UNIVERSITY OF NAIROBI

COLLEGE OF HUMANITIES AND SOCIAL SCIENCE

SCHOOL OF ECONOMICS

XET 101: INTRODUCTION TO MICROECONOMICS

2020/2021 ACADEMIC YEAR

DATE: TIME:

INSTRUCTIONS

ANSWER ALL QUESTIONS IN SECTION A AND ANY OTHER TWO IN SECTION B

SECTIONA: COMPULSORY (30marks)

QUESTION ONE

Part one: Pick an answer among the multiple choices (1 mark each)

i. Assume price of all the goods, together with income increase by 5.5%, what happens
to the budget line?
a) It will be vertically parallel
b) Remains unchanged
c) Moves inward by 5.5%
d) Moves outward by 5.5%
e) Rotates around its axis
f) None of the above
g) All of the above
ii. A consumer consumes two goods A and B, this implies that both A and B would not
be what?
a) Be normal.
b) Have down-sloping demand curves.
c) Be inferior.
d) Have unitary elasticity.
e) Have diminishing marginal utility.
iii. Assume a County government which consumes only two goods, then suddenly; the
prices of these two goods are halved and the income of the consumers doubles. The
following will happen
a) The consumption of both goods will decrease.
b) The consumer will not maximize utility.
 c) The production cost of one of the goods will increase.
d) The budget constraint will shift outward to the right.
e) There will be no change in the consumption of either good.
iv. Which of the following is true about a normal good
a) The demand curve is always linear for normal goods.
b) The demand curve is always positively sloped: price and quantity demanded
are negatively related.
c) The demand curve is always negatively sloped: price and quantity demanded
are positively related.
d) The demand curve is always positively sloped: price and quantity demanded
are positively related.
e) The demand curve is always negatively sloped: price and quantity demanded
are negatively related.
v. Which ONE of the following will tend to make the demand for a company’s product
less price elastic?
a) A fall in consumer incomes.
b) A rise in the price of complementary goods.
c) A fall in the number of substitute goods.
d) A lower price for the good.
vi. If the demand curves for Good A shifts to the left when the price of Good B rises, we
may conclude that:
a) The goods are substitutes.
b) Good A is an inferior good.
c) The goods are complements.
d) The demand for Good A is price elastic.
vii. In the market for shirts, which of the following best describes the effect of a decrease
in consumer income and an improvement in technology of producers?
a. Equilibrium price increases, equilibrium quantity increases
b. Equilibrium price increases, change in equilibrium quantity uncertain
c. Change in equilibrium price uncertain, equilibrium quantity increases
d. Equilibrium price decreases, change in equilibrium quantity uncertain
e. Change in equilibrium price uncertain, equilibrium quantity decreases
viii. Which of the following best describes how a consumer decides how much to
purchase of a good?
a. The consumer purchases goods with the lowest prices
b. The consumer purchases the goods that give the highest utility
c. The consumer purchases good that have the highest quality
d. The consumer maximizes utility subject to his or her budget constraint
e. All of the above
 ix. If the supply curve shifts left and there is also an increase in demand what happens to
equilibrium price and quantity?
a) Price is indeterminate, quantity increases
b) Price increases, quantity is indeterminate
c) Price is indeterminate, quantity decreases
d) Price decreases, quantity is indeterminate
x. If the government removes a binding price ceiling from a market, then the price paid
by buyers will
a) Increase and the quantity bought and sold in the market will increase.
b) Increase and the quantity bought and sold in the market will decrease.
c) Decrease and the quantity bought and sold in the market will increase.
d) Decrease and the quantity bought and sold in the market will decrease.

Part two: Briefly answer all the following questions below

i. Which of the following statements are positive and which are normative? (a)
Annual inflation is below 10 percent. (b) Because inflation is low, the
government should cut taxes. (c) Income is higher in the Kenya than in
Tanzania. (d) Kenyans are happier than Tanzanians.
(4 marks)
ii. Suppose the relationship between the price of a car and its quantity demanded,
other things equal, is graphed as a downward-sloping straight line and suppose
consumer’s income increases and the demand for cars increases. What
happens to the downward-sloping straight line? (3 Marks)
iii. How is the demand curve for toasters affected by the invention of the toaster
oven if people prefer this new way of toasting? What happens to the
equilibrium quantity and price of toasters? (3 Marks)
iv. You are a sheep farmer. Give three examples of a change that would reduce
your supply of wool. Did you use a fall in the price of wool as one of your
examples? Is it a valid example? (4 Marks)
v. For each of these categories:
(a) Milk, dental services, beer
(b) Chocolate, chicken, train journeys
(c) Theatre trips, tennis clubs, films.
Do you expect demand to be elastic or inelastic? (Then rank the elasticities
within each category. Explain your answers. (3 Marks)
vi. A competitive industry has free entry and exit. Why does free exit matter?
How would the analysis change if it was costly to exit? (3 Marks)
SECTIONB: ANSWER ANY TWO QUESTIONS (40 Marks)

QUESTION TWO

a) Discuss the following statements

i. Excess supply for a commodity is ordinarily eliminated through market forces
(5 Marks)
ii. The second stage of production is the optimal one for a firm (5 Marks)
b) Briefly answer the following questions
i. To a response in price ceiling by the government, a black market develops and
gains control of all of the supply of the commodity. What happens to the
economy? (5
Marks)
ii. What is the difference between cross price elasticity and income elasticity of
demand (5 Marks)
QUESTION THREE
a) Discuss the following statements
i. The concept of Elasticity is important for firms to consider when setting their
pricing strategies. (5 Marks)
ii. All the goods consumed by an individual cannot be inferior (5 Marks)
b) Briefly answer the following questions
i. When there is an increase in price, then there is a decrease in demand. Why is
such a statement wrong? (5
Marks)
ii. A market equilibrium is stable. What does this mean? (5 Marks)

QUESTION FOUR
a) Discuss the following statements
i. At the point of tangency between an Isocost line and an isoquant the firm is at
equilibrium (5 Marks)
ii. Monopolies and perfect competitive markets are not easy to find in many
countries (5 Marks)
b) Briefly answer the following questions
i. What is the micro impact of a significant rise in average Nairobi house prices?
(5 Marks)
ii. Why is the law of diminishing marginal utility a psychological aspect?
(5 Marks)