10 marks d briefly explain the concept of scarcity

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(10 marks) d) Briefly explain the concept of scarcity and opportunity cost. (5 marks) Question Two a) State the assumptions of cardinal approach to utility. (5 marks) b) Using a well labeled diagram explain the relationship that exist between average total cost, average variable cost and marginal cost. (10 marks) c) Graphically demonstrate the consumer surplus. (5 marks) Page 1 of 2 INVOLVEMENT IN ANY EXAMINATION IRREGULARITY SHALL LEAD TO DISCONTINUATION
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Question Three a) Explain the sources of monopoly power. (6 marks) b) Using a well labeled diagram, explain the effect on the equilibrium price and quantify of a sales tax imposed on the substitute of the product. (6 marks) c) With an aid of necessary tools proof that price ceilings and price floors can become source of non-clearance of market. (8 marks) Question Four The demand function for a good k is given by: Q k = 1000 – 0.25 pk – 0.65P w + 3P x + 8M Where Q k = Quantity demand of good k P k = Price of good k P w and P x – Prices of related good W and X M = income Given P x = sh.500, P k = shs.800, P w = sh.2000 M = shs.1,000 Required: i) Compute income elasticity of demand. From the income elasticity of demand is good K a luxury good or a necessity good? Explain. (7 marks) ii) Compute cross price elasticities of demand and interpret your results and show how commodity k and w are related. (6 marks) iii) Explain the importance of the concept of elasticity. (7 marks) Question Five a) Show the graphical derivation of demand curve using indifference curve approach. (10 marks) b) Discuss characteristics of perfect competition and explain why individual firms are price takers. (10 marks) Page 2 of 2 INVOLVEMENT IN ANY EXAMINATION IRREGULARITY SHALL LEAD TO DISCONTINUATION
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