a) Completeness is based when the consumer does not have the indifference between two t

goods. For example , Eddy has two alternatives choices steak or chicken , the assumption
of completeness reflect the idea that Eddy should able to compare his option , in this case
steak or chicken , in other words Eddy should able to say whether he like steak or chicken
better.
Transivity is based on defining a relationship between goods, such as if a consumer prefer
good A to good B and prefers good B to good C. Then the consumer should prefer A to
Indifference curve is a graph that shows combination of two goods that yield equal
satisfaction. Transivity is consumers preference over choice/ bundle is consistent, loyalty,
rational, a consumption prefer A o B and B to C and A to C

b) The indifference curves do not cross or intersect because it contradicts and violates the rule
of strictly preferences (transitivity). This means that at the point of tangency the highest
indifference curve will give as much as of the two goods as is given by the lower
indifference curve. The intersections implies a consumer being indifferent about the bundle
to choose whether the higher indifference curve and a lower indifference curve, thus could
not lie on a distinct indifference curves and to rule out clearly the axioms of transitivity
and more is better than less, the indifference curve must not cross.
See the attached graph to aid the explanation, supposed that Indifference curve cross at
Bundle b, a consumer will be indifferent between b and d on I2 and between b and c on I1.
If this individual is indifferent between b and d, and between b and c she must be indifferent
between d and c by transitivity assumption but c has more of both goods than d, so she
must prefer d to c, because of this contradiction and violence, the indifference curve do not
cross.

c) Least cost rule is to ensure that a firm produces good and services at a lower cost of production
in order to maximize credit .More goods are produced at lower costs .least cost rule is the ratio
between marginal products of labour (MPC) to its price equal to the ratio between marginal product
and capital and its price (MPk.)
Example labour price is $10 and price for rent capital is $20.

Marginal product labour is 40 and marginal product of capital is 60

MPC/Pl=MPC/Pk
40/10=60/20
4=3 units
Means for each labour employed ,for every $1 spent 4units in produced for each capital , every $1
rent we have 3 unit produced .this means that more worker should be hired because they produce
more unit of output and at least cheaper cost .hire more laborer because per dollar spent or labour
produces more unit of product than capital .

e) Consumer equilibrium is an equilibrium when the weighted marginal utilities of both products
equal .in equilibrium a consumer maximizes utility satisfactions
Example of weighted marginal utility.
MUb/Pb =MUo/Po
60/$3=120/6
20=20

MU=Marginal utility
B=banana
Pb=price of Banana
O =Orange
Po =price of orange
Question 2

i)
Clyde

Decision Confess Silent

Bonnie
Confess 16, 16 0, 40

Silent 40,0 2, 2

ii) If Clyde decides to confess, the best decision for Bonnie is to confess too. He rather confess
and get 16 years in prison than keep quiet, and get 40 years. However from the payoff matrix table
it shows that confessing is a dominant strategy for both of them.

iii) If Bonnie decides to confess, the best decision for Clyde is to confess as well, just like in (i),
he rather confess too and have a better imprisonment years of 16 than be silent and get 40 years.
Just like Bonnie, confessing is also his dominant strategy because it yields a higher pay off
regardless of the strategy of each prisoner.

iv) The outcome of the game is for both prisoners to confess so that their outcomes will be Nash
Equilibrium and Maximum solution. This means that knowing what the opponent is doing, as
rational decision makers the optimal choice is to confess, so each of them must confess.
Question 3

a) Monopoly firms has one seller / business and their products are unique, the example of
monopoly firms are such as NAMWATER , NORED etc. . and competitive firms has many
business and they similar products , the examples are such as supermarkets ( pick n pay ,
shoprite spar etc)
Welfare effect of monopoly and competitive firms.
Graph
D =Demand curve
MC =Marginal cost curve
MR =Marginal revenue curve
Pm =Price for monopoly firm
Pc =Price for competitive firm
Qm =Quality produce for monopoly firms
Qc=Quantity product of competitive firm

Monopoly firm will produce / supply Qm where marginal revenue equals to marginal cost.
Monopoly sell Qm at Pm. Triangle A represent consumer surplus. Competitive firms produces Qc
where MC=D=Pc. competitive market firms produces more quantity more than a monopoly firms
.Pc is lower than Pm for monopoly .The consumer surplus in competitive firm area is A+B+C.So
competitive firms is good than monopoly .

b) An externality is the action by either a producer or a consumer which affects others but it is
not accounted for in the market price. In other words, it is a cost or benefit directly to the third
party that is not paid for.
Negative externality occurs when the action of one party imposes costs on another party, that the
imposer is not compensating the sufferers of his or her consequences. It has a bad impact on the
market, for example a steel plant that dumps its waste in a community dam where the community
depend on daily water consumption.
However, positive externality occurs when the action of one party benefits another party, the
beneficial consume the benefits for free that someone has paid for. It has a good impact on the
market, this includes the installation of streetlights by the municipality/an individual, a neighbor
or non-inhabitant of the street will benefit from this.

c) Not always
If the negative externality does not affect relatively large number of people and where the
properties rights are well defined, it is not necessarily for the government to intervene to achieve
economic efficiency. The parties that are involved can always bargain for the best interest of both
parties as according to Coarsens Theorem. This is the likes of loud music played in the
neighborhood, the two/three neighbors can negotiate in good faith and solve the externality

But then again, due to asymmetric information in the market and mostly large number of parties
involved, property rights not well defined and common property resources, the government can
always intervene to correct the negative externality in this situation.
Question 4

i)MRS is the willingness to substitute between goods.

