Bec 171 Exam

KWAME NKRUMAH UNIVERSITY
SCHOOL OF BUSINESS STUDIES
BEC 171: INTRODUCTION TO MICROECONOMICS

FINAL EXAMINATION
3RD MARCH, 2023.
TIME: 14.00 - 17.00 HOURS
DURATION: THREE (3) HOURS MARKS: 100
INSTRUCTIONS
1. Check that you have the correct examination paper in front of you.
2. This paper consists of FIVE (05) questions. You are required to answer any FOUR (04)
questions only.
3. The marks allocated to each part of a question are indicated in brackets at the end of the
question.
4. Write your student number on all the answer booklets used.
5. Show all necessary working in support of your answers.
6. Scientific calculators may be used in this examination.
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

QUESTION 1 (25 MARKS)
a) Mention four factors that determine price elasticity of demand? What role does price
elasticity of demand play in the decision-making of business firms? (5 marks)
b) Explain the relationship between price elasticity of demand and total revenue.
(5 marks)
c) Suppose that the market demand for beef is given by Qd = 200 - 6P + 2Y, where P is
the price of meat per kg and Y is the consumers’ income. Suppose that consumers’
income is K100. If the price of beef decreases from K10 to K8 per kg, find the
corresponding elasticity of demand. Now suppose that the price is fixed to K8 while
consumers’ income increases from K100 to K150, find the corresponding income
elasticity of demand if beef is a normal good? (5 marks)
d) The market research department of Big Tree has determined that the demand for
baking powder is
Q = 150 - 5.4P + 0.8A + 2.8Y – 1.2 P ¿
where P is the price of big tree baking powder, A is advertising expenditure , Y is
income, and P¿ is the price of Royal baking powder. Suppose that P = K15, A =
K10,000, Y = K12,000, and P¿ = K3.
i. Compute the income elasticity of demand for big tree baking powder.(5 marks)
ii. Compute the advertising elasticity of demand for big tree baking powder.
(5 marks)
a) Suppose the market for sunglasses initially has a supply described by

Ps = 10 + 0.5Qs and demand described by Pd = 200 – 2Qd.
i. What is the equilibrium price and quantity demanded (5 marks)
ii. The price of the glass used to make sunglasses increases and so the new supply of
sunglasses is given by Ps = 20 + 0.5 Qs. What effect will this have on the
equilibrium price? (5 marks)
b) Distinguish between movement along the supply curve and a shift in the supply curve.
With the aid of a diagram, describe a situation in which there is a shift in supply?
(10 marks)
c) In connection with the determination of price, explain excess demand and excess
supply? What do they lead to? (5 marks)
a) Explain how equilibrium price and quantity will change in the following cases:
i. Demand for a commodity increases, the supply remaining the same. (3 marks)
ii. Supply for a commodity decreases, the demand remaining the same.
(3 marks)
iii. Demand for and supply of a commodity increase by an equal amount.
(3 marks)
b) What is meant by opportunity cost? (2 marks)
c) Consider the following two countries. Assume that they only produce these two
goods. Note that productivity is measures in how many goods can be produced per
hour.
ZAMBIA GERMANY
CARS 12 10
COMPUTERS 4 6
i. What is Zambia’s opportunity cost of making cars and what is Germany’s opportunity
cost of making cars? (5 marks)
ii. What is Zambia’s opportunity of making computers and what is Germany’s
opportunity cost of making computers? (5 marks)
iii. Which country has a comparative advantage in production of cars and which one has
a comparative advantage in computers? (4 marks)

a) Consider a consumer who consumes only two goods, peas and beans. He has an
income of £10, the price of beans is 20p per kg (= £0.2) and the price of peas is 40p
per kg (= £0.4).
i. Suppose that the consumer consumes 30 kg of beans. Assuming that the
consumer wants to spend all his income, how many kg of peas is he going to
consume? (3 marks)
ii. Assume that the price of peas falls from 40p to 20p. Assuming that the
consumer still consumes 30 kg of beans, find the new quantity of peas.
(3 marks)
iii. After the decrease in the price of peas to 20p, assume that the consumer is just
as well off as he was in (i) if he has an income of £7.60. However, with that
income and the new price of peas he would have consumed 20 kg of beans.
Find the quantity of peas he would have consumed in this case. (3 marks)
iv. Find the substitution effect on consumption of peas due to the decrease in the
price of peas in (iii). (5 marks)
v. Find the income effect on consumption of peas due to the decrease in income
in (iii). (5 marks)
b) You are given the following total utilities of good x and good y obtained by a
consumer.
Number of units Total utility Total utility

Consumed of a commodity For good x For good y (utils)
(utils)
1 20 24
2 38 45
3 54 63
4 68 78
5 80 87
6 90 90
Given that the price of good x is K2, and the price of good y is K3, and that the
consumer has an income of K24 to spend on the two goods. Find the optimal
combination of goods. (6 marks)

a) Do the following functions exhibit constant increasing or decreasing returns to scale:
i. Q = ( KL¿ ¿ 4 /5 (3 marks)
ii. Q = 2L + 3K (3 marks)
iii. Q = 10√ L √ K (3 marks)
b) Suppose a firm has the following total variable cost (TVC) function:
2 3
TVC =200 Q−9 Q +0.25 Q
If the firm’s fixed costs are equal to K150,
i. What is the firm’s total cost function (1 mark)
ii. Derive the firm’s marginal cost function (1 mark)
iii. Derive the firm’s average variable cost function (1 mark)
iv. Derive the firm’s average fixed cost function (1 mark)
v. Derive the average total cost function (1 mark)
vi. At what output level will average total cost be minimum (1 mark)
c) Derive (draw) the long run average cost curve from the short-run cost curves. How
are they related to each other? How are they related to each other? (10 marks)
END OF EXAMINATION.
ALL THE BEST 

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KWAME NKRUMAH UNIVERSITY

SCHOOL OF BUSINESS STUDIES

BEC 171: INTRODUCTION TO MICROECONOMICS

3RD MARCH, 2023.

TIME: 14.00 - 17.00 HOURS

DURATION: THREE (3) HOURS MARKS: 100

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

QUESTION 2 (25 MARKS)

a) Suppose the market for sunglasses initially has a supply described by

QUESTION 3 (25 MARKS)

QUESTION 4 (25 MARKS)

Number of units Total utility Total utility

QUESTION 5 (25 MARKS)

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