UNIVERSITY OF NAIROBI

UNIVERSITY EXAMINATIONS 2020/2021

EXAMINATIONS FOR THE DEGREE OF MASTER OF ARTS IN ECONOMICS AND

MASTER OF ARTS IN ECONOMIC POLICY MANAGEMENT

XET 502: ADVANCED MICROECONOMIC THEORY II

DATE: MAY 11, 2021 TIME: 5.00 P.M. –9.00 P.M.

INSTRUCTIONS

1. Read instructions carefully and answer All Questions

2. The Questions Carry Equal Marks

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1. Consider the OLS estimation results for the food budget share, W (share of food expenditure
in total household income):

W = 0.15 + 0.25y,

where y is the log of household income, and W =0.75.

(i) Interpret the estimated coefficients;

(ii) Compute the income elasticity of the budget share and interpret it;

(iii) Compute the income elasticity of the food expenditure and comment on the claim that
food is a luxury good.

(iv) Sketch a graph of W as a function of income (note: not as a function of log of

income). Is this graph in accordance with your expectation? Explain.

2. Write brief notes on four of the following:

(i) Experimental economics;

(ii) Behavioral economics;

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 (iii) Game theory;

(iv) Network economics;

(v) Neoclassical economics.

3. (i) Derive the Slutsky Equation and demonstrate it graphically.

(ii) Argue rigorously (with the help of a diagram) that a monopolist is Pareto inefficient.

4. Consider the following Cobb-Douglas production function for a perfectly competitive maize
farm:

Q = KaLb,

where Q is maize output in Kgs, and K & L are capital and labor inputs, respectively.

(i) Derive the elasticity of output (Q) with respect capital (K) and interpret it

(ii) Derive the constant elasticity of substitution () between K and L and interpret it

(iii) Derive the marginal product of labor, and write down a general expression for the
total money wage bill that the farmer pays her workers.

(iv) Are there workers that are paid more than others? Explain.

(v) What data would you need to estimate this model? How would you collect the data?

5. (i) The City Government has been using the police to evict hawkers from the Central
Business District (CBD). Construct a discrete choice economic model that the
Government can use to incentivize hawkers to shift voluntarily to a location outside of
the CBD.

(ii) On what variables would you collect the data to estimate your model? What estimation
method would you use? Explain.

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