A)Describe the following concepts with the use of clear diagrams i)Consumer surplus
ii)Income Demand curve
b)The total cost in the monthly production of commodity X is represented thus:
C=1000+ 100Q-15Q2+Q3
Where C= Cost per month (in Kenya Shillings
Q= Quantity of X produced per month
Required:
i) Identify and explain fixed and variable cost in this situation
ii) Compute the total and average costs at an output of 10 units.
iii) What is the marginal cost of the 10 th unit?
iv) Sketch the relationship between the average cost (AC) and Marginal cost (MC) curves in the
production function.
c)The total cost in the monthly production of a commodity is represented by
TC=60+20Q-14Q2+Q 3
Required
i) Average cost function
ii) Average variable cost function
iii) Average fixed cost function
iv)Marginal cost function
d)Consider the total Utility schedule of commodities X and Y below,
Units of Commodity TU x TU y
0 0 0
1 5 6

2 9 11
3 12 15
4 14 18
5 15 20

i. Define marginal utility (2 marks)
ii. If consumer’s income is 5 and price of X and Y is 1, how many units of X and Y
should the consumer consume in order to maximize utility? (3 marks)

QUESTION TWO
a)With the help of kinked demand curve explain the price war between Safaricom and Airtel as
experienced in the market
b) What do you understand by discriminating monopoly? Explain the conditions
under which price discrimination is possible.
c)Explain why firms under perfect competition making losses in the short-run might increase its
output in the long-run while output of the industry falls.
d) Compare Cardinalist analysis of demand with ordinalist utility analysis? Which one is
superior?
e) Explain the consumer’s equilibrium condition with the help with the help of indifference
curve approach.
f) What is the marginal rate of substitution? Use a precise example to illustrate this concept.

QUESTION THREE
a)The Kenya Power Supplies Company Ltd. Is the role of electricity in Kenya. This commodity is
purchased by two separate consumers, namely (i) commercial users and (ii) domestic users, to whom the
company is able to charge different prices or tariffs. Assuming that the major goal of the company is to
maximize profits:
i)How should the company allocate its total output of electricity between the two groups of consumers?
ii) Which group is likely to be charged a higher price? Explain clearly the reasons for your answer.
b) Define an indifference curve and briefly explain the nature of indifference curves for perfect substitutes
and complementary goods.

c)Given the following schedule of total utility for commodity X;

Units of X consumed per
unit time period

Total utility Marginal Utility

1 9
2 21
3 35
4 50
5 65
6 79
7 91
8 100
9 105
10 105

i)Derive the corresponding marginal utility
ii)Is the marginal utility schedule derived in (i) consistent with the Law of Diminishing Marginal
Utility?
d) Define an indifference curve and briefly explain the nature of indifference curves for perfect
substitutes and complementary goods.
QUESTION FOUR
a) What is production?
b) The table below shows output variation with increasing amounts of labour and fixed
amounts of other factors
No. of workers TPP APP MPP
1 1 --- ---
2 3 --- ---
3 8 --- ---
4 20 --- ---
5 30 --- ---
6 36 --- ---
7 40 --- ---
i. Complete the table above
ii. Identify the point at which Diminishing APP and MPP are experienced
iii. Graph the TPP, APP and MPP above clearly showing the three stages of
production

c i) State and explain any two production periods
ii) How short is short run?
d i))What is a monopoly? Explain three conditions necessary for the existence of a monopoly.
ii) What is non-price competition? What role does it play in monopolistic competition?
iii) What are the different types of price leadership that may be established in oligopolistic
market situation

QUESTION FIVE
a)What is the marginal rate of substitution? Use a precise example to illustrate this concept.
b)The utility approach to consumer demand theory is based on the assumption of cardinal utility,
while the indifference curve approach is based on ordinal utility. Which approach is better?
Why?
c)From the following total utility schedule

i) derive the marginal utility schedule.
ii)plot the total and the marginal utility schedules.
iii.)determine where the law of diminishing marginal utility begins to operate.
iv.)find the saturation point.
a) What is the precise meaning of the term ‘utility’? To what extent can it be measured
cardinally?
b) One of the properties of indifference curves is that two indifference curves do not
intersect. Suppose two indifference curves for two normal goods intersect, what does it
mean?
c) Using indifference curve analysis, demonstrate how a household’s