UNIVERSITY OF NAIROBI

UNIVERSITY EXAMINATIONS 2020/2021

SECOND YEAR EXAMINATIONS FOR THE DEGREE OF BACHELOR OF QUANTITY SURVEYING &
BACHELOR OF REAL ESTATE

BQS/BRE 203: MICROECONOMIC THEORY

DATE: FEBRUARY, 18, 2021 TIME: 2.00 – 5.00 P.M.

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INSTRUCTIONS

1. Answer THREE questions in total. Question 1 is COMPULSORY.

2. Choose any other TWO questions from the remaining four.

3. Each question MUST start on a separate page and be clearly numbered!!

4. To earn marks, you MUST show all your working and provide comprehensive answers.

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1. Given that the price of capital is Kshs 10 per unit and that of labor is Kshs 20 per unit, use the
data provided in the table below to answer the following questions.

Capital labour Total output

inputs (K) inputs (L) (X)

10 1 43

10 2 160

10 3 351

10 4 600
 10 5 875

10 6 1152

10 7 1372

10 8 1536

10 9 1656

10 10 1750

10 11 1815

10 12 1860

a) Define and compute the total cost, total fixed cost, total variable cost, average fixed cost,
average variable cost, average total cost and the marginal cost.
b) Graphically illustrate and explain the relationships between the average and marginal
costs facing the firm in the short-run.

[30 Marks]

2. Joan’s income is given as Y. She is faced with the decision to purchase two goods x and y whose
prices are px and py respectively.
a) i) Derive the budget constraint equation facing Joan.
ii) Graph the budget constraint equation facing Joan.
iii) Compute and comment on the slope of the budget constraint.
 b) Assume that your income is Kshs. 6000.The market prices of goods X and Y are Kshs 160
and Kshs 200 respectively.
i) Derive your budget constraint equation.
ii) Graph your budget constraint
iii) Compute and comment on the slope of your budget constraint.

[20 Marks]

3 a) Distinguish between an isoquant and an indifference curve

b) Write short notes on:

i) Linear isoquant

ii) Leontief isoquant

iii) Kinked isoquant

iv) Convex isoquant

[20 marks]

4 Write short notes on the following:

a) Marginal rate of substitution

b) Homogeneity of the production function
c) Compensating variation
d) Law of diminishing returns
e) Returns to scale

[20 marks]

5 Answer the following questions about indifference curves

a) State and discuss the assumptions and properties of well-behaved indifference curves
b) Discuss the assumptions of indifference curves theory.
c) Critique the indifference curves theory

[20 marks]