IAS 106 - Midterm 1 .Questions and Answers

IAS 106 - Midterm 1 .Questions and Answers 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 Escalade. Suppose that the demand is Qd = 500 - 3P + 3PKIA - 2PRW , where P is the price of an Escalade (in thousands of dollars), PKIA is the price of a Kia Sorrento (in thousands of dollars), and PRW is the price of the platinum-plated wheel rims people put on Escalades. Assume that supply is given by Qs = 100 + 7P. Assume PKIA = 40 and PRW = 10. a) (3pts) What is the equilibrium price and quantity for the Escalade? Qd = 500 - 3P + 3Pkia – 2 Pwr Pkia = 40, Pwr = 10 à Qd = 500 - 3P + 3(40) – 2(10) = 600 – 3P Qs = 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 Escalade? ε = ΔQd /ΔP * P/Q = -3 * (50/450) = -0.333 η = ΔQs /ΔP * P/Q = 7 * (50/450) = .777