Economics 305

UNIVERSITY OF KWAZULU-NATAL

SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE

ECONOMICS 305

CLASS RECORD TEST 3: 15 MAY 2014

DURATION: 60 MINS                TOTAL MARKS: 100

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INSTRUCTIONS TO CANDIDATES

• This test consists of 30 multiple choice questions.
• Candidates are required to attempt all 30 MCQ questions.
• Record all your answers on the separate MCQ answer sheet (pink form) provided.
• Only HB pencil may be used on the MCQ answer sheet.
• Negative marks (-1) will be scored for each incorrect answer. +5 marks are awarded for each correct answer. Unanswered questions score zero.  The total scored out of a possible 150 marks for the multiple-choice section will be converted into a score out of 100.

MULTIPLE-CHOICE QUESTIONS                                         100 marks

1. Which of the following will increase the potential profitability of a collusive agreement?

1. Highly elastic market elasticity of demand.
2. Low barriers to entry.
3. The smaller the number of participating firms relative to the number of firms outside the agreement.
4. The greater the market share of participating firms.
5. All of the above.

Consider a supergame where the stage game is Cournot and it is repeated infinitely.  There are two identical firms, i and j and the Cournot, collusive and defection outputs and profits for a stage game are shown in the table below.  Under collusion the two firms have equal shares of the monopoly profits.    Use the table below to answer questions 2, 3, 4 and 5.

1. Consider the following grim strategy, which is a subgame perfect Nash equilibrium:

(1) Play the collusive output in each period as long as the other firm has done so in the past.

(2) If any firm has ever deviated from playing its collusive output, play the Cournot output

If in one period firm i decides to defect, then in the next period firm i will earn a profit of

1. 3200.
2. 3600.
3. 4050.
4. 0.
5. 7200.

1. Consider the same grim strategy set out in question 2.  If neither firm has a history of cheating, then the profits of each firm in each game will be as follows:

1. Firm i =3200 and firm j = 3200.
2. Firm i =3200 and firm j = 3600.
3. Firm i =3600 and firm j = 3600
4. Firm i =4050 and firm j = 4050
5. Firm i =4050 and firm j = 3200.

1. Consider the following statements:

1. If the firms agree to collude, then the higher the discount factor of each firm, the more successful collusion is likely to be.
2. If the discount factor for both firms is close enough to one, then the grim strategy set out in question 2 is a subgame perfect Nash equilibrium.
3. The history of the game has little effect on each stage game when firms are playing a supergame.

Which of the above statements is correct?

1. Only iii.
2. Only ii.
3. i and ii.
4. ii and iii.
5. i, ii and iii.

1. Use the values in the table above to calculate the critical value of the discount factor for the grim strategy to sustain a collusive agreement.  Based on your calculation, you will be able to conclude that collusive agreement will be sustained if the discount factor for each firm exceeds _______:

1. 1.
2. 0.53.
3. 1.89.
4. 0.89.
5. 0.79.

1. Which of the following statements is correct?

1. Price discrimination is more likely to be profitable if arbitrage between customers is possible.
2. Tying and bundling are not examples of price discrimination.
3. Price discrimination can be defined as the ability to set prices so that the difference between average prices and average costs varies between different sales of either the same good or closely related goods.
4. Price discrimination is more likely to be profitable if warranties are transferred by one customer to another when resales between customers take place.
5. All of the above statements are correct.

Consider a monopoly gym club which has two types of consumers, and for simplicity suppose there is one consumer of each type.  The low demand consumer’s demand for gym classes is given by the equation: