ICA EXAM 1 QUESTIONS WITH
COMPLETE SOLUTIONS
Course
ICA
QUESTION 1: BASIC ECONOMIC CONCEPTS
A farmer produces 500 bags of maize. He sells each bag at KSh 3,200. The total production cost
was KSh 1,100,000.
Required:
a) Calculate the Total Revenue
b) Calculate the Net Profit
c) State whether the farmer made a profit or loss
Solution
a) Total Revenue (TR)
TR=Price×QuantityTR = Price \times QuantityTR=Price×Quantity
TR=P×QTR = P \times QTR=P×Q
TR=3,200×500TR = 3,200 \times 500TR=3,200×500 TR=1,600,000TR =
1,600,000TR=1,600,000
b) Net Profit
Profit=TR−TCProfit = TR - TCProfit=TR−TC
Profit=TR−TC\text{Profit} = TR - TCProfit=TR−TC
=1,600,000−1,100,000= 1,600,000 - 1,100,000=1,600,000−1,100,000 =500,000=
500,000=500,000
c) Conclusion
The farmer made a profit of KSh 500,000.
QUESTION 2: DEMAND AND SUPPLY
The demand function for tomatoes is:
Qd=100−2PQ_d = 100 - 2PQd=100−2P
The supply function is:
,Qs=20+3PQ_s = 20 + 3PQs=20+3P
Required:
Determine the equilibrium price and quantity.
Solution
At equilibrium:
Qd=QsQ_d = Q_sQd=Qs 100−2P=20+3P100 - 2P = 20 + 3P100−2P=20+3P 100−20=3P+2P100
- 20 = 3P + 2P100−20=3P+2P 80=5P80 = 5P80=5P P=16P = 16P=16
Substitute into demand equation:
Q=100−2(16)Q = 100 - 2(16)Q=100−2(16) Q=100−32Q = 100 - 32Q=100−32 Q=68Q = 68Q=68
Answer
Equilibrium Price = KSh 16
Equilibrium Quantity = 68 units
QUESTION 3: ELASTICITY OF DEMAND
The price of onions increased from KSh 50 to KSh 70 per kg. Quantity demanded reduced from
200 kg to 140 kg.
Required:
Calculate price elasticity of demand.
Solution
Formula:
PED=%ΔQ%ΔPPED = \frac{\%\Delta Q}{\%\Delta P}PED=%ΔP%ΔQ
Percentage change in quantity
140−200200×100\frac{140 - 200}{200} \times 100200140−200×100 =−30%= -30\%=−30%
Percentage change in price
70−5050×100\frac{70 - 50}{50} \times 1005070−50×100 =40%= 40\%=40%
PED
PED=−3040PED = \frac{-30}{40}PED=40−30 PED=−0.75PED = -0.75PED=−0.75
Interpretation
, Demand is inelastic because elasticity is less than 1.
QUESTION 4: COST OF PRODUCTION
A dairy farmer has the following costs:
Fixed Costs = KSh 150,000
Variable Costs = KSh 350,000
Output = 10,000 litres
Required:
a) Total Cost
b) Average Cost per litre
Solution
a) Total Cost
TC=FC+VCTC = FC + VCTC=FC+VC =150,000+350,000= 150,000 +
350,000=150,000+350,000 =500,000= 500,000=500,000
b) Average Cost
AC=TCQAC = \frac{TC}{Q}AC=QTC
AC=TCQAC = \frac{TC}{Q}AC=QTC
=500,00010,000= \frac{500,000}{10,000}=10,000500,000 =50= 50=50
Answer
Total Cost = KSh 500,000
Average Cost = KSh 50 per litre
QUESTION 5: FARM BUDGETING
A farmer intends to plant tomatoes on 2 acres.
Expected revenue = KSh 400,000
Expected costs = KSh 250,000
Required:
COMPLETE SOLUTIONS
Course
ICA
QUESTION 1: BASIC ECONOMIC CONCEPTS
A farmer produces 500 bags of maize. He sells each bag at KSh 3,200. The total production cost
was KSh 1,100,000.
Required:
a) Calculate the Total Revenue
b) Calculate the Net Profit
c) State whether the farmer made a profit or loss
Solution
a) Total Revenue (TR)
TR=Price×QuantityTR = Price \times QuantityTR=Price×Quantity
TR=P×QTR = P \times QTR=P×Q
TR=3,200×500TR = 3,200 \times 500TR=3,200×500 TR=1,600,000TR =
1,600,000TR=1,600,000
b) Net Profit
Profit=TR−TCProfit = TR - TCProfit=TR−TC
Profit=TR−TC\text{Profit} = TR - TCProfit=TR−TC
=1,600,000−1,100,000= 1,600,000 - 1,100,000=1,600,000−1,100,000 =500,000=
500,000=500,000
c) Conclusion
The farmer made a profit of KSh 500,000.
QUESTION 2: DEMAND AND SUPPLY
The demand function for tomatoes is:
Qd=100−2PQ_d = 100 - 2PQd=100−2P
The supply function is:
,Qs=20+3PQ_s = 20 + 3PQs=20+3P
Required:
Determine the equilibrium price and quantity.
Solution
At equilibrium:
Qd=QsQ_d = Q_sQd=Qs 100−2P=20+3P100 - 2P = 20 + 3P100−2P=20+3P 100−20=3P+2P100
- 20 = 3P + 2P100−20=3P+2P 80=5P80 = 5P80=5P P=16P = 16P=16
Substitute into demand equation:
Q=100−2(16)Q = 100 - 2(16)Q=100−2(16) Q=100−32Q = 100 - 32Q=100−32 Q=68Q = 68Q=68
Answer
Equilibrium Price = KSh 16
Equilibrium Quantity = 68 units
QUESTION 3: ELASTICITY OF DEMAND
The price of onions increased from KSh 50 to KSh 70 per kg. Quantity demanded reduced from
200 kg to 140 kg.
Required:
Calculate price elasticity of demand.
Solution
Formula:
PED=%ΔQ%ΔPPED = \frac{\%\Delta Q}{\%\Delta P}PED=%ΔP%ΔQ
Percentage change in quantity
140−200200×100\frac{140 - 200}{200} \times 100200140−200×100 =−30%= -30\%=−30%
Percentage change in price
70−5050×100\frac{70 - 50}{50} \times 1005070−50×100 =40%= 40\%=40%
PED
PED=−3040PED = \frac{-30}{40}PED=40−30 PED=−0.75PED = -0.75PED=−0.75
Interpretation
, Demand is inelastic because elasticity is less than 1.
QUESTION 4: COST OF PRODUCTION
A dairy farmer has the following costs:
Fixed Costs = KSh 150,000
Variable Costs = KSh 350,000
Output = 10,000 litres
Required:
a) Total Cost
b) Average Cost per litre
Solution
a) Total Cost
TC=FC+VCTC = FC + VCTC=FC+VC =150,000+350,000= 150,000 +
350,000=150,000+350,000 =500,000= 500,000=500,000
b) Average Cost
AC=TCQAC = \frac{TC}{Q}AC=QTC
AC=TCQAC = \frac{TC}{Q}AC=QTC
=500,00010,000= \frac{500,000}{10,000}=10,000500,000 =50= 50=50
Answer
Total Cost = KSh 500,000
Average Cost = KSh 50 per litre
QUESTION 5: FARM BUDGETING
A farmer intends to plant tomatoes on 2 acres.
Expected revenue = KSh 400,000
Expected costs = KSh 250,000
Required:
