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Econ 100: Introduction To Microeconomics Question Paper
Econ 100: Introduction To Microeconomics
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
COURSE CODE: ECON 100
COURSE TITLE: INTRODUCTION MICROECONOMICS
STREAM: Y2S1
INSTRUCTIONS
1. Answer ALL the Questions in Sections A. This section carries 30 marks.
2. In Section B, answer ONE question. Each question carries 20 marks.
3. In Section C, answer ONE question. Each question carries 20 marks.
PLEASE TURNOVER
2
SECTION A (30 MARKS)
Question 1
Consider the following information for John’s total utility from consuming cookies and
Samosas. John’s wage is Shs. 90 and the prices of cookies and Samosas are Shs. 20 and Shs.
10 respectively.
Number
of Products
Cookies Samosas
TU MU MU/P TU MU MU/P
0 0 0
1 100 80
2 180 150
3 240 210
4 280 260
5 310 300
6 330 330
(a) Copy the table and fill the columns for MU and MU/P. (4 marks)
(b) Given John’s income of Shs. 90, what quantities of cookies and Samosas will he purchase
to maximize utility? (2 marks)
(c) Suppose the price of cookies falls to Shs. 10, what quantities of cookies and Samosas will
John purchase? (3 marks)
(d) Suppose there are 50 identical consumers like John who have the same income and derive
utility from consuming cookies. Draw the industry demand curve for cookies at the
following prices; Shs. 20 and Shs. 10. (3 marks)
Question 2
The following information refers to an open-mixed economy. Except for the marginal
propensity to consume, all figures are in currency units (Shs.).
• C = 500 + 0.75Yd
• Ig = 900
• G = 650 and T = 400
• X = 850
• M = 600
where C is consumption, Y is real GDP, Ig is planned investment (gross), X is exports, M
is imports, G is government spending and T is the lump-sum tax.
3
(a) Derive an equation for aggregate expenditure (AE) as a function of real GDP (Y).
(2 marks)
(b) Calculate the equilibrium value of real GDP (Y). (3 marks)
(c) Using your equation from question (a), calculate AE for each Shs. 1000 increase of GDP
(starting with no real output, i.e. GDP = 0 up to GDP = Shs. 14000) and draw the
Aggregate Expenditure model. (hint: use Shs. 2000 steps for both axes).
(5 marks)
(d) Suppose that exports increase to X = Shs. 950 and imports decline to M = 500. Calculate
the new equilibrium value of real GDP (Y). (2 marks)
(e) Draw the new aggregate expenditure function in the diagram and explain how
equilibrium is re-established in the economy. (3 marks)
(f) Suppose that the economy is at the equilibrium calculated in (e) and that fullemployment
(i.e. potential) GDP is Shs. 10000. Calculate the GDP gap.
(2 marks)
(g) What type of GDP gap does the economy experience? (1 mark)
SECTION B - MICROECONOMICS (20 MARKS)
Question 1
Assume that the Kenyan public service labour market is modelled by the following:
P = -QD + 27
P = 8QS
Where: QD = number of workers per month (in millions),
QS = number of workers per month (in millions), and
P = wage in Shs. per month (thousands)
Subject to QD = 0, QS = 0, and P = 0.
(a) Deduce what the price elasticity of supply is. (Hint: you do not need to calculate it)
(1 mark)
(b) Calculate the equilibrium wage and quantity. (3 marks)
(c) Draw a diagram showing both the demand and supply curves. (2 marks)
(d) Assuming no government intervention, calculate worker, firm and total surpluses.
(5 marks)
(e) Suppose the government believes that public servants receive too low wages and want to
impose a minimum wage of Shs. 20,000 per year to ‘protect them’. Will this minimum
wage be effective? Explain your answer. (2 marks)
4
(f) Suppose the government now sets a minimum wage of Shs. 30,000 per year. Calculate
the new worker and firm surpluses (assume that people use no resources for search
activities). In addition, calculate the deadweight loss.
(7 marks)
Question 2
Compare and contrast a perfectly competitive industry with a monopolistically competitive
industry with respect to allocative and productive efficiency. Use appropriate graphs.
(20 marks)
SECTION C - MACROECONOMICS (20 MARKS)
Question 1
In the month of May 2010, the governor of Central Bank of Kenya (CBK), Professor Njuguna
Ndung’u, urged commercial banks to lower interest rates after the CBK had lowered its
discount rate. Illustrate using the AD-AS model how the low interest rates can lead to inflation
in Kenya. (20 marks)
Question 2
Using appropriate diagrams, explain the effect of the following on the equilibrium interest
rates:
(a) A fall in money supply (10 marks)
(b) An interest in people’s desire to hold bonds instead of money. (10 marks)
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