value of the determinant unchanged.
a b
= ad + kab − bc − kab = ad − bc
c + ka d + kb
Property 5. If one row (or column) is a multiple of another row (or column), the value of the
determinant will be zero. This property serves to establish whether some rows (columns) are linearly
dependent and, hence, whether the matrix is nonsinuglar. Thus, a nonsingular matrix will have a
determinant different from 0. When the determinant is 0, then the matrix does not have an inverse.
3
ka kb
= kab − kab = 0
a b
Property 6. The expansion of a determinant by the “wrong” row or column yields a value of zero. If
a b 
for the matrix A =   we expand the determinant by using its first-row elements but the
c d 
cofactors of the second-row elements we get a vanishing determinant.
2
A= a
j =1
1j C2 j = a11 C21 + a12 C22 = −ab + ab = 0

We use this property in the process of matrix inversion.

Matrix Inversion

Assume that we have an n  n non-singular matrix

 a11 a12 ... a1n 

a a22 ... a2 n 
A =  21
( n n )  ... ... ... ... 
 
 an1 an 2 ... ann 
Its cofactor matrix consists of the cofactors to all of its elements:

 C11 C12 C1n 

...
 
C C22 ... C2 n 
C =  21
( n n )  ... ... ... ... 
 
 Cn1Cn 2 ... Cnn 
A transpose of the cofactor matrix exists such that:

 C11 C21 Cn1 

...
 
C C22 ... Cn 2 
C  =  12
( n n )  ... ... ... ... 
 
 C1n
C2 n ... Cnn 
Another name for the transpose of the cofactor matrix is adjoint of A or an adjoint matrix so

 C11 C21 Cn1  ...

 
C C22 ... Cn 2 
AdjA = C  =  12
( n n )  ... ... ... ... 
 
 C1n C2 n ... Cnn 
where if we multiply the matrices A and C  we obtain

 n n n


 a1 j C1 j  a1 j C2 j ... a 1j Cnj 
 j =1 j =1 j =1 
 n n n  A 0 ... 0
 

 a2 j C1 j
AC  =  j =1
a 2j C2 j ...  a2 j Cnj   0
 =
A ... 0
= AI
  ... ... 
j =1 j =1
( n n )  ... ...
 ... ... ... ...  0 
 
0 ... A 
 n n n


 anj C1 j
 j =1 a
j =1
nj C2 j ... 
j =1
anj Cnj 


4
The nonsingularity of matrix A implies that A  0 so we can divide both sides of the equation and
we obtain
AC 
=I
A
Pre-multiplying by the inverse matrix A−1 we get
C
A−1 A = A−1 I
A
C
We get the identity matrix on the left side, therefore, I = A−1 or the inverse matrix A−1 of A is
A
equal to the transpose of its cofactor matrix divided by its determinant:
C 1
A−1 = or alternatively A−1 = AdjA
A A

We see that in order for any matrix to have an inverse (be non-singular) its determinant must be
different from 0 or A  0 .

Cramer’s Rule

Sometimes in the variable term vector we may be looking for only one of the unknown variables
x1 , x2 ,..., xn . Matrix inversion allows us to use a convenient method to obtain just one of the x
variables without having to find all others. This short-cut method of solving is known as the Cramer’s
rule. Solving a system of linear equations through the method of matrix inversion yields:
C
x = A−1d = d
A
 n 
 C i1 di 
 C11 C21 ... Cn1   d1   C11 d1 + C21 d 2 + ... + Cn1 d n   i =1 
 x1   n 
x      
 2  = 1  12 C C 22 ... C d
n2   2 
=
C
1  12 1 d + C d
22 2 + ... + C d
n2 n 
=
1   Ci 2 di 
 ...  A  ... ... ... ...   ...  A  ...  A  i =1 

        ... 
 xn   C1n C2 n ... Cnn   d n   C1n d1 + C2 n d 2 + ... + Cnn d n 
 n 
 
 i =1
Cin di 

For the first variable x1 we get
n
A1
C
1
x1 = i1 di =
A i =1 A

It turns out that the value of first variable is the ratio of two determinants where the determinant
A1 is the same as A but its first column is substituted with the column vector d . The index shows
that the first column has been substituted. For the variable xi we substitute the i th column
respectively so
Ai
xi =
A

5
Thus, if we want to find the value of the second unknown variable x2 we substitute the constant term
vector d in the second column of the original determinant. We illustrate the Cramer’s rule with a
simple numerical example. For the system of two equations with two unknowns
5 x1 + 3 x2 = 30
6 x1 − 2 x2 = 8

we must solve for x1 and x2 . Finding A ,

A = 5(−2) − 3(6) = −28  0

By Cramer’s rule
30 3 5 30
A1 8 −2 −60 − 24 A2 6 8 40 − 180
x1 = = = =3 x2 = = = =5
A (−28) (−28) A (−28) (−28)

The Gauss Method

An alternative method for solving systems of linear equations is the Gaussian elimination method. We
simply write the system of equations in a matrix form and transform the coefficient matrix into an
identity matrix with the help of repeated row operations. We will use the numerical example above to
illustrate how this simple method works. Given the system
5 x1 + 3 x2 = 30
6 x1 − 2 x2 = 8

we can use the Gauss elimination method to find the values of x1 and x2 . We write the system in the
form of an augmented matrix:
5 3 30
AB= 
6 −2 8 
1
where A is the coefficient matrix. We multiply the first row by to obtain 1 in the a11 element.
5
 3 
1 5 6 
 8
6 −2 
Then we subtract 6 times the first row from the second row to obtain 0 for the first row of the second
element and clear the first column.
 3 
1 5 6 

 28 28
0 5 
5
We multiply the second row by to obtain 1 in a22 .
28
 3 
1 6
 5
5
 0 1 
3
We multiply the second row by and subtract it from the first row. This gives
5
6
1 0 3
 
0 1 5
Now the solution is on the right or x1 = 3 and x2 = 5 .

The Gauss method is further extended to finding an inverse of a matrix. This time from the augmented
matrix we try to obtain the identity matrix on the right. After applying a number of row operations we
transform the coefficient matrix into the identity matrix and what remains on the right is the inverse
matrix. We will again illustrate this using our previous example. For the coefficient matrix

5 3 
A= 
6 −2
we set up the augmented matrix
5 3 1 0 
 
6 −2 0 1 
1
and we use similar steps as those for solving linear equations. First, we multiply the first row by .
5
This gives us 1 for the first element in the coefficient matrix.

 3 1 
1 5 5 0 
 
6 −2 0 1 
Now we multiply the first row by 6 and subtract the second row from it.
 3 1 
1 5 5
0
 
 28 6 
0 −1
5 5 
5
We multiply the second row by to obtain 1 in the main diagonal of the lead matrix
28
 1 
1 3 5 0 
 5 
0 1 3 −
5
 14 28 
3
We only have one more term to clear – to do that we multiply the second row by and subtract it
5
from the first row. Hence,
 1 3 
1 0 14 28 
 
0 1 3 −
5
 14 28 
The matrix we obtained on the right is the inverse of the original coefficient matrix. This can easily be
checked by multiplying the two matrices such that this should result in the identity matrix:
AA−1 = A−1 A = I

7
 1 3 
 5 3  14 28  1 0 
6 −2   3 =
  5  0 1 
−
14 28 

Market Equilibrium Analysis

Consider the market for one commodity the demand and supply for which are given by
qd =  −  p ,  0
qs = − +  p  ,  0
where  ,  ,  and  are all positive parameters. Assuming the market is in equilibrium we have
quantity demanded equal to quantity supplied at the equilibrium price. We could solve for equilibrium
quantity and price either by direct substitution or using the matrix method. Rewriting the example in a
matrix form,
 p + q =
 p−q =

 1  p  
 −1 q  =  
    
coefficient var iable cons tan t
matrix matrix term
matrix

A = − −   0

Solving by the Cramer’s rule,

 1
A1  −1 − −   + 
p= = = = 0
A − −  − −   + 
 
A    −   − 
q= 2 = = =
A − −  − −   +
where we would presume that    in order to have positive equilibrium quantity. Graphically
this can be shown as
q
q s = − + p


q
q d =  − p

p
p
−

Figure 1
8
By direct substitution
 −  p = − +  p
 +  ( +  )  − 
p= q = −  p = − =
 +  +  +
are the results obtained previously. The example given illustrates the case of partial market
equilibrium when the market for only one commodity is in equilibrium. In a general market
equilibrium we should have
Ei = qdi − qsi = 0 i = 1, 2,..., n

where Ei is the excess demand for the i th commodity and in the conditions of general equilibrium
this excess demand is equal to zero for all goods.

Let us assume a simple two-commodity model where for the first commodity we have
qd1 = ao + a1 p1 + a2 p2
qs1 = bo + b1 p1 + b2 p2

as the quantity demanded and supplied of the first good. The prices of the two goods are respectively
p1 and p2 . Then it must be that the two goods are related. For example, if the coefficient a2 is
positive, it must be that the two goods are substitutes. If it is negative, they must be complements.
Naturally we would expect a1 to be negative as the law of demand would dictate and b1  0 in
consistency with the law of supply. For the second commodity we have
qd2 =  o + 1 p1 +  2 p2
qs2 =  o + 1 p1 +  2 p2

Similarly for good 2, we expect to have  2  0 and  2  0 . As to the value of  1 , again it may be
either positive or negative depending on whether the two goods are complements or substitutes. In the
conditions of general-market equilibrium we should have
qd1 = qs1 and
qd 2 = q s2

Hence, from each set of equations

ao + a1 p1 + a2 p2 = bo + b1 p1 + b2 p2
 o + 1 p1 +  2 p2 =  o + 1 p1 +  2 p2
Rearranging,
(a1 − b1 ) p1 + (a2 − b2 ) p2 = bo − ao
(1 − 1 ) p1 + ( 2 −  2 ) p2 =  o −  o

Let us set ai − bi = ci and  i −  i =  i for convenience. Thus we get

c1 p1 + c2 p2 = −co
 1 p1 +  2 p2 = − o
Solving by the matrix method,
 c1 c2   p1   −co 
    p  =  − 
 1 2 2  o

9
 A = c1 2 − c2 1

Since the determinant A should be different from zero we should have c1 2  c2 1 . Furthermore,
−co c2
A1 − o 2 −c  + c  c  −c 
p1 = = = o 2 2 o = 2 o o 2 0
A c1 2 − c2 1 c1 2 − c2 1 c1 2 − c2 1
c1 −co
A2  1 − o −c  + c  c  −c
p2 = = = 1 o o 1 = o 1 1 o 0
A c1 2 − c2 1 c1 2 − c2 1 c1 2 − c2 1

where for both prices we expect to get positive values. For a general-market equilibrium with n
commodities we have
qdi = q ( p1 , p2 ,..., pn )
qsi = q ( p1 , p2 ,..., pn )

where pi is the price of the i th commodity and i = 1, 2,..., n . For equilibrium

qdi = qsi or excess demand is exactly zero.

Ei = qdi − qsi = 0

Alternatively, Ei ( p1 , p2 ,..., pn ) = 0

A Simple National-Income Model

A simple Keynesian national-income model can be introduced where national income is Y , C is the
level of consumption, I o gives the aggregate investment level and government spending is given by
Go . Furthermore, the notation behind the last two variables shows that aggregate investment and
government spending are exogenous variables. In the context of economic modelling this means that
they depend on factors external to the model and therefore their values cannot be influenced in the
model and should be taken for granted. At the same time the other variables are presumed to be
endogenous and, hence, they depend on factors internal to the model. In fact, the endogenous variables
in the model depend on the exogenous ones as well as on the parameters. Here  is the level of
autonomous consumption, the consumption that is unrelated to the level of national income. Whether
the nation produces any output or not it would still consume some positive amount. The parameter 
gives the share of national income that goes into consumption known as the marginal propensity to
consume. Therefore, this is the consumption that depends on the level of output produced in the
economy. This consumption is negatively related to the level of savings since the income that is not
consumed is saved and vice versa. Therefore, the marginal propensity to consume  and the marginal
propensity to save s in a closed economy should equal 1 since the national income would either be
spent or saved. We want to solve for the endogenous variables Y and C in equilibrium.
Y = C + I o + Go
C =  + Y  0   (0,1) since  + s = 1

Thus formulated, the equations give the so called structural form of the model. When we solve for Y
or C , we obtain the reduced form of the model. We have the reduced form solution when the
endogenous variable is expressed in terms of the exogenous variables or parameters in the model.
Rewriting the equations,
Y − C = I o + Go
− Y + C = 
10
 1 −1 Y   I o + Go 
−   =
 1  C    

coefficient var iable cons tan t
matrix matrix vector
matrix

A =1−   0

The determinant is clearly positive since the marginal propensity to save is less than 1. Solving for Y
we get
I o + Go −1
 I o + Go + 
1
Y= = 0
1−  1− 
From this simple national-income model we obtain that equilibrium national income is positive and is
positively related to exogenous aggregate investment, government spending and the autonomous
consumption. On the other hand, it is positively related to the marginal propensity to consume which
means that it is negatively affected by the marginal propensity to save s . In a closed economy like the
one described above, i.e. in the absence of foreign trade we have in equilibrium
I o + Go + 
Y=
s
For aggregate consumption
1 I o + Go
−   +  ( I o + Go )  +  ( I o + Go )
C= = = 0
1−  1−  s
Equilibrium aggregate consumption is positive, too. As can be expected, it is negatively related to the
marginal propensity to save. The more the nation is inclined to save, the lower its consumption would
be, the more likely it is to consume, the larger the level of aggregate consumption. We can also see
that aggregate consumption is positively related to non-income related consumption and the level of
investment and government spending.

