Mathematics for Economists and Social Sciences

Cristian Necula¼escu
(Cristian Necul¼
aescu) Academy of Economic Studies, room 2625, Calea DorobanŢ i nr.
11-13, sector 1, BucureŞ ti, România
E-mail address, Cristian Necul¼
aescu: math.fabiz.b.09.10@gmail.com
Dedicated to the memory of my Teachers and Professors: Dan Jebeleanu, Gheorghe Pântea, Aristide Halanay and Ştefan
Miric¼a.
 Contents

Part 1. Calculus 1
Chapter 1. In…nite series 3
1.1. Introduction 3
1.2. Special cases 6
1.3. Convergence Tests for positive series 9
1.4. Convergence tests for general series 11
1.5. Convergence tests for alternating series 12
1.6. Some formulas and exercises 12
1.7. A Macroeconomical Example 12
1.8. Power Series 13
1.9. Taylor’s expansions 14
Chapter 2. Functions of several variables (2 lectures) 17
2.1. Introduction 17
2.2. Continuity 19
2.3. Derivatives 21
2.4. Higher order derivatives 22
2.5. Applications in Economics 23
2.6. The implicit function theorem 29
2.7. Taylor Polynomials 31
2.8. Extreme points 33
2.9. Unconstrained Local Optimization 34
2.10. Constrained Optimization 39
2.11. Functions of several variables. Limit, continuity, partial derivatives, di¤erentiability and
di¤erential. Extremes. 42
2.12. Unconstrained optimization. Approximating functions by Least Square Method. 43
Chapter 3. Ordinary di¤erential equations (1/2 lecture) 47
Chapter 4. Finite di¤erence equations (1/2 lecture) 53
Chapter 5. Improper integrals. Euler functions: Gama, Beta 55
Chapter 6. Applications of Calculus to economic modelling 57

Part 2. Probabilities (7 lectures) 59

Chapter 7. Events. Probability: classic and axiomatic de…nition. Field of events. Properties of
probability. 61
iii
iv Cristian Necul¼
aescu

Chapter 8. Conditional probability. Probability of a union/intersection of events. Total probability

formula. Bayes formulas. Classical probability schemes. 63
Chapter 9. De…nition of a random variable. Operations with random variables. Examples on the
discrete case. Cumulative distribution function: de…nition, properties. Functions of
random variables. 65
Chapter 10. Continuous random variables. Probability density function: de…nition, properties. 67
Chapter 11. Moments of random variables. Expectation and variance. Properties. Chebyshev
inequality. 69
Chapter 12. Discrete bivariate random variables: marginal distributions, moments, conditional
distributions, covariance, correlation. 71
Chapter 13. Discrete and classical distributions. Applications of probability theory to economic
modelling. 73
Chapter 14. Convexity 75
Appendix A. * High School Revision 77
A.1. Sets 77
A.2. Usual Number Sets. Countability 80
A.3. Minorants, majorants 83
A.4. Relations 84
A.5. Functions 85
A.6. Binary Logic 89
A.7. Database applications for Logic, Sets, Relations and functions 92
A.8. Sequences 94
A.9. Symbols 99
Appendix B. Topology 101
Appendix C. Functions of one variable 105
Appendix. Bibliography 107
 Part 1

Calculus
 CHAPTER 1

In…nite series
"Divergent series are the invention of the devil,
and it is shameful to base on them
any demonstration whatsoever." Abel, 1828

The starting point for the main body of these Lecture Notes is the level of knowledge given in Mathe-
matics by "High School graduate, with the maximum concentration on Mathematics". Broadly speaking,
this means all "Precalculus", "Geometry and Trigonometry", "Analytic Geometry", "Linear Algebra –
linear systems, matrices, determinants", "Abstract Algebra – groups, …elds, rings", "Calculus – limits,
continuity, derivability, graphs of functions", "Calculus –elementary integrals". In the Appendix it may
be found a brief review of some of these topics; still, you may …nd useful to keep close appropriate high–
school texts. During the lectures and seminars, each of you is welcomed to ask questions and to comment.
As Murphy says, "Science advances when the student asks and the teacher doesn’t know the answer".

