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Further Topics In Microeconomics Question Paper

Further Topics In Microeconomics

Course:Bachelor Of Economics

Institution: University Of Nairobi question papers

Exam Year:2013

University of Nairobi
First semester examinations- 2012/2013
Third year examinations for the degree of Bachelor of Economics and Bachelor of Arts
CEC 305/XET 301: Advanced Microeconomics/Further topics in Microeconomics
Date: May 24, 2013 Time: 2.00 pm- 4.00 pm
Instructions:
Answer Question ONE and any other TWO questions.
Question One:
Two firms in an oligopolistic market are making decisions as to whether to engage in high or low advertisement. The payoffs associated with the two strategies are given below,

Firm 2
High Low
Firm 1 High 3,1 1,4
Low 2,2 3,1
What are pure strategies? How do they differ from mixed strategies? [4 marks]
Does this game have a Nash equilibrium in pure strategies? If yes please specify it. [2 marks]
Determine the Nash equilibrium in mixed strategies. [7 marks]
Explain why goods will not be distributed efficiently among consumers if the marginal rate of transformation (MRT) is not equal to the consumers’ marginal rate of substitution. [6 marks]
Can a firm have a production that exhibits increasing returns to scale, constant returns to scale and decreasing returns to scale as output increases? Discuss. [4 marks]
Define adverse selection. How does it arise in insurance markets? [4 marks]
State any three features of an oligopoly market. [3 marks]

Question 2
Describe several ways sellers can convince buyers that their products are of high quality. Which of these apply to LG washing machines, Galitos Pizza? [6 marks]
Two firms compete by choosing price. Their demand functions are;
q1 = 20 – p1 + p2
q2 = 20 + p1 + p2
where p1 and p2 are prices charged by each firm respectively and q1 and q2 are the resulting demands. The total costs are TC1 = 10 TC2 = 20.
Suppose the two firms set their prices at the same time. Find the resulting Nash equilibrium. What price will each firm charge, how much will it sell and what will its profit be? [6 marks]
Suppose firm 1 sets its price first and then firm 2 sets its price. What price will each firm charge, how much will it sell and what will its profit be? [ 4 marks]
Suppose the firms collude, what price will they charge, how much will they sell and what will be the profit?

Question 3
What is the marginal rate of transformation (MRT)? Explain why the MRT of one good for another is equal to the ratio of the marginal cost of producing the two goods? [4 marks]
Suppose the market for petrol can be described by the following equations:
Demand: P = 10 – Q
Supply: P = Q – 4
Where P is the price in Kenyan shillings per unit and Q is the quantity in thousands of units.
What is the equilibrium price and quantity? [1 marks]
Suppose the government imposes a tax of 1 shilling per unit to reduce petrol consumption and raise the government revenue, what will the new equilibrium be? What price will the buyer pay? What amount per unit will the seller receive? [ 6 marks]
Graph the old and the new equilibrium [11/2 marks]
Suppose the government decides to make public happy by removing the tax and instead granting a subsidy of 1 shilling per unit to petrol producers. What will the equilibrium be? What price will the buyers pay? What amount per unit will the seller receive? [6 marks]
Graph the old and the new equilibrium. [11/2marks]
Question Four
The burden of tax is shared by producers and consumers. Under what conditions will consumers pay most of tax? Under what conditions will producers pay most of the tax? [5 marks]
Anne has 3 litres of soft drinks and 9 sandwiches.
Tom has 8 litres of soft drinks and 4 sandwiches.
With these endowments, Anne’s marginal rate of substitution (MRS) of soft drinks for sandwiches is 4 and Tom’s MRS is equal to 2.
Draw an Edgeworth box diagram to show whether this allocation of resources is efficient. If it is not, explain why. [6 marks]
Show that not all exchanges that make consumers better off are efficient. [5 marks]
What is utility possibility frontier? [4 marks]
Question Five
Show how feedback effects can make a general equilibrium analysis substantially different from a partial equilibrium analysis. [8 marks]
Explain why the marginal rate of technical substitution is likely to diminish as more and more labor is substituted for capital. [ 3 marks]
Two firms are in the ice cream market. Each can choose to go for the high end market (high quality) or the low end (low quality). Resulting profits are given by the following payoff matrix:

Firm 2
High Low
Firm 1 High -20, -30 900, 600
Low 100, 800 50, 50
What outcomes, if any, are Nash equilibria? [2 marks]
What is a maximum strategy? [2 marks]
If managers of both firms are conservative and each follows a maximum strategy, what will be the outcome? [3 marks]
In the stackelberg model, the firm that sets output first has an advantage. Explain why? [2 marks]

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