Limit and Exponential Functions

y a , a 1
x
10
10

y a , 0 a 1
x

8
8 6 4 2

6 4 2

-6

-4

-2 -2

-6

-4

-2 -2

The above graph confirm that exponential functions are continuous everywhere.

lim a a
x x c

Break Even Analysis

Sometimes in business environment we need to find a level of output of a firm or industry where zero profit/zero loss are earned. Such a level is called break-even point. Recall that profit=total revenue-total cost

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Example
Suppose that a firm is involved in production of fire detectors. The fixed costs of the firm equals Rs. 6700 and production of one unit of a product requires Rs. 78. also suppose that each fire detectors is sold at a price of Rs 110. How many units of fire detectors may be produced to ensure break-even.
Copyright by Houghton Mifflin Company, Inc. All rights reserved.

Say firm produces X units of fire detectors then

Here the Revenue function is R(X)=110X And the cost function is C(X)=6700+78X Now for break even R(X)-C(X)=0 Or R(X)=C(X) 110X=6700+78X 110X-78X=6700 X=6700/32=209.4
Copyright by Houghton Mifflin Company, Inc. All rights reserved.

Conclusion
So if firm produces 210 fire detectors then there would be no profit no loss. 210 is the equilibrium quantity of output.

Copyright by Houghton Mifflin Company, Inc. All rights reserved.

Interest
.

Definition
Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money , or, money earned by deposited funds . Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements.

Interest
Interest can be thought of as "rent of money". For example, if you want to borrow money from the bank, there is a certain rate you have to pay according to how much you want loaned to you. Interest is compensation to the lender for forgoing other useful investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost.

Principal Amount
In Simple Interest the amount invested initially is used, as a Principal Amount for calculation of payable amount of interest. I=P r t In other words Interest (I) is calculated by multiplying Principal (p) times the Rate (r) times the number of Time (t) periods. For example, if I invest $100 (the Principal) at a 5% annual rate for 1 year the simple interest calculation is: I=P r t $5 = $100 x 5 % x 1 yr

Simple Interest Limitations

Simple interest is a very basic way of looking at interest. In fact, your interest whether youre paying it or earning it is usually calculated using different methods. However, simple interest is a good start that gives us a general idea of what a loan will cost or what an investment will give us. The main limitation that you should keep in mind is that simple interest does not take compounding into account.

Example:
A student purchases a computer by obtaining a simple interest loan. The computer costs $1500, and the interest rate on the loan is 12%. If the loan is to be paid back in weekly installments over 2 years, calculate: 1. The amount of interest paid over the 2 years, 2. the total amount to be paid back, 3. the weekly payment amount. Given: principal: 'P' = $1500, interest rate: 'R' = 12% = 0.12, repayment time: 'T' = 2 years

Solution
Part 1: Find the amount of interest paid. interest: 'I' = PRT = 1500 0.12 2 = $360 Part 2: Find the total amount to be paid back. total repayments = principal + interest = $1500 + $360 = $1860

.
Part 3: Calculate the weekly payment amount total repayments weekly payment amount = --------------------------------------loan period, T, in weeks
No of weeks in a year = approx. 323/7=52

$1860 = ------------------2 52

= $17.88 per week

Example 2
Ross deposited $400 earning simple interest of 4% per year. Calculate the simple interest at the end of one year and at the end of five months. Solution I=prt I = $400 x 0.04 x 1= $16.00 Ross will $16.00 interest after one year.

Solution
Recall: Interest rates are based on 12 months. Therefore, to find the interest after five months, divide the time by 12. I=prt I = $400 x 0.04 x 5/12 =$6.67

Ross will pay $6.67 interest after five months.

Time in months Interest rate

12
1 5

0.04
0.04/12=0.003333 5*0.003333=0.017

Example
What amount of principal will earn interest of $175.50 when invested at 6.5% in 2 years? I=prt $175.50 = p x 0.065 x 2 175.50 = p x .13 p = 175.50/.13 p = 1350 The principal required would be $1350

Compound Interest
.

Definition
Compounding interest is "interest on interest." It is a method of calculating interest where the interest is added to the original principle. This new value is now our principle for the next time period. In this method the interest earned in past terms can earn interest in future terms. Simple interest is a type of interest that is paid only on the original amount deposited and not on past interest paid.

Formula for Compound Interest

P is the principal (the initial amount you borrow or deposit) r is the annual rate of interest n is the number of times interest is compounded in a years. t is the number of years for which loan is availed/financed. A is the amount of money accumulated after n years, including interest.

Amount accumulated after ONE year

Here are a few examples of the formula: Annually = P (1 + r) = (annual compounding) Quarterly = P (1 + r/4)4 = (quarterly compounding) Monthly = P (1 + r/12)12 = (monthly compounding)

Problem 1
If you have a bank account whose principal = $1000, and your bank compounds the interest twice a year at an interest rate of 5%, how much money do you have in your account at the year's end? 2.1 here Amount of Money
means 2*1 or 2X1

Problem
The first credit card that you got charges 12.49 % interest to its customers and compounds that interest monthly. Within one day of getting your first credit card, you max out the credit limit by spending $1,200. If you do not buy anything else on the card and you do not make any payments, how much money would you owe the company after 6 months?

Principal loan=1200=P Interest rate per year=0.1249=r Compounding frequency=monthly=12=n Loan financed for time=5 months or t=5