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Bcom 201:Intermediate Microeconomics Question Paper
Bcom 201:Intermediate Microeconomics
Course:Bachelor Of Commerce
Institution: Chuka University question papers
Exam Year:2011
INSTRUCTIONS:
1. Answer Question ONE and any other TWO questions.
2. Apart from question ONE; all other questions carry equal marks. Marks for subdivisions are shown in brackets.
3. Calculators are allowed in the examination room provided they are not programmable and cannot store or recall information.
4. Marks will be awarded to candidates who demonstrate clarity and accuracy of presentation.
5. Diagrams should be used where helpful.
6. Do not write on the question paper.
QUESTION ONE
(a) Consider the table below showing Total Utility for commodities X and Y.
Q TUX TUY 1 15 8 2 27 14 3 36 18 4 42 20
2
If the prices for X and Y are, PX =3 and PY =2 respectively and consumer’s income (M), equals 13,
(i) Compute consumer equilibrium [3 marks]
(ii) Compute consumer’s total utility when in equilibrium. [1 mark]
(iii) Using indifference curves and budget line, plot the consumer equilibrium above [2 marks]
(b) (i) Using relevant examples, distinguish between a ‘Good’ Good and a ‘Bad’ Good. [3 marks]
(ii) By aid of a diagram, show the indifference curves of a ‘Good’ Good and a ‘Bad’ Good. [3 marks]
(c) (i) Distinguish between a ‘good’ input and a ‘bad’ input. [2 marks]
(ii) Show that other than in region ONE in the isoquant map, in all other regions at least one input is ‘bad’ input. [4 marks]
(d) (i) Show that AVC curve is U shaped. [3 marks]
(ii) Explain why it’s rational for a firm that is making losses in the short run to continue production when P > AVC and shut down when P < AVC. [3 marks]
(e) The demand curve is given by P = a – bQ and firms have identical TC = cQ Where, a>c hence part of demand curve lies above MC.
(i) What is perfect market equilibrium? [1.5 marks]
(ii) Show that in equilibrium, P = MC [1.5 marks]
(ii) Determine the firm’s maximum profit [3 marks]
3
QUESTION TWO
(a) John has Ksh 500 and enjoys only coffee and hamburgers. A cup of coffee costs Ksh 5 and hamburger costs Ksh 10.
(i) Graph John’s budget line and determine its slope. [2.5 marks]
(ii) Graph John’s budget line when the price of coffee doubles as a result of global coffee blight and determine the new slope. [2.5 marks]
(b) Consider the following demand function given by;
Q = 700 – 100P + 2M
Where;
P = 4 M = 1200
(i) If price increases from 4 to 6, compute substitution and income effect of price change. [6 marks]
(ii) Compute total effect of price change. [2 marks]
(iii) Comment on the nature of the good under consideration. [2 marks]
(c) Show that consumer equilibrium conditions both under Cardinal utility theory and Ordinal utility theory are identical. [5 marks]
QUESTION THREE
(a) Explain why Cobb-Douglas production function is preferred to linear and Leontief production functions in economics. [5 marks]
(b) Consider a Cobb-Douglas production function given by
Q = AKa Lß
If K and L changes by a factor ?, and Q changes by another factor µ,
(i) Show that µ = ?a+ß [3 marks]
(ii) From the relationship in (b) (i) above, derive the rules for the laws of returns to scale. [4.5 marks]
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(iii) Using Isoquants explain how you would tell that a production function is exhibiting the returns to scale in (b) (ii) above. [3 marks]
(c) Using graphical analysis, derive the firm’s long run total cost curve. [4.5 marks]
QUESTION FOUR
(a) Explain why a firm under perfect competition which is making supernormal profits in the short run might decrease its output in the long run while the output of the industry increases. Diagram necessary. [5 marks]
(b) In the long run, all firms in a perfectly competitive market are in equilibrium when making normal profits. The importance of this conclusion about long run equilibrium lies in its implications for the efficiency of the perfectly competitive firm. Explain this statement. [5 marks]
(c) (i) Distinguish between the 1st and 2nd degree price discrimination. [3 marks]
(ii) Explain with aid of a diagram, the efficiency and welfare losses from the monopolization of a perfectly competitive industry. [7 marks]
QUESTION FIVE
(a) Consider the following Duopoly with a demand function given by,
P = a – bQ
Each firm has an identical total cost function given by,
TC = cQ
Determine,
(i) The reaction functions for each firm [5 marks] (ii) Profit maximizing output for each firm [3 marks] (iii) The Coumot’s price [2 marks]
(b) (i) Briefly explain the Pareto-optimality criterion of social welfare. [2 marks] (ii) Using edge worth box, show that only distribution of two commodities say X and Y for two consumers A and B on the contract curve are efficient. [8 marks] -----------------------------------------------------------------------------------------------------
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