Leontief Input-Output Model

One of the most vivid applications of matrix algebra in economic analysis is the Leontief input-output
model. If an economy has n industries how much output should each industry supply to satisfy the
needs of the economy? It should be noted that the output of each industry is an input for some other
industries or even for that industry itself. For example the electrical industry might use some of its
own output – electricity. To avoid bottlenecks in the economy the output levels of the n industries
must be consistent with the input requirements of all of these n industries. The model makes three
assumptions: 1) Each industry produces a homogeneous product (if some industry produces several
products, we can hypothetically split that industry into several other industries. 2) All industries use
fixed input proportions or factors of production are applied at a particular constant ratio. 3) There are
constant returns to scale in each industry which means that doubling inputs doubles output.

Let the input of the i th commodity needed to produce a unit of the j th commodity be aij . Thus the
production of one unit of the j th commodity will require a1 j amount of the first commodity, a2 j of
the second commodity, … anj of the n th commodity. “A dollar’s worth” of each commodity as its
unit is assumed where prices are assumed to be given. For an n -industry economy the input
coefficients aij can be arranged as a matrix such that:

11
  a11 a12 ... a1n 
a a22 ... a2 n 
A =  21
 ... ... ... ... 
 
 an1 an 2 ... ann 

where A is called an input coefficient matrix. To produce a unit (a dollar’s worth) of the commodity
of the first industry, for example, we need a11 units of its own output, a21 units of the output of the
second industry, … an1 units of the output of the n th industry or the n th commodity.

The open input-output model developed by Leontief has a greater importance to applying matrix
algebra to economic analysis as it gives a meaningful solution. The open model contains an “open” or
“external” sector, which represents the exogenously determined final demand or the demand of the
households for the product of each industry. In return for its demand the household sector provides the
primary input or labor. If the household sector is absorbed into the model as just another industry (we
add one more row and column to the input coefficient matrix), the model becomes closed. We shall
not prove here that the rows of this matrix are linearly dependent but as it has an infinite number of
solutions, no unique output mix can be found. What is more interesting is finding the optimal output
of the n th industries in the open model.

The sum of the elements in each column of the input coefficient matrix A must be less than 1 that is
n

a
i =1
ij  1 where j = 1, 2,..., n . Since the value of output ($1) must be used to pay for other factors of

production, the amount by which the column sum falls short of $1 must represent the payment to the
primary input of the open sector. Thus the value of the primary input needed to produce a unit of the
n
j th commodity is 1 − a
i =1
ij .

In the open model if the first industry is to satisfy the input requirements of the n th industries and the
final demand of the external sector, its output level must be equal to:
x1 = a11 x1 + a12 x2 + ... + a1n xn + d1
which transforms into
(1 − a11 ) x1 − a12 x2 − ... − a1n xn = d1

where d1 is the final demand of the external or open sector. For all the n industries we obtain the
following system of n linear equations:
(1 − a11 ) x1 − a12 x2 − ... − a1n xn = d1
− a21 x1 + (1 − a22 ) x2 − ... − a2 n xn = d 2
………………………………………
− an1 x1 − an 2 x2 − ... + (1 − ann ) xn = d n
Writing the system with the help of matrixes yields:

1 − a11 − a12 ... − a1n   x1   d1 

 −a − a2 n   x2   d 2 
 21 1 − a22 ...
=
 ... ... ... ...   ...   ... 
    
 − an1 − an 2 ... (1 − ann )   xn   d n 

or the coefficient matrix is nothing but the identity matrix I n minus the input coefficient matrix A .
The variable term vector is x and the constant term vector is d , respectively:

12
( I − A) x = d
The difference I − A is also called the technology matrix T where
Tx = d
and in order to solve for x we have to find the inverse of the technology matrix such that:

x = T −1 d

Problems

1. The demand and supply for two commodities are given by

qd1 = 53 − 2 p1 − 3 p2 qd2 = 64 − 3 p1 − 4 p2
qs1 = −4 + 3 p1 qs2 = −8 + 2 p2
where the prices of the two goods are respectively p1 and p2 , qdi is the quantity demanded of the
respective good and q si is the quantity supplied of it. Use the matrix approach to determine the prices
and quantities when each of the two markets is in equilibrium. How are the two goods related, if at
all?
Solution:
In the conditions of general-market equilibrium we should have
qd1 = qs1 and
qd 2 = q s2

From each set of equations

53 − 2 p1 − 3 p2 = −4 + 3 p1
64 − 3 p1 − 4 p2 = −8 + 2 p2

5 p1 + 3 p2 = 57
3 p1 + 6 p2 = 72 (:3)

5 p1 + 3 p2 = 57
p1 + 2 p2 = 24
Writing in a matrix form,
5 3  p1  57 
1 2  p  =  24
  2  
A = 10 − 3 = 7  0

Using Cramer’s rule,

57 3
A1 24 2 114 − 72
p1 = = = =6
A 7 7
5 57
A2 1 24 120 − 57
p2 = = = =9
A 7 7

From the supply equation for the first good

13
q1 = −4 + 3(6) = 14
For the second good
q2 = −8 + 2(9) = 10
From the two demand functions we can easily see the cross-price effect of a change in one price.
When the price of good two increases, the quantity demanded for first good decreases which indicates
they are complements and are consumed in a bundle. Similarly, when the price of the first good
increases the quantity demanded of the second decreases.

2. The demand and supply for two commodities are

qd1 = 16 − 2 p1 + 2 p2 qd2 = 37 + p1 − 3 p2
qs1 = −10 + 4 p1 + p2 qs2 = −4 + 2 p1 + 6 p2

where the prices of the two goods are respectively p1 and p2 , qdi is the quantity demanded of the
respective good and q si is the quantity supplied of it for i = 1, 2 . Use matrix inversion to find the
equilibrium prices and quantities of the two goods. How are the two goods related?
Solution:
In equilibrium on both markets
qd1 = qs1 and
qd 2 = q s2

From each set of equations

16 − 2 p1 + 2 p2 = −10 + 4 p1 + p2
37 + p1 − 3 p2 = −4 + 2 p1 + 6 p2

6 p1 − p2 = 26
p1 + 9 p2 = 41
Written in a matrix form,

6 −1  p1   26
1 9   p  =  41
   2   

A = 54 + 1 = 55

To solve by matrix inversion

9 −1  9 1
C=  C =  
1 6   −1 6 
 p1  1 1  9 1   26 1  275 5 
 p  = C d =  −1 6  41 =  220 =  4
 2 A 55     55    
From the supply equation for the first good
q1 = −10 + 4(5) + 4 = 14
For the second good
q2 = −4 + 2(5) + 6(4) = 30

14
From the two demand functions we see that when the price of the second good increases, the quantity
demanded of first good increases. This shows they are substitutes. Similarly, when the price of the
first good increases the quantity demanded of the second increases.

3. Consider the model of general-market equilibrium in an economy with three goods. The demand
and supply functions for the three commodities are given by
qd1 = 3 − p1 + 2 p2 − p3 qd2 = 28 + p1 − 2 p2 − 2 p3 qd3 = 58 − 2 p1 − p2 − 4 p3
qs1 = −6 + p1 qs2 = −4 + 2 p2 qs3 = −5 + 3 p3

where the price of the respective good is pi , qdi is the quantity demanded and q si is the quantity
supplied for i = 1, 2,3 . Use the matrix approach to determine the equilibrium price and quantity in
each market. Can you conclude how the three goods are related to one another?
Solution:
In the conditions of general-market equilibrium we have
qdi = qsi

From each set of equations

3 − p1 + 2 p2 − p3 = −6 + p1
28 + p1 − 2 p2 − 2 p3 = −4 + 2 p2
58 − 2 p1 − p2 − 4 p3 = −5 + 3 p3

2 p1 − 2 p2 + p3 = 9
− p1 + 4 p2 + 2 p3 = 32
2 p1 + p2 + 7 p3 = 63
In a matrix form,
 2 −2 1   p1   9 
 −1 4 2   p  = 32 
  2  
 2 1 7   p3   63

Developing the determinant by Laplace expansion,

4 2 −1 2 −1 4
A =2 +2 +1 = 2(28 − 2) + 2(−7 − 4) − 1 − 8 = 52 − 22 − 9 = 21
1 7 2 7 2 1
Using matrix inversion,
 26 11 −9   26 15 −8
C = 15 12 −6  C  =  11 12 −5
 −8 −5 6   −9 −6 6 

 p1   26 15 −8  9   234 + 480 − 504  210 10

 p  = 1  11 12 −5 32  = 1  99 + 384 − 315  = 1 168  =  8 
 2  21     21   21    
 p3   −9 −6 6   63  −81 − 192 + 378  105   5 

From the supply equation for each good

q1 = −6 + 10 = 4 q2 = −4 + 2(8) = 12 q3 = −5 + 3(5) = 10

15
From the demand function for the first good we see its quantity demanded is positively related to the
price of the second good and negatively to that of the third good. This implies goods one and two are
substitutes and one and three – complements. The third demand function also shows goods one and
three are complements. At the same time the second and the third good seem to be complements,
which is logical given that good one and three are complements and good one and two are substitutes.

4. Determine the equilibrium prices of three related goods that satisfy the condition:
p1 + 2 p2 + 2 p3 = 40
p1 + 3 p2 + 4 p3 = 67
p1 + 4 p2 + 5 p3 = 84
Use whichever matrix method you find most suitable.
Solution:
In a matrix form,
1 2 2   p1   40 
1 3 4   p  = 67 
  2  
1 4 5   p3  84 

Developing the determinant by the first column,

A = 15 − 16 − 10 + 8 + 8 − 6 = −1

Using matrix inversion,

 −1 −1 1   −1 −2 2 
C =  −2 3 −2  C  =  −1 3 −2 
 2 −2 1   1 −2 1 

 p1   −1 −2 2   40   1 2 −2   40   40 + 134 − 168   6 
 p  = −1  −1 3 −2  67  =  1 −3 2  67  =  40 − 201 + 168  =  7 
 2          
 p3   1 −2 1  84   −1 2 −1 84   −40 + 134 − 84 10

5. A consumer consumes two goods, the quantities of which are x and y , and whose total amount is
28. The price of x is $3, that of y is $5 and his total budget on the two goods is $120. Use the matrix
method to find the quantities of the two goods.
Solution:
x + y = 28
3 x + 5 y = 120
Writing in a matrix form,
1 1  x   28 
3 5  y  = 120
    
A =5−3= 2  0

Using Cramer’s rule,

16
 28 1 1 28
A1 120 5 140 − 120 A2 3 120 120 − 84
x= = = = 10 y= = = = 18
A 2 2 A 2 2

When the consumer spends his budget fully, he buys 10 units of the first good and 18 units of the
second.

6. A firm buys two inputs, labor L and capital K , the total amount of which cannot exceed 50. The
wage is $8 and the rental rate is $10. The firm can at most spend $440 on the two inputs. What are the
quantities of the two inputs the firm must buy in order to produce a maximum output? Use the matrix
approach.
Solution:
L + K = 50
8 L + 10 K = 440
Given in a matrix form,
1 1   L   50 
8 10   K  =  440
    
A = 10 − 8 = 2  0

Using Cramer’s rule,

50 1 1 50
A1 440 10 500 − 440 A2 8 440 440 − 400
L= = = = 30 K= = = = 20
A 2 2 A 2 2

The firm can at most buy 20 machines and hire 30 workers.

7. Suppose the demand and supply functions on the market for milk are given by qd = 90 − 4 p and
qs = 6 + 2 p , respectively.
a) What are the equilibrium quantity and price of milk? Determine the total consumer
surplus and producer surplus on the market for milk.
b) If a price floor of 20 is set, what will be the resulting market surplus? Find the
deadweight social loss caused by the price floor.
c) Provide a graph that shows the equilibrium point, the consumer and producer surpluses
and the effect of the price floor.
Solution:
a) 90 − 4 p = 6 + 2 p
6 p = 84
pe = 14

qe = 6 + 2(14) = 34 where the intercepts are found as

90
qd (0) = 90 pd (0) = = 22.5 qs (0) = 6 ps (0) = −3
4
(22.5 − 14)34 (6 + 34)14
CS = = 7.5(17) = $144.5 PS = = 20(14) = $280 - area of a trapezoid
2 2
b) p f = 20
17
qd (20) = 90 − 4(20) = 10

qs (20) = 6 + 2(20) = 46

The market surplus is the excess supply or qs − qd = 46 − 10 = 36 . Since only 10 units are traded after
the trade floor is imposed, there is a deadweight social loss which is net loss in both consumer and
producer surplus.
(20 − 14)(34 − 10) (14 − 2)(34 − 10)
DSL = + = 72 + 144 = 216
2 2
c)
p

22.5
20
CS
14 DSL
D
PS
2
6 34 90
q
-3

Figure 2

8. Suppose the demand and supply functions on the market for milk are given by qd = 70 − p and
1
qs = p − 10 , respectively.
3
a) What are the equilibrium quantity and price of milk? Determine the total producer surplus
enjoyed by milk producers. What is the consumer surplus?
b) Determine the quantity demanded, the quantity supplied and the shortage resulting from
the imposition of a price ceiling of 45 per gallon of milk. Is there a deadweight social loss
resulting from the price ceiling?
c) Provide a graph that shows the equilibrium point, the producer surplus and the effect of
the price ceiling.
Solution:
p
a) 70 − p = − 10
3
4p
= 80
3
pe = 60
From the demand function
qe = 70 − 60 = 10

