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Introduction To Microeconomics

The document is an economics exam paper containing multiple choice questions about microeconomics concepts. The first question asks to determine the profit-maximizing level of output and price for a monopolist given demand and cost functions. The solution shows the output is 8 units and price is 58 shillings. The second question asks to explain market equilibrium using diagrams when the market price is not the equilibrium price. The response illustrates market surplus when price is above equilibrium and shortage when price is below, causing the price to rise or fall accordingly until it reaches equilibrium. The third question asks with a diagram to explain the three stages of production and why a firm should not operate in the first or third stages. The response provides a

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423 views5 pages

Introduction To Microeconomics

The document is an economics exam paper containing multiple choice questions about microeconomics concepts. The first question asks to determine the profit-maximizing level of output and price for a monopolist given demand and cost functions. The solution shows the output is 8 units and price is 58 shillings. The second question asks to explain market equilibrium using diagrams when the market price is not the equilibrium price. The response illustrates market surplus when price is above equilibrium and shortage when price is below, causing the price to rise or fall accordingly until it reaches equilibrium. The third question asks with a diagram to explain the three stages of production and why a firm should not operate in the first or third stages. The response provides a

Uploaded by

cyrus
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MOUNT KENYA UNIVERSITY

BED1101-INTRODUCTION TO MICROECONOMICS
MAY/AUGUST 2021 SEMESTER
CAT
NAME: K CAROLINE GITARI
ADM NO: BBM/2017/62292

INSTRUCTIONS: Attempt all the questions.


a. You are provided with the following demand and cost information for a monopolist.
P=60-0.25 Q and TC=Q2+40Q+50 Where P is price, Q is quantity of the product and TC
is total cost. Determine the profit maximizing level of output and prices. (10Marks)
Solution
TC is maximized when MR = MC
MR = dTR
dQ

TR = Q (60 – 0.25Q)
TR = 60Q – 0.25Q2
dTR = 60 – 0.5Q - MR
dQ

TC=Q2+40Q+50
dTC = 2Q + 40 = MC
dQ

60 – 0.5Q = 2Q + 40
60 – 40 = 2Q + 0.5Q
20 = 2.5Q
Q = 20 = 8 units
2.5
Maximizing price

P = 60 – 0,25Q
P = 60 – (0.25 x 8)
P = 60 – 2 = Sh. 58

b. The market mechanism is the tendency for prices to change until the quantity
demanded equals quantity supplied. Using illustrations provide an explanation on
how the market adjusts to the market equilibrium when the price in the market is not
originally set at the market equilibrium price.(10Marks)
Solution
The market is in equilibrium when the supply and demand curves intersect. When the quantity
demanded and quantity given are equal, this is called equilibrium. The equilibrium price or market-
clearing price is the corresponding price, and the quantity is the equilibrium quantity.
In a competitive market, the equilibrium price is determined by the demand for and supply of an
item or service.
Equilibrium:
At the price at which quantities requested and supplied are equal, equilibrium is established. The
combined price and quantity at which the supply and demand curves connect can be shown in a
graph to illustrate a market in equilibrium.

Putting the supply and demand curves from the previous sections together. These two
curves will intersect at Price = $6, and Quantity = 20. 

In this market, the equilibrium price is $6 per unit, and equilibrium quantity is 20 units.

At this price level, market is in equilibrium. Quantity supplied is equal to quantity


demanded ( Qs = Qd). 

Market is clear.
Surplus and Shortage
When the market price is higher than the equilibrium price, the amount supplied exceeds
the amount sought, resulting in a surplus. The market price will decrease.
For example, if you are a manufacturer, you may have a large amount of unsold inventory.
Will you make them available for purchase? It's very likely that the answer is yes. When
you cut the price of your product, the quantity required for it rises until it reaches
equilibrium. As a result, surplus drives down prices.
When the market price is lower than the equilibrium price, the quantity supplied falls short
of the quantity demanded, resulting in a shortage. The market is in a state of flux. It is in
short supply. Because of the scarcity, market prices will climb.

If the market price (P) is higher than $6 (where Qd =


Qs),
for example,  P=8, Qs=30, and Qd=10.
Since  Qs>Qd, there are excess quantity supplied  in the
market, the market is not clear. Market is in surplus.

THE PRICE WILL DROP BECAUSE OF THIS SURPLUS.

If the market price is lower than equilibrium price,  $6,


for example,  P=4, Qs=10, and Qd=30.
Since Qs<Qd, There are excess quanitty demanded in
the
market. Market is not clear. Market is in shortage.
THE PRICE WILL RISE DUE TO THIS SHORTAGE

c. With the help of a well labeled diagram explain the three stages of productions. Why
should a firm not operate in the first and third stages? (10 marks)
Solution

There are three stages to the process.


The initial stage
Stage one is when a company's production expands the most. During this time, each extra
variable input will result in the production of more items. This indicates that the
investment in the variable input surpasses the cost of generating an additional product at
an increasing rate, resulting in an increasing marginal return. For example, if one employee
produces five cans on his own, two employees may collectively generate 15 cans. In this
stage, all three curves are growing and positive.
Second Stage
The second stage is when marginal returns begin to decline. Each extra variable input will
still result in more units being produced, albeit at a slower rate. This is due to the law of
decreasing returns, which states: With each extra unit of variable input, output slowly falls
while all other inputs remain constant. For example, if a prior employee increased
production by nine cans, the new employee may only increase production by eight cans. In
this stage, the total product curve continues to rise, while the average and marginal curves
both begin to fall.
Stage three
Marginal returns begin to decline in stage three. Increasing the number of variable inputs is
unproductive; adding another source of labor reduces overall production. Hiring an extra
employee to create cans, for example, will result in fewer cans being produced overall. This
could be due to constraints in labor capacity and efficiency. The total product curve begins
to trend down at this point, while the average product curve continues to decline and the
marginal curve turns negative.
- In the near run, sensible enterprises should only operate in stage II, according to
economic theory. Stage III is clearly irrational: the company would use more of its
variable input to produce less output. However, it may not be immediately obvious
why stage I is likewise regarded as unreasonable.
REFERENCES
1. Hardwick, Philip, et al; An introduction to Modern Economies, Longman Group

2. Saleemi M.A (2001) Economics Simplified (Revised Edition) Saleemi Publishers.

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