MURANG’A UNIVERSITY COLLEGE (MRUC)

A Constituent College of Jomo Kenyatta University of Agriculture and Technology (JKUAT)

UNIT NAME: INTRODUCTION TO MICROECONOMICS (HR/BCOM)

UNIT CODE: HBC 2104

DATE: 24th April 2013 TIME ALLOWED: 2 HOURS

INSTRUCTIONS:-
Answer questions ONE (compulsory) and any other TWO questions.
Question One (compulsory)
a) Write short notes on the following:-
i. Consumer sovereignty
ii. Scarcity and choice
iii. Opportunity cost
iv. Production possibility frontier [8 marks]

b) More economies are currently opting for free market systems as opposed to
controlled systems. Compare the two systems describing their respective
advantages and disadvantages. [6 marks]

c) The following economic functions have been derived by the accountant of

Murang’a University College.
Qa = 3P2 – 4P
Qb = 24 –P2
Where P is Price and Q is quantity.

i. Which of the two functions could represent a demand curve?

A supply curve? and why? [3 marks]

ii. At what values of price and quantity is the market in equilibrium? [5 marks]

d) Distinguish between price elasticity of demand and cross elasticity of demand. [3 marks]

e) Explain FIVE major sources of monopoly power. [5 marks]

Question Two
a) Distinguish between “the law of variable proportions” and the law of returns
of scale. [5 marks]

b) Using a suitable diagram, explain the THREE stages of the law of variable
proportions. [10 marks]

c) Briefly explain FIVE assumptions of the law of variable proportions. [5 marks]

Question Three
a) What is meant by the terms; Economies of scale and Diseconomies of scale? [5 marks]

b) Write explanatory notes on the various types of internal and external

economies of scale. [15 marks]
Question Four
The total cost equation in the production of popcorns by a retailer in Murang’a
is as follows;

C = 1000 + 100Q – 15Q2 + Q3

Where C is cost, while Q is quantity of popcorns.
a) Compute the total and average costs at the output level of 10 and 11 packets [5 marks]

b) What is the marginal cost of the 12th packet? [5 marks]

c) Explain the shape and relationship between AC, AVC, MC and AFC curves using
relevant diagrams. [10 marks]

Question 5
a) State the ideal conditions for a perfect market. [4 marks]

b) Illustrate by use of diagrams the profit maximizing output of a firm in a perfectly

competitive market structure. [6 marks]

c) A watch producing firm in a perfectly competitive market structure has a total

tota cost function represented by:

C = 100 + Q2
C is total cost and Q is quantity.
Required:-
i. Average Fixed Cost. [1 mark]

ii. The number of watches the firm should produce to maximize profits given
that the price per watch is Ksh. 600. [4 marks]

iii. The number of watches the firm should produce to break – even. [5 marks]
 MARKING SCHEME
Question 1.
a) i. Consumer freedom of choice
ii. Insufficient resources and alternatives
iii. Value of the foregone
iv. Graph showing the allocation pf resources to produce a given quantity of output.

b) Free market – Resources are controlled by private individuals with a slight influence
from the central government.
Advantages:
- Efficiency
- Less costly from the govt’ side
- Less time consuming
Disadvantages
- Does not provide public goods.
-Less access to merit goods
- Controlled systems – Resources are controlled by the central govt’.

Advantages
- Provision of merit and public goods
- Cheaper goods
- Well distributed resources

Disadvantages
- System is costly
- Bureaucratic procedures
- Time wasting
- Low quality goods and services.

c) Demand curve - Qa
Supply Curve - Qb
Qb has a positive slope
ii. Qa = Qb

d) Price elasticity of demand - in quality as a result of a change in the commodity’s own price.
Gross elasticity – Degree of responsiveness of demand of one commodity to a change in the
price of a related commodity.

e) – Raw materials
- Patents and rights
 - Copy rights
- Statutes/acts/Government
- Expert skill
Question Three
a) Economies of scale – benefits of large scale production
Diseconomies of sale – Costs that incur as a result of large scale production.

b) Internal Economies of scale

- Technical economies
i. Increased specialization
ii. Increased dimensions
iii. Factor mobility
iv. Principle of multiples
- Financial economies
- Marketing economies
- Risk bearing economies
- External economies of sale
- Creation of labour force
- Development of subsidiary industries
- Disintegration – which leads to specialization
- Joint researches
- Provision of commercial facilities.

Question Two
a) As additional units of a variable factor are added to a given quantity of a fixed factor, total
output will initially increase at an increasing rate, but beyond a certain level of output it will
increase at a declining rate, and will eventually decline. This law of diminishing returns.

b) Stages of production

APL/
MPL
TP

APL

Labour
MPL

c) – Technology is Fixed
- Successive units of the variable factor are assumed to be equally efficient.
- Production takes place in the short – run
- One factor of production which is variable is considered.
 - Only one firm is under consideration.

