009 solve all.

a) Explain five features of a free market Economy. (10 marks) b) Discuss five disadvantages of price mechanicsm. (10 marks) c) Define the law of diminishing marginal utility. (2 marks) d) The law of marginal utility does not apply in certain cases known as exceptions of these laws. Discuss at least four exceptions.

a) Gatheru and Kambu graduated from Nkubu University and instead of seeking employment, they set up a management consultancy. They have recently started to give business advice to their clients. Acting as consultants, they estimated the demand curve of a client's firm to be: AR=200-Q. Where AR is the average revenue in millions of shillings and Q is the output in units. Investigations of the client's firm's cost profile shows that marginal cost (MC) is given by MC=Q2 -28Q+211 (in millions of shillings). Further investigations show that the firms cost when not producing output is Shs. 10 million. Required. i. The equation of total cost. (4 marks) ii. The equation of total Revenue. (3marks) iii. An express for profit. (2 marks) iv. The level of output that maximizes profit. (4 marks) v. The equation of marginal Revenue. (2 marks) b) State the relationship between total utility and marginal utility.

a) An important post Keysian theory of consumption has been put forward by Modigliani and Ando which is known as lifecycle theory of consumption. Discuss the theory using a graph. (10 marks) b) Explain five factors responsible for wage differentials between occupants.

a) Two suspects are charged with a joint crime and are held separately by the police. Each prisoner is told the following. If one prisoner confesses and other one does not, the former will be given a reward of 1 and the latter will receive a fine equal to 2, if both confess, each will receive a fine equal to 1 an if neither confesses, both will be set free. Required i. Show a pay off bi matrix. (8 marks) ii. Solve the game and show the Nash equilibrium. (4 marks) b) Explain four ways the government can influence the allocation of resources in a country. (8

1 Trade Patterns and Gains from Trade The Ricardian and Heckscher-Ohlin theories of international trade stress different aspects of comparative advantage. [You may use numeric examples, graphs, or clear verbal arguments for any of your answers.] 1. Discuss prime differences between the Ricardian and the Heckscher-Ohlin theory of trade. State their main predictions for the pattern of trade. 2. Ricardian trade. Mexico and California grow avocados and produce motorcycles. Mexico's workers can produce 300,000 motorcycles and grow 15 million avocados, while California's workers can produce 1 million motorcycles and grow 20 million avocados. In your argument, start from a point of autarky and open markets to international trade. What are Mexico's and California's opportunity costs of motorcycle manufacturing in terms of avocado? What is the pattern of trade? If the world price is 1 motorcycle for 30 avocados, how many motorcycles will Mexico Mexico make, and how many motorcycles will California make? In your analysis, demonstrate that there are gains from trade for both California and Mexico. 3. Heckscher-Ohlin trade. What will happen to real wages for avocado growers and motorcycle-making workers in Mexico and California under the assumption that avocado growing is low-skill intensive, motorcycle manufacturing is high-skill intensive, Mexico is low-skill labor-abundant and California is high-skill labor-abundant?

5 Trade in Primary Goods Trade in primary commodities and agricultural merchandize poses special challenges to an exporting country. Discuss three reasons [of your choice] why world markets for these commodities are different from other markets. For the three causes you discuss, offer economic policies that could alleviate or remove the challenges.