MUA/RASA/EXAM/QP/2020
UNDERGRADUATE UNIVERSITY EXAMINATIONS
SCHOOL OF MANAGEMENT AND LEADERSHIP
DEGREE OF BACHELOR OF COMMERCEAND BACHELOR OF
MANAGEMENT AND LEADERSHIP
BCM 215/BML 200:
MICRO-ECONOMICS
DATE:
11th December 2020
DURATION:
2 HOURS
MAXIMUM MARKS: 70
INSTRUCTIONS:
1.
2.
3.
4.
5.
6.
7.
Write your registration number on the answer booklet.
DO NOT write on this question paper.
This paper contains SIX (6) questions.
Question ONE is compulsory.
Answer any other THREE questions.
Question ONE carries 25 MARKS and the rest carry 15 MARKS each.
Write all your answers in the Examination answer booklet provided
BCM 215/BML 200: Page 1 of 5
MUA/RASA/EXAM/QP/2020
QUESTION ONE
Read the Case Study below carefully and answer the questions that follow:
KENBEST
Kenbest is a manufacturer of home cleaning and toiletries products. The company
sources for raw materials both locally and internationally. Production of benta one of
its raw materials is in the process of being banned internationally because it is
extracted from specific rare trees species which are becoming extinct. Kenbest is in
the process of sourcing for an alternative material to replace benta and it has two
options.
Option one
To use the domestic alternative of the raw material which Kenbest’s competitor uses
however this will lower the quality and change the fragrance of its cleaning product.
Moreover its product will lose the differentiating trait that gives it its distinction
from similar competing products. On the other hand it will be able to maintain the
price of its product since the cost of the domestic raw material is slightly lower than
benta.
Option two
To import an alternative raw material which is laboratory produced and a perfect
substitute of benta and hence its cleaning product would not change. However, this
raw material is more expensive than benta and if Kenbest retains the current price of
its cleaning product its profit would reduce substantially and therefore it would
have to increase the price.
Required:
a) Graphically illustrate how the demand of the domestic raw material would
change if Kenbest opted for option one and give three assumptions that
would have to hold for the demand curve you draw.
BCM 215/BML 200: Page 2 of 5
(10 Marks)
MUA/RASA/EXAM/QP/2020
b) Assuming Kenbest opted for option two, draw a graph to illustrate the change
in Kenbest’s cleaning product demand curve
(5 Marks)
c) What market structure does Kenbest operate in? Explain your answer
(5 Marks)
d) If Kenbest approached you, a consultant, to advise them on the option to go
with which option would you advise them to go with? Explain your answer.
(5 Marks)
QUESTION TWO
a. Differentiate between fiscal policy and monetary policy and for each give two
examples
(4 Marks)
b. The following information relates to the price per unit and quantity supplied
of a certain product:
Price per unit (Sh.)
12
Quantity supplied (Units) 12,000
10
8
11,000
9,000
5
6,000
2
0
Calculate the price elasticity of supply when the price decreases from Sh. 10
per unit to Sh. 5 per unit. Interpret your answer.
(4 Marks)
c) Using indifference curves explain the income and substitution effect arising
from a price change of a giffen commodity.
d) Explain the law of diminishing marginal utility
(5 Marks)
(2 Marks)
QUESTION THREE
a) Differentiate between composite demand and derived demand and use
examples.
(3 Marks)
b) Using a well labelled diagram explain the three stages of production and
clearly indicate the traits of each stage
BCM 215/BML 200: Page 3 of 5
(9 Marks)
MUA/RASA/EXAM/QP/2020
c) Differentiate between partial equilibrium and general equilibrium
(3 Marks)
QUESTION FOUR
a) Define the following terms.
i.
Marginal product
ii.
Elasticity of demand
iii.
Mixed economy
(3Marks)
b) Explain four types of production function and in each case clearly state the
general form and unique characteristic.
(8 Marks)
c) Given the below production function for a certain firm determine what case of
returns to scale it relates to in the long given that; t=2, K=10 and L=100
(4 Marks)
𝑄 = 20𝐾 + 10 𝐿
QUESTION FIVE
a) Identify a monopoly in Kenya and use it to identify three main features of a
monopolistic market.
(6 Marks)
b) Given the following production function 𝑄 = 𝐴𝐾 0.6 𝐿0.4
Where 𝐿 = 250
𝐾 = 65
𝐴=1
Determine the MPL and the MPK and interpret the answer
(5 Marks)
c) Explain two practical implications of the law of diminishing returns (4 Marks)
BCM 215/BML 200: Page 4 of 5
MUA/RASA/EXAM/QP/2020
QUESTION SIX
a) Explain four ways in which the Kenyan government intervenes in the
economy
(8 Marks)
b) If the marginal product of labour (L) is 𝑀𝑃𝐿 = 100𝐾 − 𝐿 and the marginal
product of capital (K) is 𝑀𝑃𝐾 = 100𝐿 − 𝐾, what is the level of capital and
labour that would yield the maximum possible output when the total amount
that can be spent on K and L is shillings 100,000 and the price of K is sh. 500
and the price of L in shillings 200? (5 Marks)
c) State two exemptions to the law of diminishing marginal utility
BCM 215/BML 200: Page 5 of 5
(2 Marks)