QUESTION ONE [30 Marks]

a) Suppose the market demand curve for a product is given by 𝑄 𝑑 = 1000 − 10𝑃 and the
market supply curve is given by 𝑄 𝑠 = −50 + 25𝑃.
i. What are the equilibrium price and quantity [3 Marks]
ii. What is the inverse form of the demand curve [2 Marks]
b) Consider the following utility function 𝑈(𝑥. 𝑦) = 3𝑥 2 + 5𝑦
i) Is the assumption that more is better satisfied for both goods? [2 Marks]
ii) What is 𝑀𝑅𝑆𝑥,𝑦 for this utility function? What does the 𝑀𝑅𝑆 tell us? [2 Marks]
iii) Is the 𝑀𝑅𝑆𝑥,𝑦 diminishing, constant, or increasing as the consumer substitutes x
for y along an indifference curve? [2 Marks]
c) Suppose the total cost function for manufacturing a certain product is given by the
function below
𝐶(𝑥) = 0.2(0.01𝑥 2 + 65)
Find the level of production that will minimize average cost [4 Marks]
d) Define point of inflexion. Find the point of inflexion of the following function. [5
Marks]
𝑌 = − 2⁄3 𝑥 3 + 3𝑥 2 + 12𝑥 + 6

e) The commodity and money markets for an economy are defined by the following
equations:
Commodity Market
𝐶 = 640 + 0.8𝑌 𝑑
𝐼 = 80 − 80𝑟
𝐺 = 160
𝑇 = 100

Money Market
𝑀𝑑 = 50 + 0.8𝑌 − 𝑟
𝑀𝑠 = 80
i) Derive the IS and LM curve [6 Marks]
ii) Compute the equilibrium values of Y and r in this economy [4 Marks]