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

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1 Name__________________________________ IAS 106 Spring 2018 Instr. Mario B. Muzzi Intermediate Microeconomics: Midterm Exam I This exam is out of 100 points with 110 points possible. It is worth 15% of your overall grade in the class. Please show your work and box your answers. 1. (15pts) Market Demand and Elasticities : Consider the demand for an a Cadillac Es- calade. Suppose that the demand is Q d = 500 - 3P + 3P KIA - 2P RW , where P is the price of an Escalade (in thousands of dollars), P KIA is the price of a Kia Sorrento (in thousands of dollars), and P RW is the price of the platinum-plated wheel rims people put on Escalades. Assume that supply is given by Q s = 100 + 7P. Assume P KIA = 40 and P RW = 10. a) (3pts) What is the equilibrium price and quantity for the Escalade? Q d = 500 - 3P + 3P kia – 2 P wr P kia = 40, P wr = 10 à Q d = 500 - 3P + 3(40) – 2(10) = 600 – 3P Q s = 100 + 7P At equilibrium, S = D à 200 – Q* /3 = Q*/ 7 -100/7 600 – Q* = 3Q*/7 – 300/7 4,200 – 7Q* = 3 Q* - 300 4,500 = 10Q* Q* = 450 P* = 200 – (450)/3 P* = 50 b) (4pts) What are the coefficients for the price elasticity of demand and supply the Es- calade? ε = Δ Q d / Δ P * P/Q = -3 * (50/450) = -0.333 η = Δ Q s / Δ P * P/Q = 7 * (50/450) = .777
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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.
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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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