Preparatory Course in Mathematics and Statistics

for the MPhil Programme

Faculty of Economics, University of Cambridge
July 2013

The preparatory course in mathematics and statistics is a compulsory

component of the MPhil programme in the Faculty of Economics. It begins on Monday September 16, 2013, and lasts for three weeks. All students admitted to the MPhil programme are required to have a rm grasp
of basic calculus, linear algebra, and statistics, and the preparatory course
therefore takes such a background as given and builds upon it. The aim of
the preparatory course is to ensure that all students understand the mathematical, statistical and econometric techniques which are used in the core
courses of the MPhil programme. The preparatory course is followed by a
short exam marked on a pass/fail basis. A poor performance on this exam is
a good indicator that a student will struggle with the content of the MPhil
modules.
The four components of the preparatory course are on Optimisation,
Linear Algebra, Statistics and Dierential Equations. Some further details
of these components are given below.
Teaching for the preparatory course is intense, and students are very
strongly encouraged to do some work on mathematics and statistics before
they arrive in Cambridge in September. In particular, students should ensure
that they have mastered the prerequisite material set out in the course details
below. Problems relating to the prerequisite material are given below, and
these should be done in order to check mastery of this material.
Examples of problems relating to the material covered in the preparatory
course that you would be expected to be able to answer on completion of
the preparatory course, can be found on the Faculty's web page at:
http://www.econ.cam.ac.uk/prospect/mphil/premath.html

1 Linear Algebra
1.1

Prerequisites

The course is mostly self-contained but basic knowledge of linear algebra is

assumed; see Thomas [7], Chapters 1-7 and Appendix 1, for an accessible
overview of the material which the course will assume is already known.
Chapter 5 of Silberberg and Suen [4] also provides a good account of linear
algebra with emphasis on its economic applications.
1.2

Problems on prerequisite material

Exercise 1 Find the determinants of the following matrices



1 1
3
1


,

3
2 6
6 1 1 .
2 1 8

Now nd the inverses of the above matrices.

Exercise 2 Solve the following systems of equations using Cramer's rule:

1.
2x + 1y = 2
1x + 2y = 2.

2.
7x1 x2 x3 = 0
10x1 2x2 + x3 = 8
6x1 + 3x2 2x3 = 7

Exercise 3 Consider the following model of a closed economy with Y gross

income, C consumption, I investment, G government expenditure, and a, b

parameters.
Y

C+ I+ G

a + bY.

For xed I and G, solve for equilibrium income and consumption using
Cramer's Rule.
2

Exercise 4 Find the eigenvalues and eigenvectors of the following 2 2

matrix

1.3

5 1
2 4

Topics covered in the course

Matrix denitions, addition and multiplication. Systems of linear equations

as matrices. Matrix calculus (Jacobian and Hessian). Determinants and
inverses. Eigenvalues and eigenvectors. Diagonalisation. Positive denite
matrices

2 Probability and Statistics

2.1

Prerequisites

The course is mostly self-contained and students should already be familiar

with much of the material. For those with a strong background in statistics
who would prefer a more rigorous coverage, either appendices A-C of Greene
[2], or chapters 2, 3, and appendix A of Judge et al. [3], cover much of what
is required. Note that Greene [2], appendix A also covers some of the linear
algebra material.
2.2

Problems on prerequisite material

Exercise 5 Two fair coins, a 10p and a 50p, are tossed. Find the probabil-

ities of:

1. Both showing heads

2. Dierent faces showing up
3. At least one head
4. You are told that the 10p shows heads. What is the probability that both
show heads?
5. You are told that at least one of the two coins shows heads. What is
the probability that both show heads?
6. What is the probability of 2 sixes when 2 fair dice are rolled?
7. What is the probability of at least one six when 2 fair dice are rolled?
3

Exercise 6 A random variable X has the distribution function

for
for
for

2
x
0
F (x) =

0x1
x<0
x > 1.

Dene the probability density of X , and nd its mean and standard deviation.
Exercise 7 The following data show the times of ow through an orice of

two types of sand. Is there sucient evidence that one type ows faster than
the other?
Type 1 Type 2
27.2
29.6
26.8
30.0
27.4
28.4
27.1
30.2
26.5

Exercise 8 There are 30 people in a room. What is the probability that two

or more have their birthday on the same day of the year?

Exercise 9 The following data are obtained on prices and quantities of or-

anges sold in a supermarket on 12 consecutive days.

