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Macroeconomic Theory I Question Paper
Macroeconomic Theory I
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
ARTS, COMMERCE AND EDUCATION
EET 200: MICROECONOMIC THEORY. I
DATE: Monday
23rd November 2009
TIME: 11.00am-1.00pm
INSTRUCTIONS:
Answer QUESTION ONE and any other TWO QUESTIONS
QUESTION ONE
a)
Differentiate between consumer equilibrium for two goods which are perfect
substitute
and
perfect
complements.
[6marks]
b)
Sub-Saharan African countries are said to be labour abundant and it is expected
that firms operating in this region utilize labour optimally. With the use of
calculus, derive the condition for factor payments in the case of labour for the
firms operating in SSA assuming that their objective is profit maximization in the
short run.
[10marks]
c)
Monopolies are not desirable in welfare economics because of the associated
inefficiencies. Show mathematically that in case a unit tax is levied on a
monopolist, the price of output would increase by half the tax, assuming a
constant marginal cost. Clearly show magnitude and the direction of the impact.
[6marks]
d)
Demonstrate your understanding of Pareto optimality and derive the condition for
welfare maximization.
[8marks]
Page 1 of 3
QUESTION TWO
a)
Derive the relationship between marginal revenue and price elasticity of demand
and explain its significance to the monopolist’s pricing decisions. [10marks]
b)
The following production function is presented to a micro economist in Kenyatta
University
Mombasa
campus:
? 0219
X
?
log Y =log ? 1
0781 ?
? X2
?
Required:
i)
Interpret the coefficients of the function.
[2marks]
ii)
Show the returns to scale and the degree of homogeneity [2marks]
c)
Using microeconomic tools of analysis prove that the slope of the indifference
curve is the ratio of marginal utilities of the goods.
[6marks]
QUESTION THREE
a)
Using proper equations, explain the difference between compensating and
equivalent
variations.
[4marks]
b)
O’kampo has finally won the tender to repaint Nyayo house. His problem is to
curtail the cost of painting the building with red (X1) and indigo (X2) paints. He
faces the following production function Y2 = X X . Using economic tools of
1
2
analysis
solve
O’kampo’s
problem.
[8marks]
c)
Show the elasticity of substitution of a Cobb-Douglas production function with
constant returns to scale is equal to one.
[8marks]
QUESTION FOUR
a)
Differentiate between Slutsky’s and Hicksian substitution effect. [6marks]
b)
Given the following production function for a firm;
Y=3 X X , derive the conditional and unconditional factor demand function.
1
2
[8marks]
Page 2 of 3
c)
Using a well labeled diagram, show the dead weight loss and other inefficiencies
associated
with
a
monopolist.
[6marks]
QUESTION FIVE
a)
Explain the properties of a production function as clearly as possible and give
relevant
examples.
[6marks]
b)
Using Iso-profit lines show the equilibrium of the firm and derive the optimal
condition
that
has
to
hold.
[14marks]
Page 3 of 3
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