**MAASAI MARA UNIVERSITY**

**REGULAR UNIVERSITY EXAMINATIONS**

**2015/2016 ACADEMIC YEAR**

**THIRD YEAR FIRST SEMESTER**

**SCHOOL OF BUSINESS AND ECONOMICS**

**BACHELOR OF ARTS (ECONOMICS)**

**COURSE CODE: ECO 310**

**COURSE TITLE: INTERMEDIATE MICROECONOMIC THEORY**

**DATE: May 4th, 2016 TIME: 11:A.M. -1:00 P.M.**

**INSTRUCTIONS TO CANDIDATES**

**Answer Question ONE and any other three questions**

**This paper consists of Five (4) printed pages. Please turn over.**

**QUESTION 1**

Differentiate between the following terms.

Isoquant and indifference curve

(2 marks)

Marginal rate of substitution and marginal rate of technical substitution (2 marks)

Substitution effect and income effect (2 marks)

Convex preferences and Max-Leontief preferences (2 marks)

Interior optimum and boundary optimum (2 marks)

A community in a Kenyan county derives utility from the consumption of two goods: Good A and Good B. It has a budget of $1,200 to spend on the two goods. The community’s utility functions for the 2 goods is presented as U(X_A X_B )=4.5X_A^(1/3) X_B^(2/3), where X_A and X_B are the units of Good A and Good B demanded respectively. Given that the prices of Good A and Good B are $1 and $2 respectively, find the community’s Marshallian demands for the two goods.

(10 marks)

Consider a monopolist who faces two markets with demand curves given by

Assuming that the monopolist marginal costs are constant at KES20, find p_1 and p_2 if the monopolist can price discriminate

(5 marks)

**QUESTION 2**

Jin Cheng is a construction company using a certain type of steel bars for construction of bridges. Its demand for the steel bars is given asQ=20+M/10P, where Q is the quantity of steel bars in tons. P is the price per bar of steel and M is the amount the company has set aside to spend on the bars and this is equal to $450,000. If the price per bar changes from $600 to $750, calculate the total price effect, substitution effect, and income effect of the price change.

(10 marks)

With the aid of a well labeled diagram, explain the income and substitution effects in which the latter outweighs the former.

(5 marks)

**QUESTION 3**

A firm produces and sells a product in both the domestic and foreign market. The market demand functions are given as, Q1 = 1200 – 10p1 (domestic market) and Q2 = 800 – 10p2 (foreign market) where Q1 and Q2 are the quantities sold in the respective markets at prices P1 and P2 respectively. The firms total cost function is given by TC = 0.05Q2 + 10,000 and Q= Q1 + Q2

Determine the quantities and prices that maximizes the firm’s profits

(8 marks)

What is the maximum profit for the firm?

(2 marks)

Comment on the relationship between price elasticity of demand and the prices charged in both market

(2 marks)

Explain three conditions necessary for the above firm to charge different prices in the two markets for the same products

(3 marks)

**QUESTION 4**

Define Pareto Efficiency (3 marks)

Using both the Edgeworth Box Diagram, explain how Pareto efficient allocation is achieved through exchange.

(12 marks)

**QUESTION 5**

Use a well labeled diagram to demonstrate that monopolies are a cost to the society

(10 marks)

Given the demand curve P = a – bY and that the firm is experiencing a constant marginal cost, show that if a tax rate of t is imposed on the monopolist’s output, the price would increase by half the amount of the tax.

(5 marks)