(70 − 60)10 (60 − 30)10

CS = = 50 PS = = 150
2 2
b) pc = 45

18
qd (45) = 70 − 45 = 25

45
qs (45) = − 10 = 5
3
The price ceiling causes a market shortage of 20 units. Only 5 units are traded after the trade ceiling is
imposed instead of the equilibrium 10. This causes a deadweight social loss to the amount
(65 − 60)(10 − 5) (60 − 45)(10 − 5) 25 75
DSL = + = + = 50
2 2 2 2
c)
p
S
70
65
60 DSL
45
30 D

-10 5 10 70
q
Figure 3

9. Suppose the demand and supply functions on the market for milk are given by qd = 50 − p and
1
qs = p − 6 , respectively.
3
a) What are the equilibrium quantity and price of milk? Determine the producer and the
consumer surplus.
b) Determine the quantity demanded, the quantity supplied and the shortage resulting from
the imposition of a price ceiling of 30 per gallon of milk. What is the deadweight social
loss caused by the price ceiling?
c) Provide a graph that shows the equilibrium point, the producer and consumer surplus and
the effect of the price ceiling.
Solution:
p
a) 50 − p = −6
3
4p
= 56
3
pe = 42
From the demand function
qe = 50 − 42 = 8

(50 − 42)8 (42 − 18)8

CS = = 32 PS = = 96
2 2
b) pc = 30

qd (30) = 50 − 30 = 20

19
 30
qs (30) = −6= 4
3
The market shortage caused by the price ceiling is 16 units. Only 4 units are traded after its imposition
instead of the equilibrium 8. Thus the deadweight social loss is
(46 − 42)(8 − 4) (42 − 30)(8 − 4)
DSL = + = 8 + 24 = 32
2 2
c)
p
S
50
46
42 DSL
30
18 D

-6 4 8 50
q
Figure 4

10. Suppose the demand and supply functions on the market for milk are given by qd = 60 − p and
p
qs = − 4 , respectively.
3
a) What are the equilibrium quantity and price of milk? Determine the total producer surplus
enjoyed by milk producers. What is the consumer surplus?
b) Determine the quantity demanded, the quantity supplied and the shortage resulting from
the imposition of a price ceiling of 45 per gallon of milk. What is the deadweight social
loss from this price control?
c) Provide a graph that shows the equilibrium point, the producer surplus and the effect of
the price ceiling.
Solution:
p
a) 60 − p = −4
3
4p
= 64
3
pe = 48
From the demand function
qe = 60 − 48 = 12

(60 − 48)12 (48 − 12)12

CS = = 72 PS = = 216
2 2
b) pc = 45

qd (45) = 60 − 45 = 15

45
qs (45) = − 4 = 11
3
20
The market shortage caused by the price ceiling is 4 units. After it is imposed the quantity traded falls
from 12 to 11. Thus the deadweight social loss is
(49 − 48)(12 − 11) (48 − 45)(12 − 11) 1 3
DSL = + = + =2
2 2 2 2
c)
p
S
60
49
48 DSL
45
12 D

-4 11 12 60
1 q
Figure 5

11. Suppose the demand and supply functions on the market for milk are given by qd = 100 − 2 p and
qs = 5 + 3 p , respectively.
a) What are the equilibrium quantity and price of milk? Find the total consumer surplus and
producer surplus on the market for milk.
b) If a price floor of 30 is set, what will be the resulting market surplus? What is the amount
of the deadweight social loss caused by the ceiling?
c) Provide a graph that shows the equilibrium point, the consumer and producer surpluses
and the effect of the price floor.
Solution:
a) 100 − 2 p = 5 + 3 p
5 p = 95
pe = 19
From the supply function
qe = 5 + 3(19) = 62

(50 − 19)62 (5 + 62)19 1273

CS = = 961 PS = = - area of a trapezoid
2 2 2
b) p f = 30

qd (30) = 100 − 2(30) = 40

qs (30) = 5 + 3(30) = 95

The market surplus is the excess supply or 55. Since 40 units are traded instead of 62, there is a net
loss in consumer and producer surplus.
(30 − 19)(62 − 40) (19 − 35 / 3)(62 − 40) 22(11) 605
DSL = + = 121 + =
2 2 3 3

21
c)

p
S
50
30

19 DSL
D
35/3

40 62 100
q
-5/3

Figure 6

12. The demand and supply functions are given by

p = 120 − 5qd
q
p = 24 + s
3
where p, qd and q s are, respectively, the price, quantity demanded and quantity supplied of the good.
Find the equilibrium quantity and price. If the government imposes a per unit sales tax of $32, what is
the new quantity traded, the price that consumers pay and the price that producers receive? Who pays
more of the tax?
Solution:
Prior to the tax
q
120 − 5q = 24 +
3
16q
= 96
3
q = 18
From the supply equation
18
p = 24 + = 30
3
After the imposition of the tax we have
pb − ps = t
Substituting,
qt
120 − 5qt − 24 − = 32
3
where qt is the quantity traded after tax. Solving,
16qt
= 64
3
qt = 12
As can be expected, after the tax is imposed quantity traded goes down to 12 units. The new price that
consumers now pay is
pb = 120 − 5(12) = 60
22
For consumers
12
ps = 24 + = 28
3
is the new price they receive. It can be easily seen that the difference is exactly the value of the tax,
$32. Thus the tax is shared between the two groups, but while producers only lose $2 per unit,
consumers seem much more hurt by the tax. Instead of paying a price of $30, they end up paying 60.
Thus the price doubles for them. The reason is that consumers are much more inelastic than producers
in this market – the slope of the demand function is 5, while that of supply only 1 3 . Expressed in the
form of total tax burden this is
Tax paid by buyers ( pb − p ) qt = (60 − 30)12 = $360

Tax paid by suppliers ( p − ps ) qt = (30 − 28)12 = $24

The total tax revenue to the government is the sum of the two or $384.

13. On the market for bananas demand is given by p = 25 − 0.05qd and supply by p = 4 + 0.02qs .
Find the equilibrium price and quantity. When a sales tax of $5 per unit is imposed quantity traded
decreases by one third.
a) Find the new quantity traded, the price paid by consumers and that received by banana
suppliers. Which market group bears more of the tax incidence? Explain why. What are the
total tax revenues to the government?
b) Find the loss in the consumer and producer surplus resulting from the imposition of the
sales tax. Express the deadweight social loss caused by the sales tax. Provide a graph showing
the pre-tax and the after-tax situation.

Solution:
a) In equilibrium
25 − 0.05q = 4 + 0.02q
0.07 q = 21
q = 300
p = 25 − 0.05(300) = 10

After the imposition of the tax the quantity traded becomes qt = 200 which is one third of the
equilibrium quantity. Along the demand curve
pb = 25 − 0.05(200) = 15 is the new price the consumers end up paying. Similarly for banana
suppliers
ps = 4 + 0.02(200) = 8
They now receive a price of 8 compared to the previous price of 10. At the same time consumers end
up paying 15 instead of the equilibrium level 10. Expressed in the form of total tax burden this is
Tax paid by buyers ( pb − p )qt = (15 − 10)200 = $1000

Tax paid by suppliers ( p − ps )qt = (10 − 8)200 = $400

The total tax revenue to the government is the sum of the two or $1,400. As the numbers show, most
of the tax incidence is on consumers. This is because they are the less elastic market force. From the
demand function we can deduce that its slope is 0.05, while that of the supply function is 0.02 which
shows supply is more elastic than demand. Therefore, banana suppliers bear less of the tax incidence.

23
b) To find the loss in the consumer surplus, we simply subtract the new surplus from the old one, i.e.
the area of an upper triangle from the one before the imposition of the tax. The consumer surplus at
the Pareto-optimal point is
(25 − 10)300
CS = = $2250
2
and after the tax is imposed
(25 − 15)200
CSt = = $1000
2
Hence, the loss in the consumer surplus is
CS − CSt = 2250 − 1000 = $1250
Alternatively, we can find the area of the trapezoid that represents the loss of that surplus.
(200 + 300)(15 − 10)
Loss of CS = $1250 which gives the same result. Similarly for banana
2
suppliers the loss in producer surplus is
(200 + 300)(10 − 8)
PS − PSt = = $500
2
To find the deadweight social loss from the tax which is the uncompensated loss of consumer or
producer surplus, we should subtract the total tax revenue to the government from the total loss of
social surplus. The loss of total social surplus thus is
1250 + 500 = $1750
Out of this total loss $1400 is compensated for in the form of government revenue form the tax.
Therefore, the net loss or the deadweight social loss is
DSL = 1750 − 1400 = 350
We have seen that since the tax levied on bananas moves trade away from the Pareto-optimal
equilibrium quantity traded, this inevitably leads to deadweight social loss. Graphically, this can be
represented as

25

S = 4 + 0.02q

15

DSL
10

8
D = 25 − 0.05q
4

200 300 q (bananas)

Figure 7

24
14. On the market for apples demand is given by p = 88 − 0.8qd and supply by p = 10 + 0.5qs . Find
the equilibrium price and quantity. When a sales tax of $39 per unit is levied quantity traded on the
market for apples decreases by one half.
a) Find the new quantity traded, the price paid by consumers and that received by producers.
Which market group bears more of the tax incidence? Explain why. What are the total tax
revenues to the government?
b) Find the loss in the consumer and producer surplus resulting from the imposition of the
sales tax. Express the deadweight social loss caused by the sales tax. Provide a graph showing
the pre-tax and the after-tax situation on the market for apples.
Solution:
a) In equilibrium
88 − 0.8q = 10 + 0.5q
1.3q = 78
q = 60
p = 10 + 0.5(60) = 40

After the tax the quantity traded goes down by half which means it is qt = 30 . Along the demand
curve
pb = 88 − 0.8(30) = 64 is the new price the consumers pay. For apple producers

ps = 10 + 0.5(30) = 25 is the new price producers get. This is less than the original equilibrium price
of 40 by 15. Consumers, on the other hand, end up paying 64 compared to the previous price of 40
which is an increase of 24. The total tax burden thus is
Tax paid by buyers ( pb − p )qt = (64 − 40)30 = $720

Tax paid by suppliers ( p − ps )qt = (40 − 25)30 = $450

The total tax revenue to the government therefore is $1,170. Most of the burden of the tax is on
consumers. As can be seen from the demand function, they are the less elastic market force – the slope
of the demand function is 0.8, while that of the supply function is 0.5. However, since the difference
in the elasticity is rather small, the two market forces end up paying nearly the same amount of the
tax. In other words, the burden of the tax is somewhat shared between the two market groups.

b) To find the loss in the consumer surplus, we find the old and the new consumer surplus. The
consumer surplus at the Pareto-optimal point is
(88 − 40)60
CS = = $1440
2
and after the tax is imposed
(88 − 64)30
CSt = = $360
2
Therefore, the loss in consumer surplus due to the imposition of the tax is
CS − CSt = 1440 − 360 = $1080
Alternatively, from the area of the trapezoid lost
(30 + 60)(64 − 40)
Loss of CS = $1080
2
is the result obtained previously. For apple producers the loss in producer surplus is
(30 + 60)(40 − 25)
PS − PSt = = $675
2

25
To find the deadweight social loss from the tax which is the net loss in consumer or producer surplus,
we should subtract the total tax revenue to the government from the total loss of social surplus. The
loss of total social surplus thus is
1080 + 675 = $1755
Out of this total loss $1170 is compensated for in the form of government revenue form the tax.
Therefore, the net loss or the deadweight social loss is
DSL = 1755 − 1170 = $585
Since the tax levied on apples reduces the equilibrium quantity traded, this inevitably leads to
deadweight social loss. Graphically, this can be represented as

D = 88 − 0.8q

88

S = 10 + 0.5q

64

DSL
40

25

10 D = 88 − 0.8qd

30 60 S = 10 (apples)
+ 0.5q
Figure 8

p
15. The demand and supply functions for a good are qd = 60 − and qs = 10 + 2 p . Find the
2
equilibrium price and quantity. Suppose a tax of $2 per unit is imposed on the good. What is the new
quantity traded? What is the price that consumers pay and producers get? What are the total tax
revenues to the government? What is the loss to the producers?
Solution:
In equilibrium
p
60 − = 10 + 2 p
2
5p
= 50
2
p = 20 q = 10 + 2(20) = 50
After the tax is imposed
p+2 p
60 − = 10 + 2 p and 60 − = 10 + 2( p − 2)
2 2
5p 5p
= 49 = 54
2 2
ps = 19.6 pb = 21.6

26
Thus after the tax the price that buyers pay is 21.6 and what producers receive is 19.6, the difference
being the per unit tax. For the equilibrium quantity we have
21.6
qd = 60 − = 49.2 or alternatively qs = 10 + 2(19.6) = 49.2
2
Therefore, the quantity traded goes down. The total tax revenue to the government is
T = tqt = 2(49.2) = 98.4
Before tax
TR1 = 20(50) = 1000

TR2 = 19.6(49.2) = 964.32

TR2 − TR1 = 964.32 − 1000 = −35.68

16. The demand and supply functions for a good are qd = a − bp and qs =  +  p . Find the
equilibrium price and quantity. Suppose a tax of t per unit is imposed on the good. What is the new
quantity traded and by how much does quantity fall? What is the price that consumers pay and
producers get? What is the total tax revenue the government collects with the tax?
Solution:
In equilibrium
a − bp =  +  p
a − b( a −  ) a  +  b
p= q =a− =
b+ b+ b+
After the tax
a − b( p + t ) =  +  p and a − bp =  +  ( p − t )
a − bp − bt =  +  p a − bp =  +  p −  t
a −  − bt a − + t
ps = pb =
b+ b+
It could easily be checked that the price producers get is lower than the price consumers pay exactly
by the amount of the tax. To find the new quantity traded we could take either function
b( a −  +  t ) a  +  b − b  t
qt = a − =
b+ b+
b t
We can easily see the quantity falls down by . The total tax revenue to the government is
b+
t (a +  b − b t ) (a +  b)t − b t 2
T = tqt = =
b+ b+

