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Economics Revision Questions Question Paper
Economics Revision Questions
Course:Cpa Part I
Institution: Strathmore Business School question papers
Exam Year:2004
3.4 THE THEORY OF CONSUMER BEHAVIOUR
QUESTION FOURTEEN
(a) Define marginal utility and clearly explain the oxiom of diminishing marginal utility. (6 marks)
(b) Illustrate and explain the following:
(i) Consumer equilibrium under the cardinalist approach (7 marks)
(ii) Consumer equilibrium under the ordinalist approach (7 marks)
(Total: 20 marks)
QUESTION FIFTEEN
(a) (i) What is an indifference curve? (2 marks)
(ii) Explain the main characteristics of indifference curves (6 marks)
(b) (i) Briefly explain two exceptions to the definition of an indifference curve. (4 marks)
(ii) Explain any four uses of indifference curve analysis. (8 marks)
Total: 20 marks
QUESTION SIXTEEN
(a) (i) Define an indifference curve (2 marks)
(ii) Illustrate and clearly explain the nature of indifference curves for perfect substitutes and for
complementary goods (7 marks)
(b) Explain the property of convexity to the origin of an indifference curve ( 4 marks)
(c) Using the cardinalist approach of consumer behaviour, distinguish between income and substitution effects of a price rise for a normal good (7 marks)
(Total: 20 marks)
QUESTION SEVENTEEN
(a) State the law of diminishing marginal utility (2 marks)
(b) If Mrs Breader views butter and margarine as perfect substitutes, draw a set of indifference
curves that describe her preference for these two commodities ( 3 marks)
(c) The utility (U) obtained by Olympia by consuming food (F) and shelter (S) is given by utility
function U = FS
(i) Draw the indifference curves associated with utility levels of 12 and 24 utiles. (4 marks)
(ii) If food costs Sh. 100 per unit and shelter Sh. 300 per unit and Olympia’s monthly income equals Sh. 1,200 to be spent entirely on these two commodities use graphical methods to determine the Utility maximizing choice of food and shelter for this household (6 marks)
(iii) Calculate the marginal rate of substitution when Olympia spends the Sh. 1,200 budget by
purchasing three units of each. (3 marks)
(iv) Illustrate the effect on the optimal choice in (ii) above when Olympia’s income rises to
Sh. 3,600 (2 marks)
(Total: 20 marks)
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