Question 4.
a. C = 1000 + 100(10) – 15(10)2 + 103
C = 1000 + 100(11) – 15(11)2 + 113.
AC at 10 mits.
1000 + 100(10) – 15(10)2 + 103
10
AC at 11 mits
1000 + 100(11) – 15 (11)2 +113
11

b. MC at 12th unit = 100 – 30(12) + 3(12)2

c) Costs
MC AC

FC

Output

Question 5
a. –Many buyers & sellers
- Consumers have a perfect knowledge of market
- Goods are homogeneous
- Mobility of factors is perfect
- Economic agents are rational

b. Revenues MC AC
& Abnormal profits
Costs AR = MR

Output
Revenue/ MC AC
Costs. Profit maximizing

AR = MR

0 Output
 MURANG’A UNIVERSITY COLLEGE (MRUC)
A Constituent College of Jomo Kenyatta University of Agriculture & Technology

SUPPLEMENTARY EXAM.

HBC 2104 – INTRODUCTION TO MICROECONOMICS

DATE: TIME:

INSTRUCTIONS:-
Answer questions One and any other Two questions.
Question one (Compulsory)
i. In the light of adoption of economic liberism in many developing countries, what are the
possible shortcomings of relying in free market and on the forces of competition from
the standpoint of:

a) Rational allocation of resources. [5 marks]

b) Income distribution. [5 marks]
c) Price stability. [5 marks]

ii. Explain the functioning of a mixed economic system. [5 marks]

iii. Give the meaning of the term “Price control” and explain the circumstances
under which it is considered necessary. Use graphical illustrations. [10 marks]

Question Two
a) List six factors that give rise to shifts in the supply curve. [6 marks]

b) The demand and supply curves for television sets in beach city are given as
follows:-
0.04 = 400 – Q – demand
0.06 = Q + 500 – supply
Required:-
i. Equilibrium price and quantity of television sets. [6 marks]

ii. With the aid of a diagram, explain the impact of a demand shift to the values
in (i) above

Question Three
Explain with the help of diagrams the concept of consumer equilibrium. Using
indifference curve analysis, distinguish between the income and substitution
effects of a price change. [20 marks]

Question 4
A watch manufacturing firm in a perfectly competitive market has a total cost
function represented as follows;
C = 100 + Q2
and C – total cost
Q- Quantity.
Required:
i. Average fixed cost. [3 marks]

ii. Number of watches the firm should produce to maximize its profit, given that
the price per watch is Ksh. 600. [6 marks]

iii. The number of watches the firm has to produce to break – even. [6 marks]

iv. Illustrate (iii) graphically [5 marks]

Question 5
Present carefully the law of variable proportions. What are the key assumption that
underlie this law? Discuss fully the three stages associated with this law. [20 marks]
MARKING SCHEME
INTRODUCTION TO MICROECONOMICS (HBC 2104)
SUPPLEMENTARY EXAM

Question 1.
i. a. – Gives rise to development of monopolies
- Externalities are not accounted for
- Under provision of public goods
- Under provision of merit goods
- Socially undesirable goods are produced.

b. - Unequal distribution
- Gap between rich and disadvantaged is wide.

c. i. Determination is through the forces of demand and supply.

ii. – Combines free market and planned systems.

- Resources mostly owned privately but controlled by a central government.

iii. Government regulation of equilibrium prices.

a) Minimum Price Control – set above the equilibrium price.

Price
S
Pmin - - - - - - - - - - - ------
Pe ---------------
D

O Q1 Qe Q2 Quantity

b) Maximum price control – set below the equilibrium price.

 Price S

Pe

Pmax
D
0 Q Qe Q2 Quantity
Question Two
a) - Decrease in demand – changes in weather – Price changes
- Changes in taste – Government regulation – strike incidences

ii) Supply = Demand.

51
D 50

P3

pe

Q3 Qe

Question Three

Commodity
Y
A
A
Y1 A
Y2 B C 1z
Y3

0 X1 X3 X2Bo B2 B1 Commodity X

Question 4
i. 100/4
ii. MR = MC
iii. At break – even, TR = TC

iv. B.E.P R
revenue/ cost TC
 VC
FC
VC
Quantity

Question 5.
Law of variable proportions . As more and more units of a variable factor are added to a fixed factor,
total output will initially increase but at a certain level, it will increase at decreasing rate.
Assumptions:
- Technology is fixed
- Equally efficient successive units
- Short – run production period
- One variable factor of production.