MOUNT KENYA UNIVERSITY

BED1101: INTRODUCTION TO MICROECONOMICS CAT

(MAY – AUG 2022/2023)

INSTRUCTIONS: ANSWER ALL QUESTIONS

1.) You are a leading consultant with a firm producing milk within Kiambu County. One of your
main roles is to advice the firm on price strategies that would lead to maximize profits. The firm
is a monopolist which sells in two distinct markets, one of which is completely sealed off from
the other.
In line of your assignment, you establish that the total demand for the firms output is given by
the following equation:

Q = 50 – 0.5P

The demand for the firms output in the two markets is:

Q1 = 32 – 0.4P1

Q2 = 18 – 0.1 P2

Where Q= total output

P= Price

Q1= Output sold in market 1

Q2= Output sold in market 2

P1= Price charged in market 1

P2= Price charged in market 2

The total cost of production is given by C= 50 + 40Q, where C= total cost of producing a unit of
milk.

Required:

a) The total output that the firm must produce in order to maximize profits ( 3 marks)
b) What price must be charged in each market in order to maximize profits ( 2 marks)
c) How much profit would the firm earn if it sold the output as a single price, and if the firm
discriminates ( 4 marks)
d) i.) The price elasticity of demand for the two markets at the equilibrium price and
quantity. (4 marks)
ii.) Give a comment on how the price elasticity of demand may be used in making economic

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 decisions (3 marks)

2 a) How does a competitive firm determine its profit maximizing level of output? When does a

profit maximizing competitive firm decide to shut down? When does a profit maximizing firm
decide to exit the market? Please illustrate graphically. (5 marks)
b) Draw the demand, marginal revenue, average total cost, marginal cost curves for a monopolist.
Show the profit maximizing level of output, the profit maximizing price, and the amount of
Profit. (5 marks)
c) Define price ceiling and price floor give an example of each. Which leads to shortage and
which leads to surplus? ( 4 marks)

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