MICROECONOMICS I

EET 100: MICROECONOMICS I

DATE: TUESDAY, 1ST DECEMBER 2009 TIME: 8.00 A.M. – 10.00 A.M.
INSTRUCTIONS: Answer question ONE and any other TWO questions.
QUESTION ONE
Distinguish between the following sets of terms. (30 marks)
i) Monopsony and monopoly markets
ii) Own price elasticity of demand and cross price elasticity of demand
iii) Change in supply and change in quantity supplied
iv) Engel curve and income consumption curve
v) Social costs and private costs
vi) Economies of scale and returns to scale
vii) Marginal product and average product
viii) isocline and isocost line
ix) Indifference curve and isoquant
x) Budget line and compensated budget line
QUESTION TWO
a) Suppose that a consumer consumes two goods X and Y. Suppose further
that X is a giffen good and that the price of good X increases. With the
aid of well labeled diagram explain how the quantity demanded of good X
will change, clearly isolating the income and substitution effects. (12 marks)
b) Outline and briefly explain four characteristics of a monopoly market. (8 marks)

QUESTION THREE
a) List and briefly explain the shapes of any four types of isoquants that you know.
(8 marks)
b) The fact that a firm is in equilibrium does not necessarily mean that it is
making profits. Do you agree with this statement? Illustrate your detailed
answer with the aid of well labeled diagrams. (12 marks)
QUESTION FOUR
a) Briefly distinguish between normal, inferior and giffen goods. (3 marks)
b) How does the information in (a) above help the producers of each type of
the goods in decision making. (7 marks)
c) Given X = f (K,L) is the production function of firm and C = wL + rK is
its cost constraint. Mathematically derive equilibrium of the firm. (10 marks)
QUESTION FIVE
a) Given that the Kenya Ports Authority has the following production function
3
1
2
1
L
AK , obtain the firm’s degree of homogeneity and comment on its returns
to scale. (10 marks)
b) Outline and briefly discuss any five sources of monopoly power. (10 marks)