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Microeconomic Theory 2 Question Paper

Microeconomic Theory 2

Course:Bachelor Of Economics

Exam Year:2012

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2011/2012
MAY SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF ECONOMICS
EET 200:MICROECONOMIC THEORY 2

INSTRUCTIONS:
Answer question one and any other two questions

Question 1(compulsory)

a)Citing examples,explain three basic properties of consumer preferences (9marks)

b)The following production function is presented to an economist in Kenyatta university:
log Y=0.46X1+0.55X2
1)Interpret the coefficients of the function (2 marks)

2)Show the returns to scale and the degree of homogeneity (3marks)

c)As an upcoming economist explain the concept of efficiency in relation to monopoly and perfect competition markets using diagram(s) (5 marks)

d)Use Edge worth box diagram to analyze the exchange of two goods 1 and 2 and two inputs L and K (5 marks)

E)Explain the difference between the following terms.

1)Interior optimum and boundary optimum solution (2 marks)
2)Conditional demand function and unconditional demand functions (2 marks)
3)Strong axiom of revealed preference and weak axiom of revealed preference (2 marks)

Question Two

a)Given the following equation U=X10.4X20.6 decompose the total effect of a price change when the price of good 1 reduces from Ksh. 30 to Ksh. 25.The income of the consumer is Kshs 6000 per month while the price of good 2 is Ksh. 35. (8marks)

b)Using well labeled diagrams distinguish between the substitution and income effects of a decline in price of one good under the following circumstances:

a)Imperfect substitutes (2 marks)
b)Perfect compliments (2marks)
c)Perfect substitutes (2marks)

c)Prove that the slope of the isoquant is the ratio of marginal product of the two inputs(6marks)

Question Three

a)A firm has the following production function and Q=100K0.45L0.55 where K and L represent labor and capital respectively.Obtain conditional and unconditional demand functions (12marks)

b)Given a monotonic utility function of the form U(X1,X2)=0.36InX1+0.64InX2 Calculate the marginal rate of substitution (5marks)

c)Explain the difference between short run and long run production functions (3marks)

Question Four

a)Show that the relation MR=P(1+1/e)holds for the demand function Q=1/Pk Where MR,P,Q and e are Marginal Revenue,price,Quantity and price elasticity of demand respectively.K is constant (5marks)

b)A price discriminating monopolist has the following demand and cost functions for a product he sells both locally and in a foreign country.Given the following equations

Q1=42-0.2P1
Q2=100-0.8P2
TC=4000+20Q Where Q=Q1+Q2

A)Compute the optimal quantity and price in each market (10 marks)

b)Prove the sufficient condition for profit maximization in each market
(5marks)
Question Five

In pure exchange,improving the welfare of an individual is only possible at the expense of the other if an allocation is Pareto efficient.Using Edge worth box and mathematical analysis,explain how Pareto efficient allocation is achieved through exchange (20 marks)

Microeconomic Theory 2 Question Paper

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