MRS =MUx / MUy

=0.5y / 0.5x
=y/x
ii) Expression for budget line
Income, price of x , price of y
I =Px X + Py Y
25=$3x +$2y

I= Income per week

Px =price of good x
X=Quantity of good x
Py=Price of good y
Y= Quantity of good y

iii) MRS=MRT
MUX/MUY =Px/Py
y/x=3/2
X×Y/X=3/2×X
Y=3/2x
Budget constrain
25=3x +2y
25=3x +2(3/2x)
25=3x+3x
25/6= 6x
25/6=6/6x
=4.2 x

Y=3/2 x
Y=3/2(4.2)
Y=6.3

25=3×X+2
= (3 ×4.2) + (2×6.3)
=12.60+12.6
=25

i) Adverse Selection refers to situations where one side of the market cannot observe the type or
quality of the goods on the other side of the market. It is sometimes referred to as a hidden
information problem.

While the Moral Hazard refers to situations where one side of the market cannot observe the action
of the other that can affect the magnitude or probability of a payment associated with an event. It
is sometimes referred to as a hidden action problem.

In Adverse selection one party in a transaction mostly seller/owner have all and correct information
about the quality/type of goods sold than the other party (buyer) where the item is sold to. For
Moral Hazard, unlike in Adverse Selection, the principal agent (buyer) mostly provide misleading
information and changes the behaviors after the transaction has taken place, acting on their behalf
in a hidden manner when they know they will not have to face consequences of the risks.
Adverse Selection problem causes undesirable members of a population to participate in a
voluntary exchange, a good example is a sale of used cars, it is likely to happen that the used cars
on sale are of poor quality than the used cars that are not on sale, due to sale and little information
about used cars’ quality, undesirable members of the population are likely to voluntary participate
in this exchange,

However Moral Hazard creates incentives for people to behave in an inefficient or even fraudulent
ways, for example the provision of car accident/fire insurance, the principal agents may drive
recklessly or on purpose leave fire lighters on to cause fire just because they know they will not
face the consequence of the risk they are taking.
Question 5

i) Profit maximize rule is at point where MR=MC , a competitive firm will maximise
profit by producing quantities where MR=MC.A monopoly will maximise profit where
MR=MC
It follows that if the marginal revenue from this last unit of output produced exceeds
its marginal cost, MR (q) >MC (q), the firms Marginal profit is positive, MR (q)-MC
(q) >0, so it pays to increase output. The firm needs to keep increasing its output until
its marginal profit is zero, MR (q)-MC (q) =0 Conversely, if the firm produces more
output where its marginal cost exceeds its marginal revenue, MR (q) <MC (q), the extra
output reduces the firm’s profit. Therefore the profit maximisation can only be achieved
when MR=MC.

ii) Perfect competition has large number of buyers and sellers in the market compare to
Monopolistic market. Perfect competition sell homogeneous and non-differentiated products,
while monopolistic firms sell differentiated products. Perfect competitive firms are price takers
while the monopolistic firms are price setter, thus the latter have some market power. Perfect
competition has the single supplier while the monopolistic firm each seller has his/her own
supplier.

The action and behaviors of individuals’ rival firms cannot affect the operation of the other firms
in the perfect competition market because the sellers and buyers are so many and none of them
will have influence on the price but for the monopolistic firm the strategy for an individual firm
depend on the rival’s behavior such as quality, branding and advertising. The example of perfect
competition is the orange sellers while monopolistic firms is the furniture shops i.e. Lewis and
Bears.

iii) MUx/Px=My/Py should be equal and the amount of money spent on x should be equal to the
money spent on y.if we compare the marginal utility per dollar spent on two commodities ee.g
MUx/Ps =16/20=0.8 and that MUy/Py=8/40 =0.2 .The marginal utility per dollar spent on .the
consumer will consume less x and more y this means that if the slope of the indifference curve is
steeper than that of the budget line .the consumer will consume more x and less y. if MUx/Px and
MUy/Py are not equal and the MUx/Px is greater than MUy /Py then the consumer will substitute
good x for good y. as a result the marginal utility of good x will fall.the consumer will continue
substituting good x for good y till MUx/Px= MUy/MUy where the consumer will be in the
equilibrium.