QUESTION ONE (30 MARKS)
(a) A firm faces an elastic demand for its product. The manager goes to an economist to
advice him on whether to lower the price of the product. The answer he gives is:
maybe. Why is this the right answer?
(4 marks)
(b) Using the principle of rational choice, explain why a change in taste will shift a
demand curve.
(4 marks)
(c) Commodity A and B are in composite demand. Analyze the effect of a decrease in
price of A on the supply of B. Graphically illustrate your answer.
(4 marks)
(d) Outline the problems associated with the value added approach to measuring national
income.
(4 marks)
(e) Distinguish between monetary and fiscal policy.
(4 marks)
(f) Illustrate by use of diagrams the profit maximizing output of a firm operating in a
perfectly competitive market structure.
(5 marks)
(g) Briefly explain any five Keyne’s subjective factors that influence the consumption
function.
(5 marks)
QUESTION TWO (20 MARKS)
(a) Explain what happens to the combination of consumer and producer surplus in the
market if a price moves from disequilibrium to equilibrium.
(5 marks)
2
(b) (i) Define the meaning of the terms “maximum price control”.
(2 marks)
(ii) Explain briefly the effects of price decontrol to a growing economy. (8 marks)
(c) Explain the importance of the concept of price elasticity of demand to a
manufacturer of cigarettes.
(5 marks)
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