17. Consider the nonlinear market equilibrium model where the functions of demand and supply are
given by
qd = 5 − p 2 qs = 12 p − 8
Find the equilibrium price and quantity. Provide a graph.
Solution:
For equilibrium

27
qd = q s
5 − p 2 = 12 p − 8
p 2 + 12 p − 13 = 0
D = 36 + 13 = 49
p1 = −6 − 7 = −13  0 p2 = p = −6 + 7 = 1
From the supply function
q = 12(1) − 8 = 4

q s = 12 p − 8
5

qd = 5 − q 2

0
1 p

-4

Figure 9

18. Given the supply and demand functions

p = qs2 + 2qs + 20
p = − qd2 − 4qd + 76
find the equilibrium price and quantity. Provide a graph.
Solution:
Assuming equilibrium

q 2 + 2q + 20 = − q 2 − 4q + 76
2q 2 + 6q − 56 = 0
D = 9 + 112 = 121
−3 − 11 −3 + 11
q1 = = −7  0 q2 = =4
2 2
Therefore, q = 4 . From the supply equation

p = 42 + 2(4) + 20 = 44
Graphing the functions,

28
 p
76
S = q s2 + 2q s + 20
44

D = − q d2 − 4q d + 76
20

0
q
4
Figure 10

19. The demand for bananas is given by the function qd =  −  p +  I where p is the price of
bananas and I is consumer income. The supply of bananas is qs =  +  p . It is known that
 ,  ,  ,  ,  are all positive parameters. Express equilibrium price and quantity on the market for
bananas. Are bananas a normal or an inferior good? How are equilibrium price and quantity of
bananas related to consumer income?
Solution:
qd = q s
 − p +I = + p
( +  ) p =  +  I − 
 + I −  ( +  I −  )  +  ( +  I )
p= q = + =
 +  +  +
Since demand increases with consumer income (   0 ), bananas are a normal good. Equilibrium price
and quantity are also positively related to income.

20. A two-commodity market model is given where Qd1 and Qs1 are demand and supply for the first
commodity, Qd2 and Qs2 are, respectively, demand and supply for the second commodity and the
prices of the two commodities are P1 and P2 :

Qd1 = mo + m1 P1 + m2 P2 Qd2 = po + p1P1 + p2 P2

Qs1 = no + n1P1 + n2 P2 Qs2 = qo + q1P1 + q2 P2

Equating Qd = Qs = Q and using the demand and supply functions for the second commodity
construct the coefficient matrix, the variable-term vector and the constant-term vector. Solve for P1
and P2 with the help of Crammer’s rule.
Solution:
p1 P1 + p2 P2 = Q − po
q1 P1 + q2 P2 = Q − qo

29
 p1 p2   P1  Q − po 
q = 
 1 q2   P2   Q − qo 
coefficient variable-term constant-term
matrix matrix matrix

p1 p2
A= = p1q2 − p2 q1  0
q1 q2

Q − po p2
Q − qo q2 Qq2 − po q2 − Qp2 + p2 qo Q ( q2 − p2 ) + p2 qo − po q2
P1 = = = 0
p1q2 − p2 q1 p1q2 − p2 q1 p1q2 − p2 q1

p1 Q − po
q1 Q − qo Qp1 − p1qo − Qq1 + po q1 Q ( p1 − q1 ) + po q1 − p1qo
P2 = = = 0
p1q2 − p2 q1 p1q2 − p2 q1 p1q2 − p2 q1

21. For the previous problem assuming a general market equilibrium find the two equilibrium prices
P1 and P2 through matrix inversion.
Solution:
Qd1 = mo + m1 P1 + m2 P2
Qs1 = no + n1 P1 + n2 P2
Qd2 = po + p1 P1 + p2 P2
Qs2 = qo + q1 P1 + q2 P2

mo − no + ( m1 − n1 ) P1 + ( m2 − n2 ) P2 = 0
po − qo + ( p1 − q1 ) P1 + ( p2 − q2 ) P2 = 0

 m1 − n1 m2 − n2   P1   −mo + no 
 =
p −q
 1 1 p2 − q2   P2   − po + qo 

A = (m1 − n1 )( p2 − q2 ) − (m2 − n2 )( p1 − q1 )  0

 p − q2 − p1 + q1   p − q2 −m2 + n2 
C= 2 C =  2
 −m2 + n2 m1 − n1  
 − p1 + q1 m1 − n1 
 P1  1  p2 − q2 −m2 + n2   −mo + no 
 =   
 P2  (m1 − n1 )( p2 − q2 ) − (m2 − n2 )( p1 − q1 )  − p1 + q1 m1 − n1   − po + qo 

22. In the two-commodity general equilibrium model solve for the two equilibrium prices p1 , p2
using the matrix inversion method. Use that demand and supply for the first commodity are
qd1 = ao + a1 p1 + a2 p2
qs1 = bo + b1 p1 + b2 p2 and for the second

qd2 =  o + 1 p1 +  2 p2
qs2 =  o + 1 p1 +  2 p2

30
Solution:
In the conditions of general-market equilibrium we should have
qd1 = qs1 and
qd 2 = q s2

Therefore,
ao + a1 p1 + a2 p2 = bo + b1 p1 + b2 p2
 o + 1 p1 +  2 p2 =  o + 1 p1 +  2 p2
Rearranging,
(a1 − b1 ) p1 + (a2 − b2 ) p2 = bo − ao
(1 − 1 ) p1 + ( 2 −  2 ) p2 =  o −  o

Setting ai − bi = ci and  i −  i =  i we get

c1 p1 + c2 p2 = −co
 1 p1 +  2 p2 = − o
Writing in a matrix form,
 c1 c2   p1   −co 
    p  =  − 
 1 2 2  o
A = c1 2 − c2 1  0

Since the determinant A should be different from zero we should have c1 2  c2 1 . Furthermore,

 − 1   −c2 
C= 2 C =  2
 −c2 c1   − 1 c1 

 p1  1  2 −c2   −co  1  −co 2 + c2 o 

 =     =
c1   − o  c1 2 − c2 1  co 1 − c1 o 
 p2  c1 2 − c2 1  − 1
which is the same as the result obtained previously,
c2 o − co 2 co 1 − c1 o
p1 = 0 and p2 = 0
c1 2 − c2 1 c1 2 − c2 1
where we expect both prices to be positive.

23. From the national-income model find the equilibrium values of Y and C .
Y = C + I o + Go
C = 18 + 0.8Y − 0.002Y 2
for I o = 12 and Go = 10 .
Solution:
Substituting the second into the first equation,

Y = 18 + 0.8Y − 0.002Y 2 + 12 + 10

0.002Y 2 + 0.2Y − 40 = 0
31
0.001Y 2 + 0.1Y − 20 = 0
D = 0.01 + 0.08 = 0.09
−0.1 − 0.3 −0.1 + 0.3
Y= = −200  0 Y= = 100  0
2(0.001) 2(0.001)
For equilibrium aggregate consumption

C = 18 + 0.8(100) − 0.002(100) 2 = 18 + 80 − 20 = 78
As we can see, most of the national income, 78 percent is in the form of consumption, 12 percent is
taken by aggregate investment and government spending is 10 percent.

24. Consider the national-income model

Y = C + I o + Go
C = 16 + 4 Y
Find the equilibrium values of Y and C for I o = 10 and Go = 6 .
Solution:
Substituting the second into the first equation,
Y = 16 + 4 Y + 16
Y − 4 Y − 32 = 0
D = 4 + 32 = 36

Y = 2 − 6 = −4  0 Y =2+6=8
Y1 = 16 Y2 = 64
Clearly the first root is implausible. For equilibrium aggregate consumption we have

C = 16 + 4 64 = 48

25. National income is the sum of aggregate consumption and aggregate savings. Income that is not
consumed is being saved and vice versa. Therefore,
Y =C+S
If the specific aggregate consumption function is given by
C = 16 + 0.7Y
express the aggregate savings function S and the two marginal propensities – to consume and to
spend. Graph the two aggregate functions in relation to national income in the general case of
C =  +  Y . How are consumption and savings interrelated?
Solution:
From the main identity
S =Y −C
Substituting for consumption
S = Y − 16 − 0.7Y = 0.3Y − 16
From the consumption function we can easily see that

32
MPC = 0.7
and form the savings function
MPS = 0.3
Evidently
MPC + MPS = 1
where 70 percent of national income is consumed and 30 percent is saved. Both functions are
positively related to income which could be graphed by

C =  + Y

Y
Figure 11

where in this specific case we have for the autonomous consumption  = 16 and for the marginal
propensity to consume  = 0.7 which gives the slope of the consumption function. Thus the higher
the MPC , the steeper the line of the consumption function. This means that the higher the MPC , the
more rapidly consumption increases with the increase in income. For the savings function

S = − + (1 −  )Y

 Y
−
1− 

Figure 12

We see that savings also increase with income but initially, when no income is generated in the
economy, their value is negative – it is exactly the amount of autonomous consumption. This implies
that when the nation is not producing anything, it still has to consume some positive amount and this
amount comes from negative savings, that is, the net borrowing the nation has to resort to, if it is not
producing anything. In the general case the aggregate savings function is
S = − + (1 −  )Y = − + sY
where the marginal propensity to save s in our specific example is exactly 0.3. The higher the value
of MPS is, the faster savings grow, as national income increases.
33
26. The National-Income Model is:
Y = C + I o + Go
a0 b  ( 0,1)
C = a + b(Y − T )
d 0 t  ( 0,1)
T = d + tY
List the variables in the order C , Y , T and solve by matrix inversion.
Solution:

−C + Y = I o + Go  −1 1 0  C   I o + Go 
C − bY + bT = a  1 −b b  Y  =  a 
    
−tY + T = d  0 −t 1  T   d 

−b b 1 b
A = −1 −1 = − ( −b + bt ) − 1 = b − bt − 1  0
−t 1 0 1
The determinant is definitely different from 0 since b is less than 1. Thus the determinant is negative.
C11 = −b + bt C12 = −1 C13 = −t C21 = −1 C22 = −1
C23 = −t C31 = b C32 = − ( −b ) = b C33 = b − 1

bt − b −1 −t  bt − b −1 b 
C =  −1 −1 −t  C  =  −1 −1 b 
 b b b − 1  −t −t b − 1

C  bt − b −1 b   I o + Go 
  1   
Y  = b − bt − 1  −1 −1 b   a 
T   −t −t b − 1  d 
 
C  b − bt 1 −b   I o + Go 
   1 −b   a 
1
Y  = bt − b + 1  1
T   t t 1 − b   d 
 
C  b (1 − t ) ( I o + Go ) + a − bd 
  1  
Y  = bt − b + 1  I o + Go + a − bd 
T   ( I o + Go ) t + at + d (1 − b ) 
   

27. The National-Income Model is:

Y = C + Io + G
C = a + b(Y − To ) a0, 0  b 1
G = gY 0  g 1
List the variables in the order C , Y , G and solve using matrix inversion. Set the conditions for a
unique set of endogenous variables to exist in your equilibrium model.

Solution:
−C + Y − G = I o
C − bY = a − bTo
− gY + G = 0

34
 −1 1 −1 C   I o 
 1 −b  
 0   Y  =  a − bTo 
 0 − g 1  G   0 
 
 −b −1 − g   −b g −1 −b 
C =  g − 1 −1 − g  C =  −1
 −1 −1 
 −b −1 b − 1  − g −g b − 1
C   −b g − 1 −b   I o  b 1− g b   Io 
       1   a − bTo  =
1 1
Y  =  −1 −1 −1   a − bTo  =  1 1
  g + b − 1  − g − g b − 1  0  1 − b − g  g 1 − b   0 
G      g

bI o + (1 − g )(a − bTo ) 

=
1  I o + a − bTo 
1− b − g  
 gI o + g (a − bTo ) 

We need b + g  1 in order to have a unique set of solutions.

28. For the specific national-income model given:

Y = C + I o + Go
C = 60 + 0.9(Y − T )
T = 30 + 0.2Y
where I o = 31 and Go = 20 find the values of the endogenous variables solving by matrix inversion.
Solution:
Y − C = 31 + 20
−0.9Y + C + 0.9T = 60
−0.2Y + T = 30

 1 −1 0  Y   51
 −0.9 1 0.9  C  = 60 
    
 −0.2 0 1  T  30 

Expanding the determinant along the first row,

−0.9 0.9
A =1+1 = 1 − 0.9 + 0.18 = 0.28  0
−0.2 1
To find the inverse matrix
 1 0.72 0.2   1 1 −0.9 

C= 1 1 0.2  
C  = 0.72 1 −0.9 
 −0.9 −0.9 0.1  0.2 0.2 0.1 

Y   1 1 −0.9   51  51 + 60 − 27   300 

  1     1    
C  = 0.28 0.72 1 −0.9  60  = 0.28 36.72 + 60 − 27  =  249 
T   0.2 0.2 0.1  30   10.2 + 12 + 3   90 
 

35
More than 80 percent of the national income is consumption and the rest is taken by investment and
government spending. Of all the consumption nearly one fourth is autonomous, while the
nonautonomous is 90 percent of the disposable income.

