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Midterm Test: Economics and Finance

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8 views2 pages

Midterm Test: Economics and Finance

Uploaded by

youngandbeautifull666
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MIDTERM TEST

Problem 1 (20 points)

Hanna Velasco Real Estate realized that by reducing the price of each plot by $15,000, it would sell 1,000
more plots of land per week.

The quantity sold and the price of the product are related to each other with the linear equation
1 1
Qd= 𝑎 𝑃 − 𝑎 15000 where Qd is the quantity demanded and P is the selling price.

1) Find the value of the slope of the above function. (3 points)

2) The firm's supply function is given by P= 15Qs+6000. Calculate the equilibrium price and quantity. (2
points)

3) The government imposes a tax of $t on each product sold. If the buyer has to pay $1500 in tax, how
much tax does the seller have to pay? (10 points)

4) If the current sales quantities are 250, find the approximate change in the value of TR due to a 5 unit
increase in Q. (5 points)
Problem 2 (30 points)
2.1 Given the demand function: 𝑃 = −𝑄2 − 10𝑄 + 150. Find the price elasticity of demand when 𝑄=4.
Hence estimate the percentage change in price needed to increase the quantity demanded by 10%.
(10 points)
2.2 The table below shows the index and inflation rate related to house prices from 2011 to 2016.
(20 points)

Year 2011 2012 2013 2014 2015 2016


Index 1 111 100 123 125
Index 2 88.8 114 118
Inflation 10.3% 9% 11.2% 11% R
rate

a) Which years are chosen as base years (4 points)? Find the index number of the years 2012, 2013,
2014, 2015, and 2016(round to the second decimal place) ( 5 points )
b) If house rent was $25,000 in 2011, find house prices in 2012 and 2016. ( 6 points )
c) If we do not convert to the second index, calculate the Inflation rate of 2016, knowing that the index
for the real value of 2016 is 109. ( 5 points ).
Problem 3
3.1 ( 15 points )
Andy saves $6000 in bank X at the beginning of a year at an interest rate of 12% compounded monthly.
From the second year onwards, at the beginning of each quarter, Andy saves an amount of money A at
the interest rate of 4.5% compounded quarterly. After 5 years Andy receives a total of $25010,
calculating the value of A.
3.2 ( 15 points )
An engineering company needs to decide whether or not to build a new factory. The costs of building
the factory are $150 million initially, together with a further $100 million at the end of the next 2 years.
Annual operating costs are $5 million commencing at the end of the third year. Annual revenue is
predicted to be $50 million commencing at the end of the third year. If the interest rate is 6%
compounded annually, find:
(a) the present value of the building costs (5 points )
(b) The minimum value of n year for which the net present value is positive. (10 points )
Problem 4 ( 20 points )
At the beginning of a month, a customer owes a credit card company $8480. In the middle of the month,
the customer repays $ A, where A < $8480, and at the end of the month the company adds interest at a
rate of 6% of the outstanding debt. This process is repeated with the customer continuing to pay off the
same amount, $ A, each month.
(a) Find the value of A for which the customer still owes $8480 at the start of each month. ( 4 points )
(b) If A = 1000, calculate the amount owing at the end of the eighth month. ( 6 points )
(c) Suppose after the 8th month, the debtor has an income problem so he asks to pay less than $1000
every half month. The creditor happily agreed with the condition that the interest rate would increase to
7% and the debtor must pay off the debt in 2 quarters. Calculate the new payment. ( 10 points )

Common questions

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Compounding impacts savings growth by determining how interest accumulates over time across multiple periods. Monthly or quarterly compounding means that interest is calculated more frequently, which results in a higher effective rate of interest. In the scenario where savings accrue at both monthly and quarterly compounding rates, future value calculations incorporate ongoing interest applications, thus affecting the total savings sum over the years .

Calculating the present value of building costs involves discounting future cash flows (both costs and revenues) back to their present value at the given interest rate (6% compounded annually). The formula PV = FV / (1 + r)^n is used, where PV is the present value, FV is the future value of cash flows, r is the interest rate, and n is the number of periods. This approach helps in evaluating whether the investment's future cash flows justify its costs .

The tax imposed on each product results in a division of the tax burden between the buyer and seller. In this scenario, if the buyer pays a $1500 tax, the total tax burden would require examining the impact on the price that sellers receive after tax is factored. By utilizing the equilibrium concepts and altering the post-tax price, we determine the difference absorbed by both parties, accounting for the elasticity of demand and supply .

To determine the inflation rate from index data, compare the index values from two consecutive years. The inflation rate is calculated as the percentage change from the previous year’s index to the current year’s index. For interpretation, it reflects the rate at which purchasing power is eroded or increased prices over the time period, influenced by economic conditions .

To estimate the percentage change in price needed to change the quantity demanded by a specified amount, first calculate the price elasticity of demand at the given quantity using the demand function P = -Q^2 - 10Q + 150. After determining elasticity, apply the elasticity formula (%ΔQ demanded / %ΔP) to solve for the necessary percentage change in price that results in the desired change in quantity demanded .

To find the change in Total Revenue (TR) for a 5-unit increase in quantity sold, we first calculate the initial TR using the given price and quantity. Then, determine TR at the new quantity (+5 units). Subtract the initial TR from the new TR to assess the change. This computation involves understanding the relationship between price, quantity sold, and TR, including how marginal changes in quantity can affect revenue .

The slope of the demand function is a coefficient that represents the rate at which the quantity demanded changes in response to changes in the price. In the given function Qd = -1/a(P - 15000), the slope can be determined by identifying the coefficient of P. This value (1/a) illustrates how much the quantity demand will increase or decrease with a $1 change in price. The problem specifies that a $15,000 price reduction results in an increase of 1,000 plots sold, indicating that the slope yields a specific relationship between price adjustments and demand changes .

The equilibrium in a market is found where supply equals demand. For the functions provided, Qd (demand) and Qs (supply), we must set them equal to find the equilibrium. With the demand function Qd = -1/a(P - 15000) and the supply function P = 15Qs + 6000, we substitute and solve for P and Q to find the equilibrium price and quantity .

Determining the minimum time period for achieving a positive net present value (NPV) involves analyzing when the present value of incoming cash flows outweighs ongoing or upfront costs. This requires projecting future cash flows and discounting them back at the project’s financial rate of return (e.g., 6% compounded annually). By iterating through potential project durations, identifying the earliest point where cumulative discounted revenue exceeds cumulative discounted expenses reveals the minimum positive NPV period .

Changes in interest rates and payment structures alter the speed and cost of debt repayment. Increasing the interest rate results in larger portions of repayments being allocated to interest rather than principal. If payments are adjusted (e.g., lowered or rescheduled), it impacts the payment timeline and total interest paid. Adjusting these variables requires recalculating the series of payments needed to achieve complete debt settlement under new terms .

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