MICROECONOMIC THEORY 1

EET 100: MICROECONOMIC THEORY 1

DATE: Tuesday 22nd December 2009 TIME: 8.00am – 10.00am
INSTRUCTIONS:
Answer question ONE and any other TWO questions.
QUESTION ONE
a. Write short notes on the following concepts:
i) Consumer sovereignty [1mark]
ii) Scarcity and choice [1mark]
iii) Fee market economic system [1mark]
iv) Veblen and Giffen goods [2marks]
v) Economic and non economic goods [1mark]
vi) Movement along and shift of demand curve [1mark]
vii) Arch and point elasticitiy [2marks]
viii) Diminishing marginal utility and the marginal products [2marks]
ix) Law of returns to scale and low of variable proportions. [2marks]
x) Monopoly and monopolistic market structure. [2marks]
b) The following economic function has been derived by the Revenue Manager of
Kenya Coffeex Limited:
Qa = 3p2 – 4P
Qb = 24 – P2
Where P represents price and Q is quantity
Required:

i) Which of the two functions could represent a demand curve? A supply
curve? Why? [2marks]
ii) At what values of price and quantity is the market in equilibrium?
[6marks]
Hint: Q1 and Q2 = -b+v (b2 – 4ac)
c) Explain with an aid of well labeled diagram supernormal profit of a firm
in a monopoly market. [6marks]
QUESTION TWO
a) Identify the main determinant of elasticity of demand. [6marks]
b) Briefly describe these economic applications of the concept of elasticity of
demand. [6marks]
c) The demand for commodity is five units when the price is Shs.100 per unit.
When the price per unit falls to Shs.600 the demand rise to six units. Compute
point and arch elasticity of demand. [6marks]
d) Is the above commodity a necessity or luxurious? Explain. [2marks]
QUESTION THREE
a) Explain the proposition of the law of variable proportions during the relevant
diagram. [6marks]
b) The total cost equation is the production of bacon at some hypothetical factory is
given as follows: C = 1000 + 100Q + 5Q2 + Q3
Where C= Cost measured in shillings, which
Q = Quantity measured in kilogram’s
Required:
a) Compute the total and average costs at the output level of 10 and 11 kilogrammes.
[6marks]
b) What is the marginal cost of the 12gh kilogram? [2marks]
c) Explain the shape and relationship between A.C, A.VC, M.C and A.F.C curves
using relevant diagrams. [6marks]
QUESTION FOUR
a) Define the term indifference curves. With the aid of separate diagrams, illustrate
indifference curves for perfect substitutes and for complementary good.
[4marks]
b) Using the relevant economics tool, distinguish between substitution and income
effect of a normal goods. [6marks]
c) Explain clearly the concept of consumer’s equilibrium. [5marks]
e. Distinguish between price consumption and income consumption curve.
[5marks]
QUESTION FIVE
a. Briefly explain the main characteristics of a perfect market. [4marks]
b) Discuss clearly the necessary and sufficient conditions for profit maximization by
a firm. Support your answer with appropriate illustrations. [4marks]
c) Suppose a monopolist demand function is given as Qd = 240 – 4P and his cost
function is given as C = Q2 + 40Q + 50.
Required:
i) What is the profit maximizing price and quantity? [5marks]
ii) What is the maximum profit for the monopolist? [2marks]
d) Explain with the aid of a diagram what would be the effect on market equilibrium,
if there is simultaneous increase in costs of production and a fall in the price of
complementary goods. [5marks]