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Macroeconomic Theory I Question Paper
Macroeconomic Theory I
Course:Bachelor Of Arts In Economics
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
ECONOMICS AND BACHELOR COMMERCE
EET 100:
INTRODUCTION TO MICROECONOMIC THEORY
DATE: Tuesday, 22nd December, 2009
TIME: 8.00 a.m. – 10.00 a.m.
------------------------------------------------------------------------------------------------------------
INSTRUCTIONS:
Answer question ONE and any other TWO questions.
Question One
a) Distinguish
between the following terms:-
i)
Consumer surplus and producer surplus
ii)
Arc elasticity and point elasticity
iii)
Inferior and Normal good
iv)
Marginal rate of substitution and marginal rate of technical substitution
(8 marks)
b)
The market for Nokia mobile phones is represented by the following functions
Q+1/3P = 36
Q+9 = 1/2P
Where P = price
Q = Quantity
i)
Identify the demand and supply functions, giving reasons in each case.
(4 marks)
ii)
Determine the equilibrium Price and Quantity.
(4 marks)
Page 1 of 4
iii)
Calculate the price elasticity of demand for Nokia phones, when its price
changes from Ksh. 30 to Kshs. 36.
(4 marks)
c)
Considering the effects of a price fall on consumer equilibrium, carefully
distinguish between an inferior good and a giffen good, giving examples in each
case.
(10 marks)
Question Two
a)
Distinguish between consumer equilibrium in cardinal and ordinal approach.
(6 marks)
b)
The information given below shows the combination of two goods (X and Y) that
yield the same level of utility to Jack. He has Ksh.200 to spend entirely on the
two goods and wishes to purchase the utility maximizing combination. The
prices of good X and Y are Ksh.24 and Ksh.3 respectively.
Combination
Good X
Good Y
MRS of good X for good Y
A
1 68
-
B
2 56
-
C
3 46
-
D
4 37
-
E
5 29
-
F
6
23
-
G
7 19
-
H
8 16
3
i)
Copy and complete the table above by filling in the missing values for
MRS.
(3 marks)
ii)
Using the above information, explain the concept of diminishing marginal
rate
of
sustition. (3
marks)
iii)
Determine the utility maximizing combination of good X and good Y.
(4 marks)
iv)
How much extra income does Jack need in order to purchase this utility
maximizing
combination.
(4
marks)
Page 2 of 4
Question Three
a)
Use a well labeled diagram to explain: Short run equilibrium, Long run
equilibrium and shut down point of perfectly competitive market. (15 marks)
b)
The demand function of a monopolist is given by P = 140-2Q and his/her cost
function is given by TC = 10 + 5Q2. Determine the profit maximizing quantity
and price
(5 marks)
Question Four
a)
The production information of a firm operating under perfect competition is
provided in the table below. The firm sells each unit of its output at Kshs.131.
Total output (Q)
Total variable cost (TVC)
0
0
1
90
2 170
3 240
4 300
5 370
6 450
7 540
8 650
9 780
10
930
i)
Calculate the values of total cost (TC), Average total cost (ATC), average
variable cost (AVC), marginal cost (MC) and revenue (MR)
(5 marks)
ii)
Plot AVC, ATC, MC and MR on a graph and estimate the profit
maximizing
price
and
quantity. (6
marks)
iii)
What is the level of economic profit attained at this output (3 marks)
b)
Outline any three reasons why the existence of monopolies may be beneficial to
the
economy.
(6
marks)
Page 3 of 4
Question Five
a)
Explain why indifference curve for a rational consumer
i)
Slope downward from left to right
(3 marks)
ii)
Convex
to
the
origin
(3
marks)
iii)
Do
not
intersect (4
marks)
b)
Describe how you derive market demand curve form individual curves.
(4 marks)
c)
Explain three importance of elasticity. (6
marks)
Page 4 of 4
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