ECON 313
CHUKA UNIVERSITY
UNIVERSITY EXAMINATIONS
EXAMINATION FOR THE AWARD OF DEGREE OF BACHELOR OF SCIENCE IN
ECONOMICS
ECON 313: ADVANCED MICROECONOMICS
STREAMS: BSC ECON TIME: 2 HOURS
DAY/DATE: TUESDAY 11/12/2018 8.30 A.M. – 10.30 A.M.
INSTRUCTIONS:
Answer question ONE and any other TWO questions.
Do not write anything on the question paper.
QUESTION ONE (COMPULSORY)
(a) Differentiate between Shephard’s Lemma and Hotelling’s Lemma. (4 marks)
(b) Describe three types of production functions. (6 marks)
(c) Consider a market with four oligopoly firms. Suppose that the market demand curve is
given by 𝑃 = 100 − 𝑄, where 𝑄 = 𝑞1 + 𝑞2 + 𝑞3 + 𝑞4 . Suppose there is a constant
marginal cost of 5 and no fixed costs. Calculate the Cournot equilibrium quantities, price
and profits. (10 marks)
(d) Using the above information, prove that the joint profit of the oligopolistic firms will be
lower than the monopolistic profit, but higher than the competitive profit. (10 marks)
QUESTION TWO
Suppose the cost function of a certain firm is given as 𝐶 = 10𝑊10.6 𝑊20.4 𝑄
(i) Derive the associated production function using the concept of duality. (10 marks)
(ii) Explain the properties of the above production function. Prove your answers. (10 marks)
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ECON 313
QUESTION THREE
The following is the utility function of a certain consumer
𝑈 = 12𝑋10.25 𝑋20.75 where 𝑥1 and 𝑥2 are the two goods that are consumed by this consumer.
Required
(i) Compute the compensated demand function for this consumer. (10 marks)
(ii) By the use of the identities approach, derive the uncompensated demand
functions. (10 marks)
QUESTION FOUR
(i) Suppose a firm in a perfectly competitive market has cost function given as
1
𝐶 = 50𝑄 − 4 𝑄 2 . Determine the firm’s supply function. (5 marks)
(ii) There are two categories of economic welfare; that is first and second theory of welfare.
With the aid of diagrams distinguish between them. (5 marks)
(iii) With the use of well labelled diagram, explain the inefficiency associated with monopoly.
(5 marks)
(iv) Prove that the marginal cost curve of a perfect competitive firm cuts the average cost
curve from below at its minimum point. (5 marks)
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