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The Market
The Kenya Power Supplies Company Ltd. Is the role of electricity in Kenya. This commodity is purchased by two separate consumers, namely (i) commercial users and (ii) domestic users, to whom the company is able to charge different prices or tariffs. Assuming that the major goal of the company is to maximize profits:
(a) How should the company allocate its total output of electricity between the two groups of consumers? (12 marks)
(b) Which group is likely to be charged a higher price? Explain clearly the reasons for your
answer. (4 marks)
(c) What conditions make it possible for the company to change different prices for the same product? (4 marks)
(Total: 20 marks)
Preferences
(a)
(i) Define an indifference curve and briefly explain the nature of indifference curves for perfect substitutes and complementary goods. (7 marks)
(ii) Using separate diagrams, illustrate and explain the income and substitution effects of a price rise for both inferior and giffen goods. (10 marks)
(b) (i) Why does marginal rate of substitution decline from left to right along an
indifference curve? (1 mark)
(iii) Define the term marginal propensity to save and show its influence on the multiplier
(2 marks)
(Total: 20 marks)
Economy
(a) Why is it important to estimate National Income of a country? What difficulties do economists encounter while carrying out such a task particularly in developing countries? (10 marks)
(b) The table below represents economic transactions for country XYZ in billions of shillings:
Total Output Intermediate purchases
Agriculture 30 10
Manufacturing 70 45
Services 55 25
Required:
(i) Calculate the Gross Domestic Product of this economy using the value
added approach. (3 marks)
(ii) If depreciation and indirect taxes equal 8 billion and 7 billion shillings respectively, determine the Net Domestic Product both at market prices and at factor costs. (7 marks)
(Total: 20 marks)