Midterm 1 (ans).pdf

# Midterm 1 (ans).pdf - Name IAS 106 Spring 2018 Instr Mario...

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2 c) (4pts) What are the cross-price elasticities on the demand for big SUVs with: 1) the price of the Kia Sorrento and 2) platinum-plated wheel rims? How do you know for sure if they are complements or substitutes? ε x,kia = Δ Q x / Δ P kia * P kia /Q x = 3 * (40/450) = .267 We know for sure that Kia and Escalades are substitutes because the cross- price elasticity is positive. An increase in price of Kia produces an increase in demand for Escalades. ε x,wr = Δ Q x / Δ P wr * P wr /Q x = -2 * (10/450) = -.044 We know for sure that rims and large SUVs are complements because the cross-price elasticity is negative. A rise in price of rims yields a decrease in demand for Escalades. d) (4pts) What if the government wants to impose a tax on big SUVs like an Escalade because they get low miles per gallon but not on small SUVs like the Kia Sorrento? How much will the price increase if a tax of 10 (in thousands of dollars) is placed on the production of each Escalade? Δ P = η /( η ε ) * Δ t Δ P = 0.777/[0.777- (-0.333)] * 10 Δ P = .7 * 10 Δ P = 7 Clearly, the consumer will absorb 70% of the tax placed on big SUVs 2. (14pts) Price Floor : What are the effects in the market for sugar when the government agrees to pay U.S. sugar farmers the difference between \$5 per pound of sugar and the price U.S. consumers are willing to pay for a pound of sugar. This is known as a defi- ciency payment system. Using the letters depicted in the graph below, determine so- cial welfare with a market outcome and a price floor outcome. Identify the deadweight loss resulting from the government’s policy.
3 (8pts) Market Price Floor Consumer Surplus ABE ABECFGH Producer Surplus CFD BCDEFJ Government -- -(BCEFGHIJ) Social Welfare ABCDEF ABCDEF-I Deadweight Loss I Mathematical Calculations: a) (2pts) Calculate total Social Welfare under market conditions: ½ (\$7-\$0.25) (3000) = \$10,125 b) (2pts) Calculate producer surplus with the price floor.

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