1.1. Introduction
Consider a sequence of real numbers denoted (an )n2N .
P
1
Def
1.1.1. De…nition (Formal). The symbol an = a1 + a2 + + an + is called "series" or "real
n=1
series" or "real in…nite series";
the number an is called "the [general] term of the series";
P
n
the number Sn de…ned by Sn = a1 + a2 + a3 + + an = ak is called "the nth order partial sum
k=1
of the series";
the sequence (Sn )n2N is called "the sequence of partial sums of the series".
1.1.2. De…nition (Informal). A series is an "in…nite summation" or (more precise) a "discrete in…nite
summation" or a "countable in…nite summation".
1.1.3. Remark. Series as an abstract mathematical model may be found in "Macroeconomics" rep-
resenting "discrete dynamics" or "inde…nite discrete …nancial ‡ows"; a typical situation describes the
(expected) present value of a future accumulation process in which the accumulation will take place at an
inde…nite number of future moments (e.g. dividends, insurance). The detailed study of these situations
is beyond the purpose of the present text –the interested reader may consult titles like [12] or [13]. You
may see at the end of this chapter a little Macroeconomic model.
P
1 2n P
1.1.4. Example. A series: 3 n
; The sign " " comes from the capital greek letter "sigma".
n=0 5
n
2
The general term: an = 3 .
5n
3
4

!!! Pay attention at the …rst term (which is not always 0 or 1), located at the bottom of the summation
symbol:
X1
an
n= !!!
…rst te rm

P
n P
n 2k
The sequence of partial sums of the series: Sn = ak = 3 ; in this particular case we may
k=0 k=0 5k
n+1
2 " #
k 1 n+1
P
n 2k Pn 2 5 2
obtain an explicit form for Sn : 3 k =3 =3 =5 1 = Sn .
k=0 5 k=0 5 2 5
1
5
It may be seen that 9 lim Sn = 5.
n!1

1.1.5. Remark. Between the sequences (an )n2N and (Sn )n2N there are certain recurrence relations:
Sn+1 = Sn + an+1 (or an+1 = Sn+1 Sn ), 8n 2 N .
P1
1.1.6. De…nition (convergence/divergence). The symbol an is called "convergent" (we say "it
n=1
converges") if the sequence (Sn )n2N is convergent (converges); only in this case is the value S = lim Sn
n!1
called "the sum of the series";
the sequence (Sn S)n2N (the di¤erence between the partial sum and the sum) is "the remainder
sequence" and it vanishes (it tends toward 0);
P1
an is divergent (diverges) if (Sn )n2N is divergent (diverges).
n=1

P
1 2n
1.1.7. Example. For the previous example, since lim Sn = 5 we conclude that the series 3
n!1 n=0 5n
P
1 2n
converges and the sum is 5 (the value of the limit). We write 3 n = 5.
n=0 5
P
1.1.8. Theorem. [Divergence test] n!1 lim an 6= 0 ) an diverges:
n2N
IF the general term does not tend towards zero,
THEN the series diverges.
P
Proof. By contradiction: the statement (an 6! 0 ) an diverges) is logically equivalent with the
P n2N
statement ( an converges ) an ! 0).
n2N
P from de…nition
an converges ) 9S = lim Sn ) an = Sn Sn 1 ! S S = 0:
n2N n!1 n!1

The behavior of a series (convergent or divergent) is a qualitative information, called "the nature
of the series". When convergent we may also talk about the sum of the series, which is quantitative
information [conditioned by the qualitative information]. A di¤erence between the two types of information
(quantitative and qualitative) is that usually the algorithms embedded in software products are built upon
the claim that the qualitative part is satis…ed –and so the usage of some software products for situations
where the qualitative part is not satis…ed may lead to unexpected results. As a general rule, it is advisable
to separate the qualitative and quantitative studies.
 5