29. In the following national-income model:

Y = C + I o + Go
C = 22 + 0.8(Y − T )
T = 15 + 0.2Y
where I o = 15 find the values of the endogenous variables, if you know that the nation maintains a
balanced budget, that is, the government spending is exactly equal to the total tax revenues. Use the
matrix approach.
Solution:
With the assumption of balanced budget we have Go = T and we can write

Y = C + I o + Go
C = 22 + 0.8(Y − T )
T = 15 + 0.2Y
Y − C − T = 15
−0.8Y + C + 0.8T = 22
−0.2Y + T = 15

 1 −1 −1  Y  15 
 −0.8 1 0.8 C  =  22 
    
 −0.2 0 1  T  15 

Expanding the determinant along the last row,

A = −0.2(−0.8 + 1) + 1(1 − 0.8) = −0.04 + 0.2 = 0.16

To find the inverse matrix

 1 0.64 0.2   1 1 0.2 
C =  1 0.8 0.2  C = 0.64 0.8 0 
 
0.2 0 0.2   0.2 0.2 0.2 

Y   1 1 0.2  15  15 + 22 + 3  250

  1     1    
C  = 0.16 0.64 0.8 0   22 = 0.16  9.6 + 17.6  = 170 
T   0.2 0.2 0.2 15   3 + 4.4 + 3   65 
 
With a balanced budget the government could spend no more than the total tax collected, which is 65.

30. Solve the national-income model:

Y = C + Io + G
C = 26 + 0.8(Y − To )
G = 0.25Y
where I o = 50 and To = 120 . Does the government incur a budget surplus or a budget deficit
according to this model? Choose whichever matrix method you deem more suitable.

36
Solution:
Y − C − G = 50
−0.8Y + C = 26 − 0.8(120)
−0.25Y + G = 0
Y − C − G = 50
−0.8Y + C = −70
−0.25Y + G = 0
Written in a matrix form

 1 −1 −1  Y   50 
 −0.8 1 0  C  =  −70 
    
 −0.25 0 1  G   0 
 
A = −0.25 + 1 − 0.8 = −0.05
50 −1 −1
−70 1 0
A1 0 0 1 50 − 70
Y = =− =− = 400
A 0.05 0.05

1 50 −1
−0.8 −70 0
−0.25 0 1 −0.25(−70) − 70 + 0.8(50) 17.5 − 30
C =− =− =− = 250
0.05 0.05 0.05
1 −1 50
−0.8 1 −70
−0.25 0 0 0.25(70 − 50)
G=− = = 100
0.05 0.05
Comparing equilibrium government spending G = 100 with taxes To = 120 , we see that taxes exceed
government spending by 20. Thus the country has a budget surplus.

31. In the Keynesian model

Y = C + I + Go
C = a + b(Y − To )
I =  − i
M so =  Y −  i

Y is national income, C is aggregate consumption, I is investment, G is government spending, To

is tax collection, M so is money supply and i is the interest rate. The parameters a, b,  ,  ,  ,  are all
positive where for the marginal propensity to consume b  (0,1) . Find the equilibrium values of Y
and i .
Solution:
Substituting in the first equation and rewriting the last one we get
Y = a + b(Y − To ) +  −  i + Go
37
M so =  Y −  i

(1 − b)Y +  i = a − bTo +  + Go
 Y −  i = M so
Writing in a matrix form,
1 − b   Y   a − bTo +  + Go 
=
 
 −   i   M so 

The determinant is
A = − (1 − b) −   0

 − −   − −  
C=  C =  
− 1 − b  − 1 − b 
Y  1  − −    a − bTo +  + Go 
 =   =
 i  − (1 − b) −   − 1 − b   M so 
1     a − bTo +  + Go 
=  −(1 − b)   =
 (1 − b) +    M so 
1   (a − bTo +  + Go ) +  M so 
=
 (1 − b) +   (a − bTo +  + Go ) − (1 − b) M so 

32. For the Keynesian IS-LM model given in the previous problem try to solve using four equations
instead of two:
Y = C + I + Go
C = a + b(Y − To )
I =  − i
M so =  Y −  i
Solution:
Rewriting the equations
Y − C − I = Go
−bY + C = a − bTo
I + i = 
 Y −  i = M so
Writing in a matrix form,

 1 −1 −1 0  Y   Go 
 
 −b 1 0
 0  C   a − bTo 
=
 0 0 1  I    
    
 0 0 −   i   M so 

The determinant is most easily found by the last row

A = −  −  (1 − b)  0

Since the determinant is nonzero, the system has a viable set of solutions.
38
  − −b  − 
 − −  −   − 
C=
 − −b − (1 − b) − 
 
− −b −  (1 − b) 1 − b 

 − − − − 
 −b −  −  −b −b 
C = 
   − (1 − b) −  (1 − b) 
 
 − − − 1− b 
Y   − − − −    Go 
 
C  = 1 
 −b −  −  −b −b   a − bTo 
=
 I  A    − (1 − b) −  (1 − b)    
    
 i   − − − 1 − b   M so 
       Go 
1
 b  + 
 b b   a − bTo 
= =
 (1 − b) +   −  −   (1 − b)  (1 − b)    
  
    −(1 − b)   M so 
  (Go + a − bTo +  ) +  M so 
b (G +  ) + (  +  )(a − bT ) + b M 
1  so 
= o o

 (1 − b) +   −  (Go + a − bTo ) + (1 − b)( +  M so ) 

 
  (Go + a − bTo +  ) − (1 − b) M so 
Comparing the results from a previous solution for Y and i we see that they are identical

Y  1   (a − bTo +  + Go ) +  M so 
 =  (a − bT +  + G ) − (1 − b) M 
 i   (1 − b) +   o o so 

33. In the Keynesian IS-LM model

Y =C+I
C = 100 + 0.8Y
I = 1000 − 20i
M so = 0.5Y − 30i
where M so = 2350 find the equilibrium values of national income Y and interest rate i .
Solution:
Substituting in the first equation and rewriting the last one yields
Y = 100 + 0.8Y + 1000 − 20i
0.5Y − 30i = 2350
0.2Y + 20i = 1100
0.5Y − 30i = 2350
Written in a matrix form,

0.2 20  Y  1100 
0.5 −30   =  2350
 i   

39
 A = −6 − 10 = −16
1100 20 0.2 1100
2350 −30 33,000 + 47,000 0.5 2350 470 − 550
Y =− = = 5,000 i =− =− = 5%
16 16 16 16

34. In the Keynesian IS-LM model

Y =C+I
C = 800 + 0.8Y
I = 4000 − 300i
L = 0.85Y − 400i
M so = L
in equilibrium money supply equals money demand L on the money market and it is known that
M so = 10,350 . Find the equilibrium values of national income Y and interest rate i . How does
money demand depend on national income?
Solution:
Substituting in the first equation and rewriting the last one yields
Y = 800 + 0.8Y + 4000 − 300i
0.85Y − 400i = 10,350
0.2Y + 300i = 4800
0.85Y − 400i = 10,350
Written in a matrix form,

 0.2 300  Y   4800 

0.85 −400   = 10,350
 i   
A = −80 − 255 = −335
4800 300
10,350 −400 (19, 200 + 31,050)100
Y =− = = 15,000
335 335
0.2 4800
0.85 10,350 2070 − 4080
i =− =− = 6%
335 335
Money demand is positively related to income and negatively to interest rate. As the nation’s income
grows, its transaction demand for money increases. If the interest rate grows, the opportunity cost of
spending money increases and therefore, people would be willing to put their money in the bank.
Demand for money thus falls.

35. Consider the Keynesian IS-LM model

Y =C+I
C = 400 + 0.9Y
I = 1100 − 40i
Lo = 0.6Y − 60i
p = 0.03Y − 8i

40
where Lo = 6750 . The average price level p is given that depends positively on national income and
negatively on the interest rate. Find the equilibrium values of Y , i and p using the matrix method.
Solution:
Substituting in the first equation and rewriting
Y = 400 + 0.9Y + 1100 − 40i
0.6Y − 60i = 6750
0.03Y − 8i − p = 0
0.1Y + 40i = 1500
0.6Y − 60i = 6750
0.03Y − 8i − p = 0
Writing in a matrix form,

 0.1 40 0  Y  1500 
 0.6 −60 0   i  = 6750 
    
0.03 −8 −1  p   0 

The determinant is
A = 6 + 24 = 30
1500 40 0
6750 −60 0
0 −8 −1 90,000 + 270,000
Y= = = 12,000
30 30
0.1 1500
0
0.6 6750 0
0.03 0 −1 −675 + 900
i = = = 7.5%
30 30
0.1 40 1500
0.6 −60 6750
0.03 −8 0 0.03(270,000 + 90,000) + 8(675 − 900) 10,800 − 1800
p= = = = 300
30 30 30

36. Consider the following open economy

Y = C + I + Go + X − M
C = 80 + 0.8Y
I = 50 − 20i
X = 0.3Y − 14i
M = 50 + 0.2Y
in which Go = 190 and the trade deficit is known to be 20. Find Y and i . What is the value of
exports and imports? How much is the marginal propensity to import?
Solution:
Since the country faces a trade deficit we have
X − M = −20

41
Substituting in the national-income equation
Y = 80 + 0.8Y + 50 − 20i + 190 − 20
and from the trade equation we have
0.3Y − 14i − 50 − 0.2Y = −20
Transforming these two equations
0.2Y + 20i = 300
0.1Y − 14i = 30
Written in a matrix form,

0.2 20  Y  300 
 0.1 −14    =  30 
 i   
A = −2.8 − 2 = −4.8
300 20 0.2 300
30 −14 4, 200 + 600 0.1 30 6 − 30
Y =− = = 1,000 i =− =− = 5%
4.8 4.8 4.8 4.8
X = 0.3Y − 14i = 0.3(1000) − 14(5) = 300 − 70 = 230
M = 50 + 0.2Y = 50 + 0.2(1000) = 50 + 200 = 250
As the model assumes, the trade balance of the country is negative at -20. This implies the nation is
importing more than it is exporting. The marginal propensity to import shows the share of national
income that is dedicated to imports, that is, MPI = 0.2 .

37. Consider an ideal global economy consisting of two countries, Home and Foreign, trading with
each other.
Y1 = C1 + I1o + X 1 − M 1 Y2 = C2 + I 2 o + X 2 − M 2
C1 = 320 + 0.8Y1 C2 = 220 + 0.7Y2
M 1 = 0.2Y1 M 2 = 0.1Y2

The first model describes Home, in which exogenous investment is I1o = 100 , and the second shows
the Foreign economy in which I 2 o = 200 . With mutual trade the exports of Home are imports for
Foreign and vice versa. Find the GDP levels of the two countries. How much is the trade between
them and what is the trade balance?
Solution:
Since the exports of Home are imports for Foreign and vice versa, we have
X1 = M 2 and X 2 = M1
Substituting in the two national-income identities,
Y1 = 320 + 0.8Y1 + 100 + 0.1Y2 − 0.2Y1
and for Foreign
Y2 = 220 + 0.7Y2 + 200 + 0.2Y1 − 0.1Y2
Rearranging,
0.4Y1 − 0.1Y2 = 420 (:0.1)
−0.2Y1 + 0.4Y2 = 420 (:0.2)

42
4Y1 − Y2 = 4200
−Y1 + 2Y2 = 2100
Written in a matrix form,

 4 −1  Y1   4200 
 −1 2    =  2100 
  Y2   
A = 8 −1 = 7
4200 −1
2100 2 8, 400 + 2100
Y1 = = = 1500
7 7
4 4200
−1 2100 8, 400 + 4200
Y2 = = = 1800
7 7
For the volume of trade
X 1 = M 2 = 0.1Y2 = 0.1(1800) = 180
X 2 = M 1 = 0.2Y1 = 0.2(1500) = 300
The value of Home’s exports is 180 which is exactly the value of imports for Foreign. Home imports
from Foreign goods and services worth 300. Hence, Foreign exports more than it imports and realizes
a positive trade balance with Home.

38. Two countries, Home and Foreign, trade with each other. Their economies are described by the
following two models.
Y1 = C1 + I1o + X 1 − M 1 Y2 = C2 + I 2 o + X 2 − M 2
C1 =  +  Y1 C2 =  +  Y2  ,  0
M 1 = Y1 M 2 = Y2 0   , ,  ,   1
The first model describes Home, in which exogenous investment is I1o , and the second shows Foreign
in which investment is I 2o . With mutual trade the exports of Home are imports for Foreign and vice
versa. Find the equilibrium GDP levels of the two countries.
Solution:
Since the exports of Home are imports for Foreign and vice versa, we have
X1 = M 2 and X 2 = M1
Substituting in the two national-income identities,
Y1 =  +  Y1 + I1o + Y2 − Y1 and
Y2 =  +  Y2 + I 2 o + Y1 − Y2
Rearranging,
(1 −  +  )Y1 − Y2 =  + I1o
− Y1 + (1 −  +  )Y2 =  + I 2o
Written in a matrix form,

1 −  +  −   Y1   + I1o 
 =
 −
 1 −  +   Y2   + I 2o 

43
 A = (1 −  +  )(1 −  +  ) −  = (1 −  )(1 −  +  ) +  (1 −  ) +  −  =
= (1 −  )(1 −  +  ) +  (1 −  )

 + I1o −
 + I 2o 1 −  +  ( + I1o )(1 −  +  ) +  ( + I 2o )
Y1 = =
A (1 −  )(1 −  +  ) +  (1 −  )
1 −  +   + I1o
−  + I 2o (1 −  +  )( + I 2o ) +  ( + I1o )
Y2 = =
A (1 −  )(1 −  +  ) +  (1 −  )

39. Consider the expanded national-income model:

Y = C + I o + Go + X o − M
C =  + Y  0
M = M o + Y 0  ,  0

where M o is the level of autonomous (non-income related) imports and  is the marginal propensity
to import. Solve for Y , C and M using the matrix approach.
Solution:
Y − C + M = I o + Go + X o
− Y + C = 
− Y + M = M o

 1 −1 1   Y   I o + Go + X o 
 
−
 1 0   C  =   

 −  0 1   M   Mo 

A =  +1−  =1−  +   0

Since 1 −   0 , we get a positive determinant.

