UNIVERSITY OF NAIROBI

DFE3 103/ DFI 103: PRINCIPLES OF MICROECONOMICS – ASSIG

INSTRUCTIONS:
1. QUESTION ONE AND ANY OTHER.
2. DEADLINE FOR SUBMISSION: 01.04.2023 – 12 PM –
jkisimbii@gmail.com
Question One
If a duopolist has a linear demand curve of the form Q=450 – P. Assuming each firm has total
cost (TC=3500+150Q). Calculate the profit-maximizing price-quantity combinations using the
three oligopoly pricing models listed below demonstrating that:
a. Under the Cournot model, both firms will earn the same level of profit and determine industry
profit and explain why this is would be the case.
b. Under the Cartel model each firm earns a higher profit than under Cournot.
c. Under the Stackelberg’s model the leader will earn more than twice the profit of the follower
and that total industry profits will be lower than under both Cournot and Cartel models.
Explain why this is would be the case.

QUESTION TWO
a. Suppose you are a manager of a Mombasa County government project that is meant to
provide rent-regulated housing units in low-income settlements. Using your knowledge of
equilibrium, advice the Governor whether this policy will be a success.
b. Based on any community project of your choice, use indifference curves and the budget
concept to illustrate your understanding of consumer equilibrium.

QUESTION TWO
A Monopolist producing and supplying cooking gas to Nairobi County faces the demand
function. Q = 11,200 – 20P. Its cost function is given by TC = 20Q + 0.05Q2.
a. Determine the quantity of cooking gas she will produce and the price she will charge to
maximize profits and determine her profit.
b. Explain how her profits will be affected if regulators force her to operate like a perfectly
competitive firm.
c. Illustrate and compute deadweight loss and lost consumer surplus associated with her
Monopoly operations and clearly point out why this problem arises under monopoly
operations.