1.1.9. Remark. There are some signi…cant di¤erences between …nite and in…nite addition (summation);
some of them:
(1) While …nite addition always exist, this is not the case with in…nite addition.
(2) While …nite addition is commutative, the rearrangement of the terms of an in…nite addition may
alter both the qualitative and the quantitative results.
(3) While …nite addition is asociative, careless grouping and regrouping of the terms of an in…nite
addition is false and may lead to unexpected results.
P
1
1.1.10. Example. Consider ( 1)n . The series diverges because the general term doesn’t tend
n=0
towards zero. Still the following false line of reasoning "…nds the sum of the series":
S = 1 1+1 1+1 1+1+ )
S 1= 1+1 1+1+ )
S 1= (1 1 + 1 1 + 1 + )= S)
1
) 2S = 1 ) S = :
2
P
1
The "result" is false and the unique mistake is "the notation" S = ( 1)n which implicitly and falsely
n=0
P
1
assumes that a number S exists and is equal with the abstract symbol ( 1)n .
n=0

1.1.11. Remark. Given a series, the inclusion/exclusion of a …nite number of terms doesn’t change the
nature of the seriesP[Because a …nite
P number of additions/substractions does not modify the existence of
a limit] [the series an and an have the same nature]. Still, it may change the value of the
n2N n2Nnf0;1; ;kg
sum, when it exists.

1.1.12. Remark. While …nite addition is associative, in…nite addition is not always associative. This
means that in…nite grouping of the added objects sometimes changes the nature of the in…nite summation.
Example: "0 = 1". False line of reasoning:
1= 1+0+0+ +0+ =
= 1 + ( 1 + 1) + ( 1 + 1) + ( 1 + 1) + =
= (1 1) + (1 1) + + (1 1) + =
= 0:

[The line of reasoning again makes the (hidden) false assumption that there is a number S equal to the
P1
abstract symbol ( 1)n and falsely assumes that rearrangements are true for divergent series]
n=0

1.1.13. Remark. When convergent, the sum of a series is unique [because the limit of a sequence is
unique].
P
1.1.14. Remark (Algebraic operations with series, Thms. 3.47, 3.50, 3.51 [14]). When the series an
P P P n2N
and bn are both convergent and 2 R, the series (an + bn ) and ( an ) are also convergent and
n2N n2N n2N
6

moreover, the following relations between the sums of series are valid:
P P P
(an + bn ) = an + bn ;
n2N P n2N P n2N
( an ) = an :
n2N n2N
P P
1.1.15. Remark. In this result, the qualitative part is: " an and are both convergent )
bn
n2N n2N P P P
(an + bn ) = an + bn ;
P P n2N P n2N P n2N
(an + bn ) and ( an ) are also convergent" while the quantitative part is:
n2N n2N ( an ) = an :
n2N n2N

1.1.16. Remark. The proof is based on translating the convergences in terms of ""–de…nitions".

1.2. Special cases

1.2.1. Arithmetic sequence (arithmetic progression). is a sequence of numbers so that the
di¤erence between any two consecutive terms is constant (and is called "common di¤erence") (Alternative
characterization: For any three consecutive terms, the middle term is the arithmetic mean of boundary
terms)
an = a1 + (n 1) d,
Arithmetic series:
P
n P
n n (n 1)
ak = (a1 + (k 1) d) = na1 + d
k=1 k=1 2
[Used in …nance, simple interest formulas]

1.2.2. Geometric sequence (geometric progression). is a sequence of numbers such that the
ratio between two consecutive terms is constant (Alternative characterization: For any three consecutive
terms, the middle term is the geometric mean of the extreme terms).
an = a1 rn 1 , r 6= 1.
Geometric Series:
Pn Pn 1 rn
ak = a1 rk 1 = a1 .
k=1 k=1 1 r
P n convergent, a 2 ( 1; 1)
a =
divergent, a 2 Rn ( 1; 1)
n2N 8
< 1 an+1
2
In fact Sn = 1 + a + a + a + 3 n
+a = ; a 6= 1
: 1 n; a a = 1:
( 1
; a 2 ( 1; 1)
So lim Sn = 1 a
n!1
does not exist or in…nite in rest.
[Used in Finance, compounded interest formulas]

