Topics In Economic Theory Question Paper

Topics In Economic Theory

Course:Bachelor Of Arts In Economics

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
ARTS, COMMERCE AND EDUCATION

AEC 400:
TOPICS IN ECONOMIC THEORY

=================================================================
DATE:
TUESDAY 22ND DECEMBER 2009
TIME: 2.00 P.M. ? 4.00 P.M.

INSTRUCTIONS

1.
Question ONE (1) is compulsory (30 marks)
2.
Answer any other TWO Questions (20 marks each)

Q.1
a)
i)
Briefly outline Alexander Hamilton?s contribution to the theory of

protection
of
local
industries by any country.

(3 marks)

ii)
Briefly outline Friedrich?s List?s contribution to the theory of

protection of domestic market by small economies.
(3 marks)

b)
List the four main impulses that trigger the import substitution strategy in

developing countries, which are similar to those of mercantilists. (4 marks)

c)
Highlight four modern arguments that justify protect of infant industries.

(8 marks)

d)
Use sketch graphs to show the effects of a tariff on the import substitution

strategy.

i)
Label the graphs appropriately showing autarky prices and quantities

and
the
same
when
trade
opens.
(6
marks)

ii)
Explain the import substitution effects of the tariff on domestic

producers,
domestic
consumers
and government revenue. 6 marks)

iii)
Given private revenue (PR), private costs (PC) and social benefits

(SB)
use
equations
to
explain
the basis on which protection of local

industry
can
be
justified.
(6
marks)
Page 1 of 2

Q.2
a)
Name two methods, which are used to measure the effective rate of protection

(ERP).

(2 marks)

b)
Given:
The free market price of one tonne of cement from Bamburi is Ksh.
14,000/-, ex factory.
To produce one tonne of cement requires Ksh. 8,400/- worth of
imported inputs (coal, fuel, gypsum, spare parts etc)
Suppose the government of Kenya imposed a tariff of 10 per cent on
imported cement from Egypt, and a 5 per cent tariff on imported inputs
used to make cement in Kenya.

What would be the effective rate of protection (ERP) for Bamburi cement,

using
any
of
the
two
methods? (12
marks)

c)
If Kenya imports vehicles worth Ksh. 500 million, textiles worth Kshs. 200
million and chemicals worth Ksh. 100 million at the tariff rates of 25%, 20%
and 15% respectively, what would be the weighted average tariff rate
(WATR)
for
the
three
imports. (6
marks)

Q.3
a)
Explain the rationale of government interventionist policies in the production
and
consumption
processes.
(12
marks)

b)
How would you measure the size of the public sector in an economy.

(8 marks)

Q.4
a)
Explain the various instruments that a government utilizes when intervening
in
the
money
sector.
(6
marks)
b)
?Government
interventionist policies may not necessarily lead to an efficient

allocation of resources.? True or False?

Give arguments to support your answer.

(14 marks)

Q.5
Show that two consumers will achieve Walrasian equilibrium when consuming two

goods if and only if the marginal rates of substitution between the goods are equal for
both
consumers.
(20
marks)
Page 2 of 2

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