1    1 1 −1 

C =  1 1 +  −   
C =  1 +   
 −1  1 −     −  1 −  

Y  1 1 −1   I o + Go + X o   I o + Go + X o +  − M o 
  1     1  
 C  = 1 −  +   1 +      = 1 −  +    ( I o + Go + X o + M o ) + (1 +  ) 
M    −  1 −    Mo    ( I o + Go + X o −  ) + (1 −  ) M o 
 

40. In the IS-LM model savings are given as a share of national income and equal private and public
investment.
sY = I + Go 0  s 1
I = Io −  i  ,  ,  0
M so =  Y −  i

44
Y is national income, I is investment, I o is some initial level of investment, Go is government
spending, M so is money supply and i is the interest rate. Use the matrix approach to find Y and i .

Solution:
Substituting the second in the first equation
sY = I o −  i + Go
M so =  Y −  i
Rearranging to solve in a matrix form
sY +  i = I o + Go
 Y −  i = M so
Writing in a matrix format

s   Y   I o + Go 
 =

 −   i   M so 

The determinant is
A = − s −   0

Using Cramer’s rule

I o + Go 
M so − ( I o + Go ) +  M so ( I o + Go ) +  M so
Y= =− =
A A s + 

s I o + Go
 M so sM so −  ( I o + Go )  ( I o + Go ) − sM so
i = = =
A A s + 

Using matrix inversion,

 − −   − − 
C= C = 
 − s  − s 

Y  1  − −   I o + Go  1  ( I + Go ) +  M so 
 =     =−  o 
 i  A − s   M so  A   ( I o + Go ) − sM so 

which proves the same result.

41. If we introduce a tax rate t in the IS-LM model, savings are a share of a smaller disposable income
such that
s (1 − t )Y = I + Go 0  s, t  1
I = Io −  i  ,  ,  0
M so =  Y −  i

where Y is national income, I is investment, I o is some initial level of investment, Go is

government spending, M so is money supply and i is the interest rate. Use Cramer’s rule to find
equilibrium Y and i .

45
Solution:
Substituting the second into the first equation
s (1 − t )Y = I o −  i + Go
M so =  Y −  i
Rearranging to solve in a matrix form
s (1 − t )Y +  i = I o + Go
 Y −  i = M so
Writing in a matrix format

 s(1 − t )   Y   I o + Go 
 =
 
 −   i   M so 

The determinant is
A = − s (1 − t ) −   0

Using Cramer’s rule

I o + Go 
M so − ( I o + Go ) +  M so ( I o + Go ) +  M so
Y= =− =
A A s (1 − t ) + 
s (1 − t ) I o + Go
 M so s (1 − t ) M so −  ( I o + Go )  ( I o + Go ) − s (1 − t ) M so
i = = =
A A s (1 − t ) + 

42. Consider the expanded linear IS-LM model

Y = C + I + Go
C = a + b(Y − T )
T = to + t1Y
I =  − i
M so =  Y −  i

where Y is national income, C is aggregate consumption, I is investment, Go is government

spending, T is total tax collection, M so is money supply and i is the interest rate. The parameters
a, b,  ,  ,  ,  are all positive. Furthermore, to is non-income tax rate, t1 is income tax rate and
0  b, t  1 . Find equilibrium Y and i .
Solution:
Substituting in the first equation and rewriting the last one we get
Y = a + b(Y − to − t1Y ) +  −  i + Go
M so =  Y −  i
Rearranging in a matrix form
(1 − b + bt1 )Y +  i = a − bto +  + Go
 Y −  i = M so

46
1 − b + bt1   Y   a − bto +  + Go 
 =

  −   i   M so 

For the determinant
A = − (1 − b + bt1 ) −   0

By Cramer’s rule
a − bto +  + Go 
M so − − (a − bto +  + Go ) −  M so  (a − bto +  + Go ) +  M so
Y= = = 0
A − (1 − b + bt1 ) −   (1 − b + bt1 ) + 
1 − b + bt1 a − bto +  + Go
 M so (1 − b + bt1 ) M so −  (a − bto +  + Go )
i = = =
A A
(1 − b + bt1 ) M so −  (a − bto +  + Go )
=− 0
 (1 − b + bt1 ) + 

43. The input-output matrix for a two-sector economy is given by

 0.25 0.40 
A= 
0.10 0.10 
Following Leontief’s input-output open model find the technology matrix T . If the external demand
10 
for the output of the two sectors is said to be D =   , find their production levels.
 20 
Solution:
1 − 0.25 0 − 0.40 0.75 −0.4
T = I − A= = 
0 − 0.10 1 − 0.10   −0.1 0.9 

T = 0.75(0.9) − 0.1(0.4) = 0.675 − 0.04 = 0.635  0

By Cramer’s rule
10 −0.4 0.75 10
T1 20 0.9 9+8 T2 −0.1 20 15 + 1
x1 = = =  26.77 x2 = = =  25.20
T 0.635 0.635 T 0.635 0.635

44. The input-output matrix for a 3-sector economy is

 0.3 0 0  10 

A =  0.3 0.3 0.4  and D =  20 
0.2 0.5 0.4   30 
Find the outputs of the three industries needed to satisfy total demand.
Solution:
 0.7 0 0 
T = I − A =  −0.3 0.7 −0.4 
 T = 0.7 ( 0.42 − 0.2 ) = 0.154
 −0.2 −0.5 0.6 

47
By Cramer’s rule
10 0 0
20 0.7 −0.4
30 −0.5 0.6 10 ( 0.42 − 0.2 ) 2.2
x1 = = =  14.29
0.154 0.154 0.154
0.7 10 0
−0.3 20 −0.4
−0.2 30 0.6 0.7 (12 + 12 ) − 10 ( −0.18 − 0.08) 16.8 + 2.6
x2 = = =  125.97
0.154 0.154 0.154
0.7 0 10
−0.3 0.7 20
−0.2 −0.5 30 0.7 ( 21 + 10 ) + 10 ( 0.15 + 0.14 ) 21.7 + 2.9 24.6
x3 = = = =  159.74
0.154 0.154 0.154 0.154

45. The input-output matrix for a 3-sector economy and the external-demand matrix are:
0.3 0 0  10 

A = 0.3 0.3 0.4   D =  20 
 0 0.5 0.4   30 
Find the technology matrix T and the outputs of the three industries as specified by the Leontief input-
output model using Cramer’s rule.
Solution:
 0.7 0 0 

T =  −0.3 0.7 −0.4 
 0 0.5 0.6 

T = 0.7(0.42 − 0.2) = 0.154

10 0 0
20 0.7 −0.4
30 −0.5 0.6 10(0.42 − 0.2)
x1 = = = 14.29
0.154 0.154
0.7 10 0
−0.3 20 −0.4
0 30 0.6 0.7.24 + 1.8
x2 = = = 120.78
0.154 0.154
0.7 0 10
−0.3 0.7 20
0 −0.5 30 21.7 + 1.5
x3 = = = 150.65
0.154 0.154

46. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the

48
government amount to $1,156,500 worth of electricity, $685,000 worth of coal, and $1,668,000 worth
of steel. Given the input-output table for this three-sector economy presented below, determine the
output of the second sector, i.e. the coal industry, that will meet both the external and the internal
demand of the economy. Once the external demand for coal is satisfied what will be the amount of
coal left for the three industries in the economy to consume?
Items Consumed (input) Items Produced (output)
Electricity Coal Steel
Electricity 0.15 0.15 0.09
Coal 0.50 0 0.10
Steel 0.10 0.03 0.20
Solution:
 0.85 −0.15 −0.09 
T =  −0.5 1 −0.1 
 −0.1 −0.03 0.8 

T = 0.85(0.8 − 0.003) + 0.15(−0.4 − 0.01) − 0.09(0.015 + 0.1) = 0.67745 − 0.0615 − 0.01035 =

= 0.6056
0.85 1156,5 −0.09
−0.5 685 −0.1
−0.1 1668 0.8 −1156,5(−0.4 − 0.01) + 685(0.68 − 0.009) − 1668(−0.085 − 0.045)
x2 = = =
0.6056 0.6056
1,150,640
= = $1,900,000 worth of coal
0.6056
Leftover coal: 1,900,000 − 685,000 = $1, 215,000

47. For the input-output matrix in the previous problem find the amount of steel that will meet total
demand and the amount that will be left for the three industries to consume.
Solution:
 0.85 −0.15 −0.09 
T =  −0.5 1 −0.1 
 −0.1 −0.03 0.8 

T = 0.85(0.8 − 0.003) + 0.15(−0.4 − 0.01) − 0.09(0.015 + 0.1) = 0.67745 − 0.0615 − 0.01035 =

= 0.6056
0.85 −0.15 1156.5
−0.5 1 685
−0.1 −0.03 1668 1156,5(0.015 + 0.1) − 685(−0.0255 − 0.015) + 1668(0.85 − 0.075)
x3 = = =
0.6056 0.6056
1, 453, 440
= = $2, 400,000 worth of steel
0.6056
Leftover steel: 2, 400,000 − 1,668,000 = $732,000

48. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the
government amount to $2,440,000 worth of electricity, $2,000,000 worth of coal, and $1,680,000
worth of steel. Given the input-output table for this three-sector economy presented below, determine
the output of the third sector, i.e., the steel industry that will meet both the external and the internal
49
demand of the economy. Once the external demand for steel is satisfied what will be the amount of
steel left for the three industries in the economy to consume? How much worth of labor is used in the
production of steel?

Items Consumed (input) Items Produced (output)

Electricity Coal Steel
Electricity 0.05 0.15 0.08
Coal 0.6 0 0.5
Steel 0.03 0.2 0.2

Solution:
 0.95 −0.15 −0.08
T =  −0.6 1 −0.5 
 −0.03 −0.2 0.8 

T = 0.95(0.8 − 0.1) + 0.15(−0.48 − 0.015) − 0.08(0.12 + 0.03) = 0.57875

0.95 −0.15 2440

−0.6 1 2000
−0.03 −0.2 1680 2440(0.12 + 0.03) − 2000(−0.19 − 0.0045) + 1680(0.95 − 0.09)
x3 = = =
0.57875 0.57875
2199.8
=  $3,800,950 worth of steel
0.57875
Leftover steel: 3,800,950 − 1,680,000 = $2,120,950
Labor share: (1 − 0.08 − 0.5 − 0.2)3,800,950 = $836, 209

49. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the
government amount to $2,500,000 worth of electricity, $1,850,000 worth of coal, and $1,600,000
worth of steel. Given the input-output table for this three-sector economy presented below, determine
the output of the second sector, i.e. the coal industry, that will meet both the external and the internal
demand of the economy. Once the external demand for coal is satisfied what will be the amount of
coal left for the three industries in the economy to consume? How much labor is used in the
production of coal?

Items Consumed (input) Items Produced (output)

Electricity Coal Steel
Electricity 0.05 0.15 0.08
Coal 0.6 0 0.5
Steel 0.03 0.2 0.2

Solution:
 0.95 −0.15 −0.08
T =  −0.6 1 −0.5 
 −0.03 −0.2 0.8 
T = 0.95(0.8 − 0.1) + 0.15(−0.48 − 0.015) − 0.08(0.12 + 0.03) = 0.57875

50
 0.95 2500 −0.08
−0.6 1850 −0.5
−0.03 1600 0.8 −2500(−0.48 − 0.015) + 1850(0.76 − 0.0024) − 1600(−0.475 − 0.048)
x2 = = =
0.57875 0.57875
3475.86
=  $6,005,806 worth of coal
0.57875
Leftover coal: 6,005,806 − 1,850,000 = $4,155,806
Labor share: (1 − 0.15 − 0.2)6,005,806 = $3,903,744

50. Consider a simple economy in which three goods are produced: electricity, coal, and steel.
Monthly external demand from businesses, households and the government amounts to $200,000
worth of electricity, $220,000 worth of coal, and $180,000 worth of steel. Using the input-output table
below, determine the output of the second sector, i.e. the coal industry, which will meet both the
external and the internal demand of the economy. Once the external demand for coal is satisfied what
will be the amount of coal left for the three industries in the economy to consume?
Items Consumed (input) Items Produced (output)
Electricity Coal Steel
Electricity 0.2 0.2 0.1
Coal 0.4 0 0
Steel 0.2 0.1 0.8
Solution:
 0.8 −0.2 −0.1
T =  −0.4 1 0 
 −0.2 −0.1 0.2 

T = −0.1(0.04 + 0.2) + 0.2(0.8 − 0.08) = −0.024 + 0.144 = 0.12

0.8 200 −0.1

T2 = −0.4 220 0 = −0.1(−72 + 44) + 0.2(176 + 80) = 2.8 + 51.2 = 54
−0.2 180 0.2

54,000
x2 = = $450,000 worth of coal
0.12
Coal for the three industries: 450,000 − 220,000 = $230,000

51. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the
government amount to $250 million worth of electricity, $180 million worth of coal, and $220 worth
of steel. Given the input-output table for this three-sector economy presented below, determine the
output of the first sector, i.e., the electrical industry that will meet both the external and the internal
demand of the economy. How much worth of labor is used in the production of electricity?