1.2.3. Harmonic sequence (harmonic progression). is a sequence of numbers such that the
sequence of reciprocals is an arithmetic sequence:
1
an = (such that any denominator is nonzero)
a1 + (n 1) d
Harmonic series:
 7

P
n P
n 1
ak = (no elementary formula available)
k=1 k=1 a1 + (k 1) d
Interpretation: Given n (ordered) observations for a certain measurement (such that the observations
are comparable), say that an observation is a "record" if it is the greatest of all (up to it). Then the
1 1 1
expected number of records is 1 + + + + .
2 3 n

P1 1
1.2.4. The number e. e =
n=0 n!

n
1
1.2.1. Theorem (Thm. 3.31, [14]). lim 1+ = e.
n!1 n

1.2.2. Theorem (Thm. 3.32, [14]). The number e is irrational.

1.2.3. Example (Achille and the Turtle (Zenon paradox); also see Section 1.3 [3]). Achilles (A) and
the Turtle (T) race together. It is assumed that Achilles’speed is much bigger than the Turtle’s speed, so
common sense tells that even if Achille gives the Turtle an initial advantage, he will still win the race.
The following line of reasoning has been known since Ancient Greece as the "Zenon paradox":
Denote A’s speed vA and T’s speed vT (with vA > vT ). Consider the advance given by A in the form of
distance S0 . A starts the race only when T covers S0 . Then A starts and until he also covers S0 T already
covers another distance called S1 . In the time needed by A to cover the new distance S1 , T covers a new
distance S2 , and so on. "Common sense" says that the distances Sn even if they are increasingly smaller,
they are always strictly positive. This is interpreted in the following manner: "Achilles will never outrun
the Turtle, because the Turtle will always have a strictly positive distance in advance".
n+1
vT
n 1
P1 vT vA S0 v A
T’s total advantage is (the geometric series): S0 = lim S0 v = [Al-
n=0 vA n!1
1
T vA vT
vA
though the Turtle’s total advantage is an in…nite sum of strictly positive distances, the total value of the
sum is …nite]
S0
The time Achille needs to cover this distance is which is equal with (the geometric series)
vA vT
n
P1 S
0 vT
.
n=0 vA vA
8

1 P
1
1.2.4. Example (Telescoping/collapsing series). Consider the series . It is convergent and
n=1 n (n + 1)
is a "telescopic series" in the sense that the sum may be calculated "elementary", by successive cancellation:
1 1 1 Pn 1 Pn 1 1
= ; so that = =
k (k + 1) k k+1 k=1 k (k + 1) k=1 k k+1
1 1
=
1 2
=
1 1
+ +
2 3
= = 1
+ + ) Sn = 1 ;
= = n+1
1 1
+
n n+1
=
1
=1
n+1
) 9 lim Sn (so the series is convergent)
n!1
and lim Sn = 1 (so the sum is 1)
n!1

P
n 1 1 Pn 1
CAUTION: The sum has a …nite number of terms so it is not wrong to write
k=1 k k+1 k=1 k
P
n 1 P1 1 1
.On the contrary, in the situation , because of the in…nite number of terms, it
k=1 k + 1 n=1 n n+1
P1 1 P
1 1
is wrong to write ; both series are divergent so that actually we have:
n=1 n n=1 n + 1

X
1
1 1 X1
1 X
1
1
"=" () 1" = "1 1:
n=1
n n+1 n=1
n n=1
n+1

P
1 p p p
1.2.5. Example. n+2 2 n+1+ n
n=1
P
1 p p p
n+2 2 n+1+ n =
n=1
P
1 p p p p
= n+2 n+1+ n n+1 =
n=1
P
n p p p p
= lim k+2 k+1+ k k+1 =
n!1 k=1
p p p p
= lim n+2 2+1 n+1 =1 2
n!1

1.2.6. Exercise. For the following telescoping series, establish their nature and if convergent …nd the
sum:
P1 1
(1) p p =1
n=1 n+ n+1
 9

P
1 1 1
(2) = 3
n=1 n2+ 5n + 6
P1 1 5
(3) 2
= 12
n=1 n + 4n + 3
P1 n
(4) ln
n=1 n+1
P1 3n2 + n 1
(5) 2
n=1 n 2n + 3
1.2.5. Various series classi…cations.

