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Econ 110: Introduction To Microeconomics December 2010 Question Paper
Econ 110: Introduction To Microeconomics December 2010
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
COURSE CODE: ECON 110
COURSE TITLE: INTRODUCTION TO MICROECONOMICS
STREAM: Y1S1
INSTRUCTIONS:
1. Answer ALL the questions in section A. this section carries 30 marks.
2. In section B, answer two questions. Each question carries 20 marks.
SECTION A (30 MARKS)
QUESTION 1
Assume that the Kenyan coffee industry is modeled by the following:
P = -QD + 27
P = 8Qs
Where: QD = quantity of coffee consumed per month (in thousands),
Qs = quantity of coffee produced per month (in thousands), and
P = price per kg (shillings)
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 price and quantity. (3 marks)
(c) Draw a diagram and show the consumer and producer surpluses. (5 marks)
(d) Assuming no government intervention, calculate consumer,producer and total surpluses.
(5 marks)
(e) Suppose the government decides to impose a tax of 90 cents per kilogram of
coffee produced, calculate the new equilibrium price and quantity. (3 marks)
(f) Calculate the consumer surplus, producer surplus, tax revenue and the deadweight loss.
(8 marks)
QUESTION 2
Use appropriate diagrams to explain why the government prefers to impose a tax on
goods that have an inelastic demand. (5 marks)
SECTION B (40 MARKS)
QUESTION 1
Complete the following labour demand table for a firm that is hiring labour competitively and
Selling its product in a competitive market.
Units of Total Marginal Total Marginal
Labour product product Revenue Revenue
(shs. ) Product (shs.)
0 0
1 17
2 31
3 43
4 53
5 60
6 65
Assuming that the price of the product is shs.20,
(a) How many workers will the firm hire if the market wage rate is shs.270? shs.190?
(4 marks)
(b) Explain why the firm will not hire a larger or smaller number of units of labour at
each of these wage rates. (4 marks)
(c) Show graphically the labour demand curve of this firm. (4 marks)
(d) Determine the firm’s demand curve for labour, assuming that it is selling in an imperfectly
competitive market and that, although it can sell 17 units at shs.25 per unit, it must lower
product price by shs. 5 in order to sell the marginal product of each successive labour unit.
(4 marks)
(e) Compare the demand curve in part(d) to that derived in part (c). Which curve is more elastic?
Explain. (4 marks)
QUESTION 2
Assume that individual firms in a competitive industry are making profits in the short-run.
Use appropriate diagrams to show and explain how in the long-run, the price and quantity
of both the firm and industry will respond to the initial situation. (20 marks)
QUESTION 3
(a) Explain the income and substitutional effects of a change in the price of a normal good. Use
appropriate diagrams. (10 marks)
(b) In 2008, the Kenyan government increased constituent colleges by 30%. In the same
year, the Joint Admission Board increased first year students from 10,000 to 15,000.
Explain the effect of these policy measures on the equilibrium price and quantity of
university education in Kenya. (10 marks)
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