Items Consumed (input) Items Produced (output)

Electricity Coal Steel
Electricity 0.05 0.15 0.08
Coal 0.8 0.4 0.2
Steel 0 0.2 0.4

51
Solution:
 0.95 −0.15 −0.08
T =  −0.8 0.6 −0.2 
 0 −0.2 0.6 

T = 0.2(−0.19 − 0.064) + 0.6(0.57 − 0.12) = −0.0508 + 0.27 = 0.2192

250 −0.15 −0.08
180 0.6 −0.2
220 −0.2 0.6 250(0.36 − 0.04) − 180(−0.09 − 0.016) + 220(0.03 + 0.048)
x1 = = =
0.2192 0.2192
116.24
=  $530.3 million worth of electricity
0.2192
Share of labor: (1 − 0.05 − 0.8)530.3 = (0.15)530.3  $80 million

52. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the
government amount to $2,700,000 worth of electricity, $2,380,000 worth of coal, and $1,750,000
worth of steel. Given the input-output table for this three-sector economy presented below, determine
the output of the third sector, i.e., the steel industry that will meet both the external and the internal
demand of the economy. Once the external demand for steel is satisfied what will be the amount of
steel left for the three industries in the economy to consume? How much worth of labor is used in the
production of steel?
Items Consumed (input) Items Produced (output)
Electricity Coal Steel
Electricity 0.05 0.15 0.08
Coal 0.6 0 0.5
Steel 0.03 0.2 0.2
Solution:
 0.95 −0.15 −0.08
T =  −0.6 1 −0.5 
 −0.03 −0.2 0.8 
T = 0.95(0.8 − 0.1) + 0.15(−0.48 − 0.015) − 0.08(0.12 + 0.03) = 0.57875
0.95 −0.15 2700
−0.6 1 2380
−0.03 −0.2 1750 2700(0.12 + 0.03) − 2380(−0.19 − 0.0045) + 1750(0.95 − 0.09)
x3 = = =
0.57875 0.57875
2372.91
=  $4,100,060 worth of steel
0.57875
Leftover steel: 4,100,060 − 1,750,000 = $2,350,060
Labor share: (1 − 0.08 − 0.5 − 0.2)4,100,060 = $902,013.2

53. For the previous problem find the output of the coal industry that will meet the external and
internal demand of the economy. What will be the amount of coal left for the three industries in the
economy to consume? How much labor is used in the production of coal?

52
Solution:
 0.95 −0.15 −0.08
T =  −0.6 1 −0.5 
 −0.03 −0.2 0.8 
T = 0.95(0.8 − 0.1) + 0.15(−0.48 − 0.015) − 0.08(0.12 + 0.03) = 0.57875

0.95 2700 −0.08

−0.6 2380 −0.5
−0.03 1750 0.8 2700(−0.48 − 0.015) + 2380(0.76 − 0.0024) − 1750( −0.475 − 0.048)
x2 = = =
0.57875 0.57875
4054.838
=  $7,006, 200 worth of coal
0.57875
Leftover coal: 7,006, 200 − 2,380,000 = $4,626, 200
Labor share: (1 − 0.15 − 0.2)7,006, 200 = $4,554,030

54. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the
government amount to $240 million worth of electricity, $180 million worth of coal, and $220 million
worth of steel. Given the input-output table for this three-sector economy presented below, determine
the output of the second sector, i.e., the coal industry that will meet both the external and the internal
demand of the economy. How much worth of labor is used in the production of coal?
Items Consumed (input) Items Produced (output)
Electricity Coal Steel
Electricity 0.04 0.15 0.05
Coal 0.7 0.4 0.5
Steel 0.02 0 0.1
Solution:
 0.96 −0.15 −0.05
T =  −0.7 0.6 −0.5 
 −0.02 0 0.9 

T = −0.02(0.075 + 0.03) + 0.9(0.576 − 0.105) = 0.4218

0.96 240 −0.05

−0.7 180 −0.5
−0.02 220 0.9 −240(−0.63 − 0.01) + 180(0.864 − 0.001) − 220(−0.48 − 0.035)
x2 = = =
0.4218 0.4218
422.24
=  $1,000 million worth of coal
0.4218
Labor share: (1 − 0.15 − 0.4)1000  $450 million

55. Consider a simple economy in which three goods are produced: electricity, coal, and steel.
Monthly external demand from businesses, households and the government amounts to $130,000
worth of electricity, $250,000 worth of coal, and $240,000 worth of steel. Using the input-output table
below, determine the output of the first sector, i.e. the electricity industry, which will meet both the

53
external and the internal demand of the economy. Once the external demand for electricity is satisfied
what will be the amount of electricity left for the three industries in the economy to consume?
Items Consumed (input) Items Produced (output)
Electricity Coal Steel
Electricity 0.1 0.2 0.2
Coal 0.5 0 0
Steel 0.2 0.3 0.6
Solution:
 0.9 −0.2 −0.2 
T =  −0.5 1 0 
 −0.2 −0.3 0.4 

T = −0.2(0.15 + 0.2) + 0.4(0.9 − 0.1) = −0.07 + 0.32 = 0.25

130 −0.2 −.2

T1 = 250 1 0 = 130.0.4 − 250(−0.08 − 0.06) + 240(0.2) = 52 + 35 + 48 = 135
240 −0.3 0.4

135,000
x1 = = $540,000 worth of electricity
0.25
540,000 − 130,000 = $410,000 worth of electricity

56. For the previous problem find the outputs of the second and the third sector, that is, coal and steel
production as well as the amounts of both left for the three industry in the economy to consume once
the external demand is satisfied.
Solution:
 0.9 −0.2 −0.2 
T =  −0.5 1 0 
 −0.2 −0.3 0.4 

T = −0.2(0.15 + 0.2) + 0.4(0.9 − 0.1) = −0.07 + 0.32 = 0.25

0.9 130 −0.2

T2 = −0.5 250 0 = 130.0.2 + 250(0.36 − 0.04) − 240(0 − 0.1) = 26 + 80 + 24 = 130
−0.2 240 0.4

T2 130
x2 = = = $520,000 worth of coal
T 0.25

Leftover coal: 520,000 − 250,000 = $270,000

0.9 −0.2 130

T3 = −0.5 1 250 = 130(0.15 + 0.2) − 250(−0.27 − 0.04) + 240(0.9 − 0.1) = 45.5 + 77.5 + 192 = 315
−0.2 −0.3 240

T3 315
x3 = = = $1, 260,000 worth of steel
T 0.25

54
Leftover steel: 1, 260,000 − 240,000 = $1,020,000

57. Consider a simple model of an economy in which only three goods are produced: electricity, coal,
and steel. Outside or external demand from businesses, other industries, households and the
government amount to $280 million worth of electricity, $300 million worth of coal, and $260 million
worth of steel. Given the input-output table for this three-sector economy presented below, determine
the output of the first sector, i.e., the electricity industry that will meet both the external and the
internal demand of the economy. How much worth of labor is used in the production of electricity?
Items Consumed (input) Items Produced (output)
Electricity Coal Steel
Electricity 0.04 0.1 0.1
Coal 0.8 0.5 0.5
Steel 0.02 0 0.1
Solution:
 0.96 −0.1 −0.1
T =  −0.8 0.5 −0.5
 −0.02 0 0.9 

T = −0.02(0.05 + 0.05) + 0.9(0.48 − 0.08) = −0.002 + 0.36 = 0.358  0

280 −0.1 −0.1

T1 = 300 0.5 −0.5 = 280(0.45) − 300(−0.09) + 260(0.05 + 0.05) = 126 + 27 + 26 = 179
260 0 0.9
T1 179
x1 = = = $500 million
T 0.358

Labor share: (1 − 0.04 − 0.8 − 0.02)500 = $70 million

58. Given the input-output table for the three-sector economy in the previous problem, determine the
output of the third sector, i.e., the steel industry that will meet both the external and the internal
demand of the economy. How much worth of labor is used in the production of steel?

Solution:
 0.96 −0.1 −0.1
T =  −0.8 0.5 −0.5
 −0.02 0 0.9 

T = −0.02(0.05 + 0.05) + 0.9(0.48 − 0.08) = −0.002 + 0.36 = 0.358  0

0.96 −0.1 280

T3 = −0.8 0.5 300 = 280(0.01) − 300(−0.002) + 260(0.48 − 0.08) = 2.8 + 0.6 + 104 = 107.4
−0.02 0 260
T3 107.4
x3 = = = $300 million
T 0.358

Labor share: (1 − 0.1 − 0.5 − 0.1)300 = $90 million

55
59. The input-output matrix for a 2-sector economy is the following:
 0.25 0.40 
A= 
0.14 0.12 
Find the production levels of each sector for each of the external demand vectors given below:

External Demands
Sector 1 10 15 20 20 40
Sector 2 20 20 20 40 30
Solution:

 0.75 −0.4
T = I − A=  T = 0.66 − 0.056 = 0.604
 −0.14 0.88 
To find x1 and x2 for all external demand vectors, it is better to use the matrix inversion method.

0.88 0.14 0.88 0.4 

C=  C =  
 0.4 0.75 0.14 0.75
 x1  1 0.88 0.4  10  1 16.8  27.81
x  = 0.14 0.75  20 =  = 
 2  0.604     0.604 16.4  27.15

 x1  1  0.88 0.4  15  1  21.20 35.09

x  = 0.14 0.75  20 =  = 
 2  0.604     0.604  17.1   28.31

 0.3 0.4 0 
 
60. The input-output matrix for a 3-sector economy is A =  0 0.3 0.2  . Find the three output
0.5 0 0.3
 x1 
 
vectors  x2  denoting the production levels of the three sectors for each set of the external demands:
 
 x3 
External Demands
Sector 1 100 100 200
Sector 2 100 200 200
Sector 3 200 300 400
Solution:
 0.7 −0.4 0 

T = 0 0.7 −0.2 
 −0.5 0 0.7 

T = 0.7(0.49) + 0.4(−0.1) = 0.303

0.49 0.1 0.35  0.49 0.28 0.08 

C =  0.28 0.49 0.2  C  =  0.1 0.49 0.14 
 0.08 0.14 0.49   0.35 0.2 0.49 

56
 x1  0.49 0.28 0.08 100   306.9 
  1 
 x2  =  0.1 0.49 0.14  100  =  287.12
  0.303  0.35 0.2 0.49   200   504.95 
 x3      

 x1  0.49 0.28 0.08 100   425.7 

  1     
 x2  =  0.1 0.49 0.14   200  =  495 
  0.303
 0.35 0.2 0.49  300  723.67 
 x3 

 x1  0.49 0.28 0.08  200  613.86 

  1 
 x2  =  0.1 0.49 0.14   200  = 574.25 
  0.303  0.35 0.2 0.49   400  1009.9 
 x3      

0.4 0.4 0 
61. The input-output matrix for a 3-sector economy is A =  0 0.3 0.4  . Find the three output
 0.1 0 0.2 
 x1 
 
vectors  x2  denoting the production levels of the three sectors for each set of the external demands:
 
 x3 
External Demands
Sector 1 200 200 400
Sector 2 200 400 400
Sector 3 500 500 200
Solution:
 0.6 −0.4 0 

T = 0 0.7 −0.4 
 −0.1 0 0.8 

T = 0.6(0.56) + 0.4(−0.04) = 0.32

0.56 0.04 0.07   0.56 0.32 0.16 

C = 0.32 0.48 0.04  C  =  0.04 0.48 0.24 
0.16 0.24 0.42  0.07 0.04 0.42 

 x1   0.56 0.32 0.16   200  800 

  1 
 x2  =  0.04 0.48 0.24   200  = 700
  0.32 0.07 0.04 0.42  500  500 
 x3      

 x1   0.56 0.32 0.16  200 1000

  1     
 x2  =  0.04 0.48 0.24  400 = 1000
  0.32
0.07 0.04 0.42  500   750 
 x3 

57
 x1   0.56 0.32 0.16  400 1200
  1 
 x2  =  0.04 0.48 0.24  400 =  800 
  0.32 0.07 0.04 0.42  200  400 
 x3      

62. For the previous problem find the three output vectors for each set of the external demands below:

External Demands
Sector 1 400 400 600
Sector 2 200 300 300
Sector 3 200 400 500
Solution:
 0.6 −0.4 0 

T = 0 0.7 −0.4 
 −0.1 0 0.8 

T = 0.6(0.56) + 0.4(−0.04) = 0.32

0.56 0.04 0.07   0.56 0.32 0.16 

C = 0.32 0.48 0.04  C  =  0.04 0.48 0.24 
0.16 0.24 0.42  0.07 0.04 0.42 

 x1   0.56 0.32 0.16  400 1000

  1 
 x2  =  0.04 0.48 0.24  200 =  500 
  0.32 0.07 0.04 0.42  200  375 
 x3      

 x1   0.56 0.32 0.16  400 1200

  1     
 x2  =  0.04 0.48 0.24  300  =  800 
  0.32
0.07 0.04 0.42  400  650 
 x3 

 x1   0.56 0.32 0.16 600 1600

  1 
 x2  =  0.04 0.48 0.24 300 =  900 
  0.32 0.07 0.04 0.42 500  825 
 x3      

0.2 0.4 0.2 

 
63. The input-output matrix for a 3-sector economy is A =  0 0.2 0.4  . Find the three output
 0 0 0.4 
 x1 
 
vectors  x2  denoting the production levels of the three sectors for each set of the external demands:
 
 x3 

58
 External Demands
Sector 1 60 20 40
Sector 2 40 40 40
Sector 3 120 60 60
Solution:
0.8 −0.4 −0.2 
T =  0 0.8 −0.4 
 0 0 0.6 

