# The theory of a firm – Questions and Answers

## TOPIC: The theory of a firm

QUESTION 1
April 2022 Question Six A
(i) Describe three economic characteristics of enterprise as a factor of production.
(6 marks)
(ii) Explain four importance of profits in a market economy. (4 marks)

QUESTION 2
April 2022 Question Seven B
Summarise six demerits of minimum wage legislation in an economy. (6 marks)

QUESTION 3
December 2021 Question Two A
Examine six features of capital as a factor of production. (6 marks)

QUESTION 4
December 2021 Question Three C
Discuss five technical economies of scale. (10 marks)

QUESTION 5
December 2021 Question Four C
The marginal cost function of a certain firm is given by:
MC = 6Q + 4
Where = MC is the marginal cost function
Q is the level of output

Required:
(i) The total cost function. (2 marks)
(ii) The average fixed cost function. (2 marks)
(iii) The average variable cost function. (2 marks)
(iv) The level of output that would minimise the average variable cost. (3 marks)
(v) The level of output that would minimise the average total cost. (4 marks)

QUESTION 6
Explain the following terms in relation to labour as a factor of production:
Participation rate. (2 marks)
Real wages. (2 marks)
Labour productivity. (2 marks)
Derived demand. (2 marks)

QUESTION 7
August 2021 Question Two A
Explain the term “marginal factor cost”. (2 marks)

QUESTION 8
August 2021 Question Two D
With the help of a well labelled diagram, distinguish between “economic rent” and “quasi rent”. (6 marks)

QUESTION 9
May 2021 Question Five A
The total cost and demand functions of a firm operating under monopolistic competition are represented as follows:
TC=850-8Q+〖10Q〗^2
P=200
Where;
TC = Total Cost
Q = Output
P = +Price

Required:
Fixed cost function. (1 mark)
Variable cost function. (1 mark)
Average cost function. (1 mark)
Marginal cost function. (2 marks)
Marginal revenue function. (2 marks)
The level of output at which the firm breaks-even. (3 marks)

QUESTION 10
May 2021 Question Six C
With the use of a diagram, illustrate the optimal point of a firm. (4 marks)

QUESTION 11
May 2021 Question Seven B
(i) With a well labelled diagram, illustrate the concept of economic rent. (5 marks)
(ii) Explain how economic rent might be used as a good base for taxation. (3 marks)

QUESTION 12
November 2020 Question five C
Summarise four factors that might lead to an inward shift in the optimal point of a firm.
(4 marks)
QUESTION 13
November 2019 Question Two B
Explain five factors that lead to the external economies of scale in an economy.
(10 marks)
QUESTION 14
November 2019 Question Two C
Describe two assumptions of the law of variable proportions. (4 marks)

QUESTION 15
November 2019 Question three B
With the aid of a well labelled diagram, explain the concept of a backward bending supply curve of labour. (6 Marks)

QUESTION 16
May 2019 Question one C
Highlight six factors that might lead to a rightward shift of the optimal point of a firm.
(6 marks)
QUESTION 17
May 2019 Question Two C
The demand and average cost functions of a hypothetical firm are represented by the following functions (in thousands):
P=50 —Q
AC=100/Q —16 +2Q
Where:
P is the unit price in shillings.
Q is the quantity of output in units.
AC is the average cost in shillings.

Required:
(1) The total cost function. (1 mark)
(ii) The variable cost function. (1 mark)
(iii) The total profit of the firm When Q=10 units. (3 marks)

QUESTION 18
May 2019 Question Three B
Highlight six factors that determine the effectiveness of trade unions in a society.
(6 marks)
QUESTION 19
May 2019 Question Four C
Suggest five policy measures that could be adopted by a government to enhance geographical mobility of labour within a country. (5 marks)

QUESTION 20
May 2019 Question Four D
The table below shows the quantity of units produced by a certain firm and the corresponding total cost:
Units produced Total cost (Sh.”000″)
0 77
2 216
4 235
6 319
8 348
10 382

Required:
(i) The average variable costs when the units produced are 2, 6 and 10 respectively.
(3 marks)
(ii) The marginal costs of production for the 4th and 8th units respectively. (2 marks)

QUESTION 21
May 2019 Question seven B
With the aid of an appropriate diagram, explain the relationship between the short run average cost curve and the long run average cost curve. (4 marks)

QUESTION 22
November 2018 Question one D
Highlight five barriers to occupational mobility of labour. (5 marks)

QUESTION 23
November 2018 Question Three A
Summarise six characteristics of capital as a factor of production. (6 marks)

