MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY

P.O. Box 972-60200 – Meru-Kenya

Tel: 020-2069349, 061-2309217. 064-30320 Cell phone: +254 712524293, +254 789151411
Fax: 064-30321
Website: www.must.ac.ke Email: info@must.ac.ke

University Examinations 2017/2018

FIRST YEAR FIRST SEMESTER EXAMINATION FOR THE DEGREE

OF
BACHELOR OF BUSINESS ADMINISTRATION, BACHELOR OF SCIENCE IN
STATISTICS, BACHELOR OF ECONOMICS AND BACHELOR OF AGRIBUSINESS
MANAGEMENT, BACHELOR OF ACTURIAL SCIENCE, BACHELOR OF COMMERCE.

BEC 3102/3100/3101: INTRODUCTION/PRINCIPLES OF MICRO ECONOMICS

DATE: MAY 2018 TIME: 2 HOURS

INSTRUCTIONS: Answer question one and any other two questions.

QUESTION ONE (30 MARKS)

a) Distinguish between the following terms:

i. Demand curve and demand schedule
ii. Ordinal utility theory and cardinal utility theory
iii. Arc elasticity and isoquants
iv. Normative and positive economists (10 marks)
b) With the help of a diagram explain what happens if the government set prices for a
commodity
i. Above the equilibrium price (5 marks)
ii. Below the equilibrium price (5 marks)
c) A consumer is confronted by a constrained utility maximization problem as follows:
u = 12 x − 6 z 2 + 20 z − x 2
When (u) is total utility and other relevant variables are given below;

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 Income level r = ksh 50
Price of (Px) = ksh 1
Price of (Pz) = ksh 6
Determine the equilibrium quantities of commodities X and Z for the consumer

(10 marks)

QUESTION TWO (20 MARKS)

a) The demand function for a good K is given

Qk = 1000 − 20.5 pk − 65 PW + 30 PX + 8M
Where;
QK= Quantity demand of good K
Pk=Price of good K
Pw and Px – Prices of related good W and X
M = income
Given Px = sh 1750, Pk = sh 1000, Pw = sh 3000
M = sh 1000
Required:
i. Compute income elasticity of demand. From the income elasticity of demand is
good K a luxury good or a necessary good? Explain (5 marks)
ii. Compute cross price elasticities of demand and interpret your results and show
commodity K and W are related (6 marks)
b) With an aid of a well labeled diagram, illustrate the short run and long-run equilibrium
conditions for a perfectly competitive firm (9 marks)

QUESTION THREE (20 MARKS)

a) Distinguish between ‘diminishing returns’ and ‘decreasing returns to scale’(4 marks)

b) State the assumption of cardinality approach to utility (4 marks)
c) Using an illustrations explain fully the stages involving in the production of any
commodity (10 marks)
d) Distinguish between an inferior good and a normal good (2 marks)

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QUESTION FOUR (20 MARKS)

a) The market supply curve for commodity X is given by

QsX = 1000 + 500 Px and the market curve is given by

Qdx = 2000 − 250 Px

Required:

i. Compute the price and quantity of x at equilibrium (2 marks)

ii. Sketch the market equilibrium and explain consumers and producers surplus
(4 marks)
iii. For each identify two factors that can cause the above curves to shift (4 marks)
b) With the help of a well labeled diagram, explain the relationship between average fixed
costs, average variable costs, average total costs and marginal cost curves (10 marks)

QUESTION FIVE (20 MARKS)

a) An economy that is producing inside its production possibility curve is not efficient show
this graphically and discuss the causes of such production level (10 marks)
b) Define mobility of factors of production and discuss barriers that may hinder mobility of
labour (10 marks)

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