Price: pence per kilo (X) Quantity: kilos (Y)

100
55
90
70
80
90
70
100
70
90
70
105
70
80
65
110
60
125
60
115
55
130
50
130

It is postulated that the demand function for oranges is of the form

Yi = + Xi + i , i = 1, 2, ..., 12

(1)

where the basic assumptions of the classical linear regression model hold.
Obtain least squares estimates of and using:
4

12
P

1. summation notation, i.e. b =

(Xi X)Yi

i=1
12
P

(Xi

X)2

b .
and b = Y X

i=1

2. matrix/vector notation, i.e. b =

(121)

b
b

(122)(21)

re-written such that Y = X

= (X0 X)1 X0 Y,

where (1) is

(121)

Exercise 10 It is hypothesised that the level of beer consumption is deter-

mined by the relative price of beer and the level of personal disposable income
as given by the model
Yt = 0 + 1 X1t + 2 X2t + t

where Y is beer consumption in millions of bulk barrels per year, X1 is the

relative price of beer and X2 is personal disposable income in 0000m at
1975 prices.
Data is available for the 17 years 1963-1979 as follows:
yt2 = 386, x21t = 2100, x22t = 1272, x1t x2t = 1521
x1t yt = 859, x2t yt = 682, X 1 = 83, X 2 = 67, Y = 36.

Lower case letters denote deviations from sample means. All summations
run from t = 1 to 17.
1. Estimate all the coecients in the above regression.
2. Make any necessary assumptions and test:
(a) H0 : 1 = 0.2 against HA : 1 6= 0.2.
(b) H0 : 2 = 0 against HA : 2 > 0.
3. Obtain the value of R2 for your regression and briey explain what it
measures.
2.3

Topics covered in the course

1. Probability, conditional probability and random variables

2. Joint and conditional density, independence
3. Expectations and other moments
5

4. Point and interval estimation

5. Method of moments, method of maximum likelihood
6. Properties of estimators bias, RMSE and the CRLB
7. Hypothesis tests, size and power
8. OLS estimation of CLRM

3 Optimisation
3.1

Prerequisites

All students on the MPhil programme are expected to have a rm grasp
of basic calculus before they arrive in Cambridge. The specic topics which
students will be expected to understand as prerequisites for the Optimisation
component of the course are as follows:
Basic concepts: necessary and sucient conditions; sets; relations and
functions (including inverse functions); exponents; logarithms; inequalities.
Calculus of one and several variables: concept of derivative; rules of
dierentiation, including partial dierentiation, continuous dierentiability
and Young's Theorem; the chain rule and the total derivative; dierentials;
integration.
Unconstrained optimisation of functions of one and several variables:
stationary values; extreme values; local and global extreme values; rst-order
necessary conditions; second-order conditions.
Constrained optimisation of functions of several variables subject to equality constraints: Lagrange's method; the interpretation of the Lagrange multiplier.
Note that these prerequisites include unconstrained optimisation and
the use of Lagrange's method to solve constrained optimisation problems
with equality constraints. These topics will be reviewed in the Optimisation
course, but it will be assumed that students have already encountered them.
There are many books that cover this prerequisite material. Sydsaeter
and Hammond [6] chapters 3-9 and 11-14 is probably the best reference, but
there are many other possibilities. For those who regard their mathematical
background as somewhat limited, Chiang and Wainwright [1] chapters 2, 412 and 14 covers this prerequisite material in a very accessible way. For those
with a strong mathematical background who would prefer a more rigorous
coverage of the prerequisite material, chapters 2-5, 12-14, 16-18 and A4 of
6

Simon and Blume [5] are recommended. For those with a strong mathematical background who would prefer a textbook which emphasises the economic
applications of the mathematics, chapters 2 and 3 of Silberberg and Suen [4]
are recommended for quick revision of the prerequisite material.
3.2

Problems on prerequisite material

Exercise 11 Write the following in set notation: (a) the set of all real num-

bers greater than 27; (b) the set of all real numbers greater than 8 but less
than 73.
Exercise 12 Given the sets S1 = {2, 4, 6}, S2 = {7, 2, 6}, S3 = {4, 2, 6} and
S4 = {2, 4}, which of the following statements are true? (a) S1 = S2 (b)
S1 = R (c) 5 S2 (d) 3
/ S2 (e) 4
/ S4 (f) S4 R (g) S1 S4 (h) S2
(i) S3 {1, 2}.

Exercise 13 Does each of the following, drawn in a rectangular coordinate

plane, represent a function? (a) A circle (b) A triangle (c) A rectangle.

Exercise 14 If the domain of the function y = 5 + 3x is the set {x : 1

x 4},

nd the range of the function and express it as a set.

Exercise 15 Find: (a) x3 /x3 (b) (x1/2 x1/3 )/x2/3 .

Exercise 16 Solve the following inequalities: (a) 3x1 < 7x+2 (b) 2x+5 <
x4

(c) 5x + 1 < x + 3.

Exercise 17 Given y = u3 + 1, where u = 5 x2 , nd dy/dx by the chain

rule.

Exercise 18 Find dy/dx for the following: (a) y = x2 e2x (b) y = ln (3x/ (1 + x))

(c) y = 5x4 ln x2 .

