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 )