1.2.5.1. With respect to the convergence/divergence (and the type of divergence) of the sequence of
convergent
%
partial sums: series ! divergent ! sum equal to 1
&
sum does not exist

general (an 2 R)
%
series ! positive (an 0)
1.2.5.2. With respect to the type of the general term:
&
alternate (an = ( 1)n bn , bn 0)
or an an+1 < 0

1.3. Convergence Tests for positive series

The general term for positive series will be positive (an 0) and strictly positive (an > 0) only when
required by the involved operations. The sum of these series always exists, but it may be in…nite (+1).
1.3.1. Theorem (Thm. 1.48, [3]). For a positive terms series, changing the order of the terms does
not change the nature of the series or the value of the sum.
P
1 P
1
Proof. Consider an with an > 0 for all n and bn a rearrangement of the …rst series (that is,
n=1 n=1
the same terms in di¤erent order).
P
n
The sequence of the partial sums Sna = a
an is an increasing sequence (because Sn+1 = Sna +an+1 > Sna )
k=1
so it has a limit (which may be in…nite, denote it by S a ).
Pn
The sequence of the partial sums Snb = bn is also an increasing sequence with limit S b .
k=1
Consider an arbitrary …xed index n. Since b1 , , bn is a rearrangement of the terms an , there is pn
the biggest index for which bk = ank (pn = max fn1 ; ; nk g). Then Snb Span S a so passing to limit for
n ! 1 it follows that S b S a . A similar argument leads to S a S b so in fact S a = S b .
10

P 1.3.2. Theorem
P (First Comparison Test; Thm. 1.49, [3]). Consider two series with positive terms
an and bn so that there is an index n0 2 N for which 0 an bn , 8n n0 .
n2N n2N
Then:
P P
(1) If bn converges then an converges;
P
n2N P n2N
(2) If an diverges then bn diverges.
n2N

Proof. Since the nature of the series does not change when substracting a …nite number of terms,
it may be assumed that the inequality 0 an bn is valid for all n. Then between the partial sums
sequences (which are increasing sequences for the present case) there is the relation Sna Snb for all n
which means that when Snb is bounded Sna is bounded too, and when Sna is unbounded Snb is unbounded
too.
P 1 1 1
Exercise: For the series n
use the inequality 3n + 2 3n ) n and the …rst
n2N 3 + 2 3 +2 3n
comparison test to study the nature of the series.
P 1 p p p p p 1
Exercise: For the series p use the inequality n + n = 2 n n + n+1 ) p
n2N n n
1
p p and the …rst comparison test to study the nature of the series.
n+ n+1
1.3.3. Theorem (Ratio Comparison Test; Thm. 1.55, [3]). Consider two series with positive terms
P P an+1 bn+1
an and bn so that there is an index n0 2 N for which 8n n0 .
n2N n2N an bn
Then:
P P
(1) If bn converges then an also converges;
P
n2N Pn2N
(2) If an diverges then bn also diverges.
n2N n2N

an+1 bn+1
Proof. Again consider that for all n. By multiplying all the inequalities from n = 0 up
an bn
ak bk a0
to n = k 1 it follows that so that ak bk for all k and The Comparison Test may be applied
a0 b0 b0
to conclude the proof.
1.3.4. Theorem (Limit Comparison Test; Thm. 1.52 [3]). If 9 lim abnn = 2 (0; 1) then the series
P P n!1
an and bn have both the same nature.
n2N n2N
P
1.3.5. Theorem (nth Root Test / Cauchy’s test, Thm. 1.65, [3]). For the series an , an > 0.
p n2N
If lim n an = L 2 (0; 1), then:
n!1
(1) For L < 1 the series converges;
(2) For L > 1 the series diverges;
(3) For L = 1 the test is inconclusive.
P
1.3.6. Theorem (Ratio Test / D’Alembert’s test, Thm. 1.62, [3]). For the series an , an > 0.
n2N
 11