Exercise 19 Find y/x1 and y/x2 for each of the following functions:

(a) y = 2x31 11x21 x2 +3x22 (b) y = (2x1 +3)(x2 2) (c) y = (4x1 +3)/(x2 2).
Exercise 20 Find fx and fy for each of the following functions: (a) f (x, y)

(b) f (x, y) = (x2 1)/xy. Then nd fx (1, 2) - the value

of the partial derivative fx when x = 1 and y = 2 - for each function.
= (x2 3y)(x 2)

Exercise 21 Find the dierential dy given: (a) y = x(x2 + 3) (b) y =

(x 8)(7x + 5).

Exercise 22 Find the total dierential dy given (a) y = x1 /(x1 + x2 ) (b)

y = 2x1 x2 /(x1 + x2 ).

Exercise 23 Find the local (or relative) maxima and minima of y in each

of the following cases: (a) y = x3 + 6x2 + 7 (b) y = x3 /3 3x2 + 5x + 3 (c)

y = 2x/(1 2x) where x 6= 1/2.

Exercise 24 Consider the two functions y = 2x 5x2 /2 + x3 and y =

{2x 5x2 /2 + x3 }.

What is the relationship between the maxima and

minima of these two functions? What general principle does this example
illustrate?
Exercise 25 Find the extreme value(s) of each of the following functions,

and determine whether they are maxima or minima: (a) y = x21 +x1 x2 +2x22 +
3 (b) y = x21 + x1 x2 x22 + 2x1 + x2 (c) y = x21 + 3x22 3x1 x2 + 4x2 x3 + 6x23 .
Exercise 26 Consider the function z = (x 2)4 + (y 3)4 . (a) Establish by

intuitive reasoning that z attains a minimum of zero at x = 2 and y = 3.

(b) Is the rst-order necessary condition for a minimum satised at this
point? (c) Is the second-order sucient condition for a minimum satised
at this point? (d) Is the second-order necessary condition for a minimum
satised at this point?
Exercise 27 (i) Use the method of Lagrange multipliers to nd the values

of x1 and x2 that satisfy the rst-order necessary conditions for a maximum

or minimum of: (a) x1 x2 subject to x1 + 2x2 = 2; (b) x1 3x2 x1 x2 subject
to x1 + x2 = 6. (ii) By considering small changes in the values of x1 and
x2 that continue to satisfy the constraint, determine whether these values
give local maxima or minima. (iii) Find whether a slight relaxation of the
constraint in the above problems will increase or decrease the optimised value
of the objective function, and at what rate.

Exercise
28 Find: (a) 9x8 dx (b) (x5 3x)dx (c) 2e2x dx (d)

(e) (2ax + b)(ax2 + bx)7 dx.

Exercise 29 Evaluate: (a)
bx + c)dx.

3 2
1 x /2 dx

(b)

1
0

x(x2 + 6)dx

(c)

(4x)/(x2 + 1) dx

1 (ax

3.3

Topics covered in the course

The implicit function theorem. Optimisation with no constraints: rst-order

necessary conditions; second-order conditions; concavity and convexity of the
objective function and suciency of the rst-order conditions. Optimisation
with equality constraints: Lagrange's method; rst-order necessary conditions; second-order conditions. Optimisation with inequality constraints:
Kuhn-Tucker conditions; quasi-concavity and quasi-convexity of the objective and constraint functions and suciency of the rst-order conditions.
Comparative statics, optimum value functions, and the envelope theorem.
Homogeneous functions.

4 Dierence and Dierential Equations

4.1

Prerequisites

This is an introductory course on dierential equations and assumes very

little prior knowledge apart from a good grounding in basic calculus as set
out above.
4.2

Topics covered in the course

The idea of a dierential equations - description and phase diagrams. 1st order constant coecient dierential equations, particular and complementary
solutions. Linear approximations. Stability. 2nd order case. Transversality
conditions. Dierence equations.

References
[1] A.C. Chiang and K. Wainwright. Fundamental Methods of
Mathematical Economics (Fourth edition). McGraw-Hill, 2005.
[2] W.H. Greene. Econometric Analysis (Fifth edition). PrenticeHall, 2003.
[3] G.G. Judge et al. Introduction to the Theory and Practice of
Econometrics (Second edition). Wiley, 1988.
[4] E. Silberberg and W. Suen. The Structure of Economics: A
Mathematical Analysis (Third edition). McGraw-Hill, 2000.

[5] C. Simon and L. Blume. Mathematics for Economists. W.W.

Norton, 1994.
[6] K. Sydsaeter and P. Hammond. Essential Mathematics for Economic Analysis (Third edition).Prentice Hall, 2008.
[7] R.L. Thomas. Modern Econometrics: an introduction. Addison
Wesley Longman, 1997.

10