KABARAK UNIVERSITY

UNIVERSITY EXAMINATIONS
MAIN CAMPUS/TOWN CAMPUS
SECOND SEMESTER 2022 ACADEMIC YEAR
EXAMINATION FOR THE DEGREE OF BACHELOR OF SCIENCE IN
ECONOMICS AND MATHEMATICS/ECONOMICS AND
FINANCE/ECONOMICS AND STATISTICS

ECON 310: ADVANCED MICROECONOMICS

STREAM: Y3S1 - REGULAR TIME: 4:00-6:00PM

EXAMINATION SESSION: MAY- AUGUST DATE: 28/7/2022

INSTRUCTIONS TO CANDIDATES
1. Answer Question ONE and any other TWO questions in the answer booklet
provided.
2. Do not write on your question papers. All rough work should be done in your
answer booklet.
3. Clearly indicate which question you are answering.
4. Write neatly and legibly.
5. Edit your work for language and grammar errors.
6. Follow all the instructions in the answer booklet

As members of Kabarak University family, we purpose at all times and in all places, to set apart in one’s heart,
Jesus as Lord. (1 Peter 3:15)
Kabarak University is ISO 9001:2015 Certified
Page 1 of 4
SECTION A: (COMPULSORY) TOTAL MARKS FOR THIS SECTION IS 30 MARKS.
1
3
a) A competitive firm’s production function is y=10+ ( x−1000 ) . The price of the input x
is w=1
Required:

i) Derive the firms total cost curve (4 Marks)

ii) Determine the minimum value of y of the marginal cost curve (3 Marks)
iii) Calculate the minimum value of y of the average cost curve (3 Marks)

b) Consider the following production function

Y = 2X0.5
Required:
i) Derive the profit function (5 Marks)
ii) Using Hotelling’s lemma derive input demand and output supply (5 Marks)

c) Three oligopolists operate in a Market with inverse demand given by

Where . Each firm has a constant marginal cost of production c and no
fixed cost. The firms choose their quantities as follows. First firms 1 and 2 simultaneously
choose q1 and q2 respectively. Then firm 3 observes q1 and q2 and chooses . Find the
subgame perfect Nash equillibria of this game. (5 Marks)

d) Consider a monopoly with the following demand function: Q = 10-5P and constant return
to scale with MC = AC =4
Required:
Determine the profit maximizing level of output and comment on your answer (5 Marks)

SECTION B. TOTAL MARKS FOR THIS SECTION IS 40.

ANSWER ANY TWO QUESTIONS FROM THIS SECTION. EACH QUESTION IN
THIS SECTION CARRIES 20 MARKS.

QUESTION TWO (20 Marks)

a) Suppose the cost function of a firm is given by;

What is the firm’s production function? (6 Marks)

b) Using the concavity property of the cost function with respect to input prices,
demonstrate how the conditional input demand function can be derived from the cost
function using the shepherd lemma. (8 Marks)

As members of Kabarak University family, we purpose at all times and in all places, to set apart in one’s heart,
Jesus as Lord. (1 Peter 3:15)
Kabarak University is ISO 9001:2015 Certified
Page 2 of 4
c) A firm has two plants with cost function

Required
What is the firm’s cost function? (6 Marks)

QUESTION THREE (20 Marks)

Consider the following utility function:
U(x1,x2) = a1x1+ a2 x2

Required:
i) Calculate the Marshallian demands for this consumer. (5 Marks)

ii) Derive the indirect utility function for this consumer. (5 Marks)

iii) Calculate the expenditure function for this consumer. (5 Marks)

iv) Calculate the Hicksian demands for this consumer. (5 Marks)

QUESTION FOUR (20 Marks)

a) You are given the following leontief production function:

y=min
[ ]
x 1 x2 1/2
,
a1 a 2
Determine:
i) Conditional input demands (2 Marks)
ii) The cost function (2 Marks)
iii) The output supply function (2 Marks)
iv) The Input demand functions (4 Marks)
b) Assume a Cournot model where there are two firms in the Market. Firm 1 produces y1 units
of the good. Firm 2 produces y2 units. The total amount produced is y = y1 +y2. Assume that
the inverse demand curve is ( 1 2 )
p y + y =100− y=100− y 1 − y 2

Assume that the cost functions are 1 ( 1 ) and 2 ( 2 )

c y =25 y 1 c y =25 y 2
. Marginal cost for either firm
is a constant 25.
Required:
i) Find firm1’s reaction function (2 Marks)
ii) Find firm 2’s reaction function (2 Marks)
iii) Determine the Cournot equilibrium quantities (2 Marks)
iv) Determine the Market price (2 Marks)
v) Determine the profit levels for each firm (2 Marks)

As members of Kabarak University family, we purpose at all times and in all places, to set apart in one’s heart,
Jesus as Lord. (1 Peter 3:15)
Kabarak University is ISO 9001:2015 Certified
Page 3 of 4
QUESTION FIVE (20 Marks)
a) With an illustration, explain the two step approach to profit maximization (7 Marks)

b) You are given the following production function:

Y = { Min (x1, x2)}β
Determine:
i) Input demand functions (3 Marks)
ii) Output supply functions (3 Marks)
c) Consider the case of single output and a single input so that
Π = pf(x) – wx
Required:
Proof the hotelling’s Lemma (7 Marks)

As members of Kabarak University family, we purpose at all times and in all places, to set apart in one’s heart,
Jesus as Lord. (1 Peter 3:15)
Kabarak University is ISO 9001:2015 Certified
Page 4 of 4