NATIONAL OPEN UNIVERSITY OF NIGERIA
14/16 AHMADU BELLO WAY, VICTORIA ISLAND, LAGOS
SCHOOL OF MANAGEMENT SCIENCES
MARCH/APRIL 2014 EXAMINATION
COURSE CODE: BUS 802 CREDIT UNIT: 2
COURSE TITLE: Economic Theory
TIME ALLOWED: 2 hrs
Instructions: 1. Attempt question number one (1) and any other (2) questions.
2. Question number 1 carries 30 marks, while the other questions carry 20
marks each.
3. Present all your points in coherent and orderly manner.
QUESTION 1:
(a) The following equation represents a relationship between household consumption
expenditure, C and income, Y: C = 120 + 0.65Y
Explain what the figure, 120 stands for in the consumption-income relationship,
and the type of relationship. 5Marks
(b) Suppose the different income levels are as follows(N’billions):
Y = 100, 120, 125, 140, 80, 115, 145, 150, 166, 200, calculate the corresponding consumption levels using the relationship specified. 10Marks
(c) Assume that an individual’s utility function is given by: U = X1X2; that P1 = 2
naira, P2 = 5 naira; and, that the individual consumer’s income for the period of
analysis is N10, 000. What are the units of goods X1 and X2 that the consumer
must purchase and consume in order that he/she maximizes his/her utility? 15Marks
QUESTION 2:
(a) List and discuss the axioms of a rational choice. 10Marks
(b) Briefly distinguish between market demand and individual demand for a
particular product. 2Marks
(c) Which of the following statements is true, and why?
i. If price elasticity = 1, MR = 0
ii. If price elasticity > 1, MR > 0
iii. If price elasticity < 1, MR < 0 8Marks
QUESTION 3
(a) Define and distinguish between Own-price elasticity and cross-elasticity of demand for a given product. 14Marks
(b) Explain the steps involved in the procedure of multiple regression analysis. 6Marks
QUESTION 4
(a) Enumerate and discuss the basic assumptions of linear programming 10Marks
(b) Assume an economy that recorded N100 billion in investment expenditures, with a consumption function given by: C = 200 + 0.75Y for a given accounting period. You are required to determine the equilibrium level of national income, Y* 10Marks
QUESTION 5
Using the appropriate graphical illustrations, explain why the existence of liquidity trap may render monetary policy ineffective during the time of economic depression. 20Marks
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