an+1
If lim = L 2 (0; 1), then:
n!1 an
(1) For L < 1 the series converges;
(2) For L > 1 the series diverges;
(3) For L = 1 the test is inconclusive.
1.3.7. Theorem (IntegralPTest, Thm. 1.57 [3]). Consider a function ( ) : [1; 1)R! R+ continuous and
1
decreasing. Then the series (n) converges if and only if the improper integral 1 (x) dx converges.
n2N
P P
1.3.8. Theorem (Cauchy Condensation Test, Thm. 2.3 [3]). The series an , an > 0 and 2n a2n
n2N n2N
have both the same nature.
P 1
1.3.9. Theorem. The p–series p
with p 2 R is:
n2N n
(1) Convergent if p > 1.
(2) Divergent if p 1.
1.3.10. Theorem (Schlömilch, Thm. 2.4 [3]). If an > 0 is eventually decreasing and the sequence nk
nk+1 nk P
is strictly increasing such that is a bounded sequence, then the series an , an > 0 and
P n k n k 1 k n2N
(nk+1 nk ) ank have both the same nature.
n2N
P
1.3.11. Theorem (Raabe’s Test, Thm. 11, [9]). For a series an with positive terms (an > 0),
n2N
an
suppose the limit lim n 1 exist and is equal with L. Then:
n!1 an+1
(1) If L > 1 then the series converges;
(2) If L < 1 then the series diverges.
(3) If L = 1 then the test is inconclusive.

1.4. Convergence tests for general series

P P
1.4.1. De…nition. The series an is called absolute convergent when jan j is convergent (the series
n2N n2N
of absolute values).
1.4.2. Remark. For a general series (with an 2 R) the series of absolute values is a positive terms
series, so the previous section applies to it.
P
1.4.3. De…nition. The series an is called conditionally convergent when it is convergent but not
n2N
absolute convergent.
1.4.4. Theorem. If a series converges absolute then it converges (in the ordinary sense).
P P
Proof. Consider an absolute convergent series an . Then jan j is convergent and:
P n2N n2N
0 an + jan j 2 jan j ) the series (an + jan j) is with positive terms and is dominated by a
n2N
convergent series so by The Comparison Test it is convergent.
12
P P P
Then because the series (an + jan j) and jan j are convergent, so it is their di¤erence: (an + jan j)
P P n2N P n2N n2N
jan j = (an + jan j jan j) = an .
n2N n2N n2N
P P
1.4.5. Theorem (Abel). If an converges and (bn )n2N is a bounded monotone sequence then an b n
n2N n2N
converges.
P
1.4.6. Theorem (Dirichlet). If an has bounded partial sums and (bn )n2N is monotone and lim bn =
n!1
P n2N
0, then an bn converges.
n2N

1.5. Convergence tests for alternating series

P
1.5.1. De…nition. The series an is called alternating when an = ( 1)n bn , bn > 0.
n2N

1.5.2. Theorem (Alternating series test / Leibniz, Thm. 1.75, [3]). If:
(1) 9n0 2 N, 8n n0 , bn+1 bn .
(2) lim bn = 0.
n!1
P
Then the alternating series ( 1)n bn , bn > 0 converges.
n2N

1.6. Some formulas and exercises

P
n
1=n
k=1
Pn n (n + 1)
k=
k=1 2
Pn n (n + 1) (2n + 1)
k2 =
k=1 6
2
Pn
3 n (n + 1)
k =
k=1 2 8
< 1 xn+1
1 + x + x2 + + xn = ; x 6= 1
1 x
: n + 1; x=1
( 1
; x 2 ( 1; 1)
1 + x + x2 + + xn + = lim (1 + x + x2 + + xn ) = 1 x
n!1
6 9 or 1 otherwise
P1 2n + 2 3n + 5n

n=1 3n + 5n

1.7. A Macroeconomical Example

Optional Macroeconomics Topic for Series: Chapter 3, Doepke, Lehnert, Sellgren MACROECO-
NOMICS, 1999.
 13

