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Advanced Microeconomic Theory Question Paper

Advanced Microeconomic Theory

Course:Master Of Economics

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF MASTER
OF ECONOMICS
SPECIAL / SUPPLEMENTARY EXAMINATION

EET 502 - ADVANCED MICROECONOMIC THEORY II

=================================================================
DATE:
TUESDAY 1ST DECEMBER 2009 TIME: 9.00 A.M. – 12.00 NOON

INSTRUCTIONS
Answer ALL the FOUR Questions.

1.
Assume that the consumer’s utility function takes the form:

5
.
0
.
0 5
U (x , x ) = x
x and that
1
2
1
2

p = 8 while o
U = 50
2

i)
Calculate the equivalent variation (EV) and compensating variation (CV)
when P1 rises from 10 to 16.
ii)
Find the change in consumer’s surplus.

2.
Consider a market with aggregate demand Q = 24 –P where Q is the amount

demanded and P is the price. In the following parts of this question, assume that all

firms have the following cost function.

C(0) = 0 and C(q) = q2 + 4q + q if q > 0, where q is the output of the firm:
Page 1 of 2

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i)
If a single firm acts as a price-setting monopolist, what is the firm’s optimal
price and quantity?
ii)
If four (4) firms act as competitive price-takes, what is the equilibrium price
and output for each firm?

3.
Using appropriate examples explain each of the following:

i)
Pareto efficient allocation in consumption.

ii)
Why a monopolist operates only where the price elasticity of demand is

greater than 1 in absolute terms.
iii)
Pigovian taxes as a solution to the problem of inefficiency caused by
production externalities.

4.
A market with aggregate demand given as Q = - 0.5P + 22 has two identical firms

where cost function is C(q) = 4q + 2q2 where P is the market price and q is the

output of the firm. If the two firms act as Cournot- Nash duopolists, what is the

equilibrium output for each firm? What is the equilibrium price?

Page 2 of 2

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Advanced Microeconomic Theory Question Paper

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