Date: Friday, 9t June 2017 Instruction Time: 2 hours Answer question ONE and ANY OTHER TWO in the answer booklet provided. Question 1 (40 Marks) a) Discuss the three principles that describe how the economy as a whole works. (15 Marks) b) Discuss the importance of relative in economic decision making. Can we do anything about this problem of relativity? (10 Marks) c) Consider the following events: Scientists reveal that consumption of oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees more productive. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges. (15 Marks) Question 2 (30 marks) a) You design computer games for sale. You charge $200 per game, and currently sell 12 computer games per month. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to $250. The law of demand says that you won't sell as many computer games if you raise your price. How many fewer games? How much will your revenue fall, or might it increase? (20 Marks) b) Discuss the recent trends in the real estate industry and the drivers of the prices which make investors decide to invest in real estate in Kenya. (10 Marks) Question 3 (30 Marks) a) Discuss the four basic central problems facing all economic systems. (16 Marks) b) With the linear production function given by: Q = 10K + 4L, what are the marginal product of capital (MPK) and the marginal product of labour (MPL)? (4 Marks) Page 1 of 2c) Look at the short-run production function given in the table below. The current market price for your output is 5. L Q MPL 0 0 20 20 38 18 54 16 64 10 70 6 If the current wage rate for labour was 75, how many units would you employ to maximize profits? (5 Marks) d) The following table gives the relationship between quantities and different cost measures for a competitive firm. Recall that MC stands for Marginal Cost and ATC stands for Average Total Cost. At a price of 15 what quantity should this firm supply to maximize its profits and what profits will the firm earn? (Assume you cannot have fractions of units - so you must pick a whole number.) (5 Marks) MC ATC 2 8 6 3 12 8 16 10 20 12 16 24 14 7 28 16 32 18 19 36 20 Question 4 (30 Marks) Following results in behavioural economics research, examine a number of well-documented onvert ns to Li psychological traps that are particularly likely to undermine business decisions. In addition to to Gall reviewing the causes and manifestations of these traps, discuss some specific ways managers to Gra can guard against them. to Gre s to Gi to Ou to Gr to POL to Kil us to Kilogr is to ions Page 2 of 2