T = 0.6(0.8)0.8 = 0.384

 0.48 0 0  0.48 0.24 0.32 


C = 0.24 0.48 0  C  =  0 0.48 0.32 
0.32 0.32 0.64   0 0 0.64 

 x1  0.48 0.24 0.32  60   200

  1 
 x2  =  0 0.48 0.32  40  = 150 
  0.384
 0 0 0.64  120  200
 x3 

 x1  0.48 0.24 0.32  20 100

  1 
 x2  =  0 0.48 0.32   40 = 100
  0.384  0 0 0.64   60  100
 x3  

 x1  0.48 0.24 0.32  40 125

  1 
 x2  =  0 0.48 0.32   40 = 100
  0.384
 0 0 0.64   60  100
 x3 

64. For the previous problem find the output of the three industries given the three sets of external
demand below:
External Demands
Sector 1 30 30 90
Sector 2 20 20 20
Sector 3 60 30 30
Solution:
0.8 −0.4 −0.2 
T =  0 0.8 −0.4 
 0 0 0.6 

T = 0.6(0.8)0.8 = 0.384

 0.48 0 0  0.48 0.24 0.32 


C = 0.24 0.48 0  C  =  0 0.48 0.32 
0.32 0.32 0.64   0 0 0.64 

59
 x1  0.48 0.24 0.32  30   38.4 100
  1     1 
 x2  =  0 0.48 0.32  20 =  28.8 =  75 
  0.384  0 0 0.64   60 
0.384
38.4 100
 x3  

 x1  0.48 0.24 0.32  30  75

  1 
 x2  =  0 0.48 0.32   20  = 50 
  0.384
 0 0 0.64  30  50 
 x3 

 x1  0.48 0.24 0.32  90  150

  1 
 x2  =  0 0.48 0.32   20 =  50 
  0.384  0 0 0.64   30   50 
 x3  

0.2 0.4 0 
65. The input-output matrix for a 3-sector economy is A =  0 0.3 0.4  . Find the three output
 0.3 0 0.2 
 x1 
 
vectors  x2  denoting the production levels of the three sectors for each set of the external demands:
 
 x3 
External Demands
Sector 1 200 200 200
Sector 2 100 200 100
Sector 3 400 400 100
Solution:
 0.8 −0.4 0 

T = 0 0.7 −0.4 
 −0.3 0 0.8 

T = 0.8(0.56) + 0.4(−0.12) = 0.4

0.56 0.12 0.21 0.56 0.32 0.16 

C = 0.32 0.64 0.12  C  = 0.12 0.64 0.32 
0.16 0.32 0.56   0.21 0.12 0.56 

 x1  0.56 0.32 0.16   200  208 520

  1     1 
 x2  =  0.12 0.64 0.32  100  =  216 = 540
  0.4  0.21 0.12 0.56   400  0.4  278  695
 x3        

 x1  0.56 0.32 0.16   200  600 

  1     
 x2  = 0.12 0.64 0.32   200  = 700 
  0.4
 0.21 0.12 0.56   400   725 
 x3 

60
 x1  0.56 0.32 0.16   200   400 
  1 
 x2  =  0.12 0.64 0.32  100  = 300 
  0.4  0.21 0.12 0.56  100   275
 x3      

66. For the previous problem solve for the outputs of the three industries where three sets of external
demand are given:
External Demands
Sector 1 200 200 200
Sector 2 100 100 200
Sector 3 300 500 300
Solution:
 0.8 −0.4 0 

T = 0 0.7 −0.4 
 −0.3 0 0.8 

T = 0.8(0.56) + 0.4(−0.12) = 0.4

0.56 0.12 0.21 0.56 0.32 0.16 

C = 0.32 0.64 0.12  C  = 0.12 0.64 0.32 
0.16 0.32 0.56   0.21 0.12 0.56 

 x1  0.56 0.32 0.16   200   480 

  1 
 x2  =  0.12 0.64 0.32  100  =  460 
  0.4  0.21 0.12 0.56  300   555 
 x3      

 x1  0.56 0.32 0.16   200  560 

  1     
 x2  = 0.12 0.64 0.32  100  = 620 
  0.4
 0.21 0.12 0.56  500  835 
 x3 

 x1  0.56 0.32 0.16   200  560 

  1 
 x2  =  0.12 0.64 0.32   200  = 620 
  0.4  0.21 0.12 0.56  300  585 
 x3      

0.5 0.4 0 
 
67. The input-output matrix for a 3-sector economy is A =  0 0.2 0.2  . Find the three output
0.5 0 0.5 
 x1 
 
vectors  x2  denoting the production levels of the three sectors for each set of the external demands:
 
 x3 
External Demands
Sector 1 100 200 100
Sector 2 100 200 200
Sector 3 400 300 400
61
Solution:
 0.5 −0.4 0 

T = 0 0.8 −0.2 
 −0.5 0 0.5 

T = 0.5(0.4) + 0.4( −0.1) = 0.16

 0.4 0.1 0.4  0.4 0.2 0.08

C =  0.2 0.25 0.2  C  =  0.1 0.25 0.1 
0.08 0.1 0.4  0.4 0.2 0.4 

 x1  0.4 0.2 0.08 100   575 

  1     
 x2  =  0.1 0.25 0.1  100  =  468 
  0.16
0.4 0.2 0.4   400 1375
 x3 

 x1  0.4 0.2 0.08  200  900 

  1 
 x2  =  0.1 0.25 0.1   200 =  625 
  0.16 0.4 0.2 0.4   300  1500
 x3      
`
 x1  0.4 0.2 0.08 100   700 
  1     
 x2  =  0.1 0.25 0.1   200 =  625 
  0.16
0.4 0.2 0.4   400 1500
 x3 

0.2 0 0.2 
 
68. The input-output matrix for a 3-sector economy is A =  0 0.2 0.2  . Use matrix inversion to
0.4 0 0.4 
 x1 
 
find the two output vectors  x2  denoting the production levels of the three sectors for each set of the
 
 x3 
external demands given below:
External Demands
Sector 1 40 40
Sector 2 40 60
Sector 3 60 80
Solution:
 0.8 0 −0.2 

T = 0 0.8 −0.2 
 −0.4 0 0.6 

T = 0.8(0.48 − 0.08) = 0.32

62
  0.48 0.08 0.32   0.48 0 0.16 
C =  0 0.4 0  C  =  0.08 0.4 0.16 
0.16 0.16 0.64  0.32 0 0.64 

 x1   0.48 0 0.16   40   19.2 + 9.6   28.8  90 

  1 1     1   1 

 x2  = C d =  0.08 0.4 0.16   40  =  3.2 + 16 + 9.6 =  28.8 =  90 
  T 0.32
0.32 0 0.64   60 
0.32
 12.8 + 38.4 
0.32
51.2  160
 x3 
 x1   0.48 0 0.16   40   19.2 + 12.8  100 
  1     1 
 x2  =  0.08 0.4 0.16   60  =  3.2 + 24 + 12.8 = 125 
  0.32 0.32 0 0.64  80  0.32  12.8 + 51.2   200 
 x3        

0.2 0.2 0.2 

69. The input-output matrix for a 3-sector economy is A =  0 0.5 0  . Use matrix inversion to
0.4 0 0.4 
 x1 
 
find the two output vectors  x2  denoting the production levels of the three sectors for each set of the
 
 x3 
external demands given below:
External Demands
Sector 1 100 150
Sector 2 50 100
Sector 3 60 80
Solution:
 0.8 −0.2 −0.2 
T =  0 0.5 0 
 −0.4 0 0.6 

T = 0.5(0.48 − 0.08) = 0.2

 0.3 0 0.2   0.3 0.12 0.1

C = 0.12 0.4 0.08
 C  =  0 0.4 0 
 0.1 0 0.4  0.2 0.08 0.4 

 x1   0.3 0.12 0.1 100   42   210 

  1 
 x2  =  0 0.4   
0   50  = 5  20  = 100 
  0.2 0.2 0.08 0.4   60   48  240 
 x3    

 x1   0.3 0.12 0.1 150   65   325 

  1 
 x2  =  0 0.4 0  100  = 5  40  =  200 
  
  0.2
0.2 0.08 0.4   80   70  350 
 x3 

63
 0.2 0.4 0 
70. The input-output matrix for a 3-sector economy is A =  0.6 0.2 0.5  . Use matrix inversion to
 0 0.1 0.4 
 x1 
 
find the two output vectors  x2  denoting the production levels of the three sectors for each set of the
 
 x3 
external demands given below:
External Demands
Sector 1 400 600
Sector 2 200 300
Sector 3 200 200
Solution:
 0.8 −0.4 0 

T =  −0.6 0.8 −0.5
 0 −0.1 0.6 

T = 0.8(0.48 − 0.05) + 0.4(−0.36) = 0.344 − 0.144 = 0.2

 0.43 0.36 0.06   0.43 0.24 0.2 

C = 0.24 0.48 0.08  C  = 0.36 0.48 0.4 
 0.2 0.4 0.4  0.06 0.08 0.4 

 x1   0.43 0.24 0.2   400  172 + 48 + 40  1300

 x  = 1 0.36 0.48 0.4   200  = 5 144 + 96 + 80  = 1600 
 2  0.2       
 x 3  0.06 0.08 0.4   200   24 + 16 + 80   600 

 x1   0.43 0.24 0.2   600   258 + 72 + 40  1850 

 x  = 1 0.36 0.48 0.4   300  = 5  216 + 144 + 80  =  2200 
 2  0.2       
 x 3  0.06 0.08 0.4   200   36 + 24 + 80   700 

71. For the previous problem solve the model using the following two sets of external demand:
External Demands
Sector 1 200 400
Sector 2 100 200
Sector 3 100 150
Solution:
 0.8 −0.4 0 

T =  −0.6 0.8 −0.5
 0 −0.1 0.6 

T = 0.8(0.48 − 0.05) + 0.4(−0.36) = 0.344 − 0.144 = 0.2

 0.43 0.36 0.06   0.43 0.24 0.2 

C = 0.24 0.48 0.08  C  = 0.36 0.48 0.4 
 0.2 0.4 0.4  0.06 0.08 0.4 

64
 x1   0.43 0.24 0.2  200 86 + 24 + 20  650
 x  = 1 0.36 0.48 0.4 100  = 5  72 + 48 + 40 = 800 
 2  0.2       
 x 3  0.06 0.08 0.4 100   12 + 8 + 40  300

 x1   0.43 0.24 0.2   400  172 + 48 + 30 1250

 x  = 1 0.36 0.48 0.4   200  = 5 144 + 96 + 60  = 1500
 2  0.2       
 x 3  0.06 0.08 0.4  150   24 + 16 + 60   500 

0.2 0.4 0.2 

72. The input-output matrix for a 3-sector economy is A =  0 0.2 0.2  . Use matrix inversion to
 0 0 0.1
 x1 
 
find the two output vectors  x2  denoting the production levels of the three sectors for each set of the
 
 x3 
external demands given below:
External Demands
Sector 1 60 50
Sector 2 60 40
Sector 3 90 90
Solution:
0.8 −0.4 −0.2 
T =  0 0.8 −0.2 
 0 0 0.9 

T = 0.8(0.72) = 0.576

0.72 0 0  0.72 0.36 0.24 


C = 0.36 0.72 0  C  =  0 0.72 0.16 
0.24 0.16 0.64   0 0 0.64 

 x1  0.72 0.36 0.24  60   43.2 + 21.6 + 21.6  150 

x  = 1  0  
0.72 0.16  60  = 1 
43.2 + 14.4  = 100 
 2  0.576  0.576 
 x3   0 0 0.64  90   57.6  100 

 x1  0.72 0.36 0.24  50  36 + 14.4 + 21.6  125

x  = 1  0   
0.72 0.16   40  =
1 
28.8 + 14.4  =  75 
 2  0.576  0.576 
 x3   0 0 0.64  90   57.6  100

0.2 0.3 0.2 

 
73. The input-output matrix for a 3-sector economy is A =  0 0.2 0.2  . Use matrix inversion to
 0 0 0.1

65
  x1 
 
find the two output vectors  x2  denoting the production levels of the three sectors for each set of the
 
 x3 
external demands given below:

External Demands
Sector 1 110 70
Sector 2 60 60
Sector 3 90 90
Solution:
0.8 −0.3 −0.2 
T =  0 0.8 −0.2 
 0 0 0.9 

T = 0.8(0.72) = 0.576

 0.72 0 0  0.72 0.27 0.22 


C = 0.27 0.72 0  C  =  0 0.72 0.16 
 0.22 0.16 0.64   0 0 0.64 

 x1  0.72 0.27 0.22  110  79.2 + 16.2 + 19.8  200 

x  = 1  0  
0.72 0.16   60  = 1 
43.2 + 14.4  = 100 
 2  0.576  0.576 
 x3   0 0 0.64   90   57.6  100 

 x1  0.72 0.27 0.22  70  50.4 + 16.2 + 19.8 150 

x  = 1  0   
0.72 0.16  60  =
1 
43.2 + 14.4  = 100 
 2  0.576  0.576 
 x3   0 0 0.64  90   57.6  100 

66