QUESTION 24
November 2018 Question Three C
Discuss four cases advanced by trade unions for increase in the wages of their members.
(8 marks)
QUESTION 25
May 2018 Question Seven C
The demand and total cost functions for a hypothetical firm are represented as follows:
P=100
TC=50 + 8Q^2
Where:
P is the price
TC is the total cost
Q is the quantity

Required:
(i) The marginal cost function. (2 marks)
(ii) The average fixed cost function. (2 marks)
(iii) The marginal revenue function. (2 marks)
(iv) The profit maximising level of output. (4 marks)

QUESTION 26
November 17 Question Three A
Outline four factors that determine the supply of labour in an economy. (4 marks)

QUESTION 27
November 17 Question Five A
The data below relate to the total cost function of’ a firm operating under perfect competition:
C = 5,000 + 500Q + 150Q^2+ 5Q^3
Where:
C = Total cost in thousands of shillings.
Q = Output in units.
Required:
Assuming an output level of 10 units, determine:
(i) Total cost of production. (1 mark)
(ii) Average variable cost of production. (2 marks)
(iii) Marginal cost of production. (2 marks)

QUESTION 28
November 17 Question Six B
Analyse six factors that influence the cost behaviour of a firm. (6 marks)

QUESTION 29
May 2017 Question Two B
With reference to the theory of production, discuss five factors that could lead to:
(i) Increasing returns to scale. (5 marks)
(ii) Decreasing returns to scale. (5 marks)

QUESTION 30
May 2017 Question Three A
Explain the difference between “real” and “pecuniary” economies of scale of a firm.
(1 mark)
QUESTION 31
November 2016 Question Two B
State six assumptions of the marginal productivity theory of wage determination
(6 marks)
QUESTION 32
November 2016 Question Four B
Using an appropriate diagram, describe the expansion curve of a firm as applied in the theory of production. (5 marks)

QUESTION 33
November 2016 Question five B
The table below shows the total variable costs of Ujuzi Limited at different levels of output.The total fixed cost of the company is Sh.150,000.

Required:
(i) The average cost of producing each level of output. (4 marks)
(ii) The marginal cost of producing each level of output. (4 marks)
(iii) The maximum attainable profit. (4 marks)

QUESTION 34
May 2016 Question Three C
Discuss five causes of the U-shaped long-run average cost curves of a firm.
(10 marks)
QUESTION 35
May 2016 Question Four A
Enumerate six barriers to occupational mobility of labour. (6 marks)

QUESTION 36
November 2015 Question One C
Argue five cases for and five cases against specialisation as a method of production.
(10 marks)
QUESTION 37
November 2015 Question Two 2
Outline four arguments upon which trade unions base their demand for increase in wages for unionisable employees. (4 marks)

QUESTION 38
November 2015 Question Two 2
State six effects of price decontrols to an economy (6 marks)

QUESTION 39
November 2015 Question Two 2
Analyse six uses of elasticity of demand in decision making. (6 marks)

QUESTION 40
November 2015 Question Two 2
The following information relate to the price per unit and quantity supplied of a certain product:

Price per unit (Sh.) 12 10 8 5 2
Quantity supplied (Units) 12,000 11,000 9,000 6,000 0

Required:
Price elasticity of supply when price decreases from Sh.10 per unit to Sh.5 per unit. Interpret your result. (4 marks)

QUESTION 41
November 2015 Question Three A and C
Explain the term “optimal size of a firm”. (2 marks)

QUESTION 42
November 2015 Question Three A and C
(i) Summarizes seven barriers to geographical mobility of labour as a factor of production. (7 marks)
(ii) Highlight six measures that could be adopted by a government to enhance mobility of labour. (6 marks)

QUESTION 43
September 2015 Question Three A
Giving examples, distinguish between “fixed costs” and “variable costs”. (4 marks)

QUESTION 44
September 2015 Question Three B
A firm operating in the short-run period has a fixed cost of Sh.8,600. The table below shows its total variable cost and the units of output:

Units of output: 0 1 2 3 4 5 6 7 8 9 10
Total variable costs (Sh.): 0 3040 5680 8000 10080 12000 14000 16240 18960 22480 26880

Required:
For each level of output, calculate the firm’s total cost, average total cost, average variable cost, average fixed cost and marginal cost giving your solution in columnar form/tabular form. (10 marks)

QUESTION 45
September 2015 Question Three A, B and C
Using an appropriate diagram for each case, explain the three properties of isoquants.
(6 marks)

QUESTION 46
September 2015 Question Seven B
(i) State the law of diminishing marginal returns. (2 marks)
(ii) With the aid of a diagram, explain the three stages of production according to this law. (8 marks)

QUESTION 47
September 2015 Question Seven C
Highlight five functions of trade unions. (5 marks)

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