QUESTION 1

(a) (I) The subsequent equations relate to the market conditions for pullovers at a given point of time:
Demand Function: Qd = 1200 - P
Supply Function: Qs = 600 + 4P

Compute:

(i) The overall revenue obtainable when the market clears

(ii) Customer surplus at the market-clearing price

(iii) The ratio of tax payable flanked by consumers and producers if the government introduces a tax of Rs 20 on pullovers.

(II) With more information, the subsequent extended demand function for pullovers was generated (where Y is income and Pg is the price of a related product:
Qd = 1800 - 1.5P + 0.02Y - 0.4Pg

If the initial conditions provided are such that P = Rs 400, Y = Rs 20,000 and Pg = Rs 200, calculate the price, income and cross elasticity of demand and comment on the nature of the product and its association with the related good.

(b) Using the theory of demand, describe how you would model the demand for health care services in your locality. You are also required to explain the accepted signs on variables that you have included in your modeling. [Spell out your assumptions clearly].

QUESTION 2

(a) ‘The car industry is categorized by broad products differentiation'
Scrutinize the long run situation of a car producer, commenting on abundance and competence levels, and elucidate why economists tend to have mixed views on the efficiency level of this industry.

(b) Using relevant theoretical underpinnings, give details how are airfares determined?

QUESTION 3

(a) Portray and examine the typical relationship between labour productivity and size of capital that characterize the short run production function of a firm.

(b) Would supplementary capital equipment necessarily lead to lower costs in the long run? Explain.

QUESTION 4

(a) Use indifference curves to distinguish between income and substitution effects.

(b) Hence, using the above techniques explain why the demand curve slope downwards.

QUESTION 5

What are the main criteria for designing a tax system? To what extent do you think the national residential property tax meet these criteria?

QUESTION 6

(a) What are externalities? A dyeing unit of a textile firm discharges effluents in the lagoon, polluting the water, adversely affecting a nearby hotel resort, fishermen and the community at large. Illustrate graphically why this problem results in a departure from a perfectly competitive market.

(b) What conclusions can be drawn about market allocations?