1.7.1. Example. A typical Macroeconomics model, called "The household’s maximization problem",
may look like this:
P
1
t 1
max
1
u (ct ) ;
fct gt=1 t=1
P
1 P (yt ct )
subject to: t 1 = 0:
t=1 (1 + R)
It is beyond the goal of the present text to study such models. Here we just mention the economical
interpretations expressed by means of series:
t 2 N means "(discrete) time" ( 0 means "now", 1 means "a year from now" and so on); the
measurement unit for time may be "year" or a certain unspeci…ed "period of time".
the discussion is about a "household", and not an individual; one di¤erence is that while an
individual lives a …nite number of years, the household may be considered "to live forever" (an
inde…nite number of years).
the household uses a single commodity (say bananas) measured in quantities (kilos of bananas)
both for income and consumption;
–yt is "the household’s income for period t" (kilos of bananas) (exogeneous)
–ct is "the household’s consumption for the period t" (kilos of bananas)
–P is the price of one kilo of bananas (doesn’t change over time :) );
–the household has access to a "bananas market", where it may buy (at price P ), sell (at price
P ) and invest money to buy bonds on the bananas market, which bear interest R (1 USD
invested gives the next period (1 + R) USD);
–u ( ) is an increasing function of consumption, called "the household’s consumption utility
function"
2 [0; 1] is "the household’s discount factor" and it is a way to express how much the household
cares for the current consumption as oposed to future consumption
– = 0 means that the household only cares about current consumption;
– = 1 means that the household cares equally about current inde…nite future consumption;
– = 0:95 (a typical value) should mean that the household cares a little more about the
present than the future consumption.
With the above conventions, the initial problem says: "…nd the maximum present utility and the
consumption strategy to attain this, while keeping equal the present values of all future income and all
future consumption".

1.8. Power Series

P
1
1.8.1. De…nition. Given a sequence of real numbers (an )n2N and a 2 R the series an (x a)n is a
n=0
power series around a and the numbers an are the coe¢ cients of the power series.
P
1 p 1
1.8.2. Theorem. For the power series an (x a)n put = lim n jan j (if it exists) and R = .
n=0 n!1
Then the power series converges if jx aj < R and diverges if jx aj > R (R is called the radius of
jan+1 j 1
convergence). A similar result is valid when = lim (if it exists) and R = ).
n!1 jan j

Proof. Apply the root test (or the ratio test).

14

1.8.3. Remark. For the values x = a R and x = a + R there is no way to decide in advance so they
have to be studied separately for each case. The interval j[a R; a + R]j is called "convergence domain"
and for each case it has to be decided if it is left/right open/closed.

1.9. Taylor’s expansions

1.9.1. Theorem (Taylor, Thm 5.15, [14]). Consider f ( ) : [a; b] ! R and n 2 N .
If:

(1) The derivatives up to nth order exist and are continuous on [a; b] (for a and b consider lateral
derivatives),
(2) The (n + 1)th derivative exist on (a; b),
(3) < 2 [a; b]
Pn f (k) ( )
(4) The polynomial P ( ) is de…ned by: P (x) = (x )k [P ( ) is called „The nth order
k=0 k!
Taylor polynomial in ”; P ( ) „coincides” with f ( ) in , in the sense that P (k) ( ) = f (k) ( ),
8k = 0; n].

f (n+1) ( )
Then: 9 2 ( ; ) such that f ( ) = P ( ) + ( )n+1 .
(n + 1)!

f( ) P( )
Proof. Consider the function g (x) = f (x) P (x) (x )n+1 .
( )n+1
Then:
f( ) P( )
g (j) (x) = f (j) (x) P (j) (x) n+1 (n + 1) n (n 1) (n j + 1) (x )n j , 8j = 0; n
( )
f( ) P( )
g( ) = f ( ) P ( ) ( )n = 0.
( )n
f( ) P( )
g( ) = f ( ) P ( ) ( )n = 0.
( )n
f( ) P( )
g (j) ( ) = f (j) ( ) P (j) ( ) n n (n 1) (n j + 1) ( )n j = 0, 8j = 0; n
( )
f ( ) P ( )
g (n+1) (x) = f (n+1) (x) (n + 1)!.
( )n+1
From "The Mean Value Theorem" (TMVT) (for example Theorem 30.3 in [2]) for g ( ) on [ ; ] there
is 1 2 ( ; ) such that g 0 ( 1 ) = 0.
From TMVT for g 0 ( ) on [ ; 1 ] there is 2 2 ( ; 1 ) such that g 00 ( 2 ) = 0.
From TMVT for g (n) ( ) on [ ; n ] there is n+1 2 ( ; n ) such that g (n+1) ( n+1 ) = 0, meaning
f( ) P( )
f (n+1) ( n+1 ) = (n + 1)!.
( )n+1
f (n+1) ( )
For = n+1 it follows f ( ) = P ( ) + ( )n+1 .
(n + 1)!
 15

1.9.2. Remark (Taylor Series). Suppose that the conditions in Taylor’s Theorem are satis…ed for any
f (n+1) ( )
n 2 N and that the remainder (h)n+1 converges to 0 as n ! 1 (uniformly with respect to h in
(n + 1)!
P
1 f (n) ( )
j[a R; a + R]j. Then f (a + h) = hn , for h 2 j[a R; a + R]j.
n=0 n!
P1 xn
1.9.1. Some usual Taylor expansions. ex = , 8x 2 R
n=0 n!
P
1 ( 1)n 2n+1
sin x = x , 8x 2 R
n=0 (2n + 1)!
n
P1 ( 1)
cos x = x2n , 8x 2 R
n=0 (2n)!
P1 lnn a
ax = xn , 8x 2 R
n=0 n!
P1 1
sinh x = x2n+1 , 8x 2 R
n=0 (2n + 1)!
P
1 1 2n
cosh x = x , 8x 2 R
n=0 (2n)!
P1 ( 1) ( n + 1) n
(1 + x) = x , jxj 1
n=0 n!
p 1 1 1 2 1 1 3 3 1 1 3 5 4
1+x=1+ x x + x x + , jxj 1
2 2 4 2 4 6 2 4 6 8
p3
1 1 2 2 1 2 5 3 1 2 5 8 4
1+x=1+ x x + x x + , jxj 1
3 3 6 3 6 9 3 6 9 12
P1 ( 1)n+1
ln (1 + x) = xn , 8x 2 ( 1; 1]
n=0 n
P
1
1.9.3. Exercise. n an
n=1

P1 (n3 + 1) an
1.9.4. Example.
n=1 (n + 1)!

P1 (n3 + 1) an P
1 (n + 1) (n2 n + 1) an
1.9.5. Solution. = =
n=1 (n + 1)! n=1 (n + 1)!
P1 (n2 n + 1) an P
1 nan an an
= = + =
n=1 n! n=1 (n 1)! (n 1)! n!
P1 nan P1 an P
1 an
= + =
n=1 (n 1)! n=1 (n 1)! n=1 n!
P1 nan P1 an 1
= ea 1 + a =
n=1 (n 1)! n=1 (n 1)!
P1 (n 1 + 1) an
= ea 1 a ea + =
n=1 (n 1)!
P1 (n 1 + 1) an
= ea 1 a ea + a + =
n=2 (n 1)!
16

P1 (n 1) an an
= ea 1 a ea + a + + =
n=2 (n 1)! (n 1)!
P
1 an 2 P1 an 1
= ea 1 a
a e +a+a 2
+a =
n=2 (n 2)! n=2 (n 1)!
= ea 1 a ea + a + a2 ea + a (ea 1) = ea 1 + a2 ea