ec1ps3 - Department of Economics University of California,...

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1 Department of Economics Professor Kenneth Train University of California, Berkeley Fall Semester 2009 ECONOMICS 1 Problem Set 3 Due in your first section meeting in the week of Oct. 19. I. Each of the following statements is misguided. Explain what is wrong with the reasoning: 1. It doesn't hurt an unregulated monopolist to have its cost rise since the monopolist can simply raise its price to cover the extra costs. 2. Consider a monopolist that is regulated under price cap regulation and prices at the cap. This regulated monopolist does not benefit from an outward shift in the demand curve since it can't raise its price in response to the higher demand. 3. There is no reason to subsidize private universities since their fees are high enough. 4. In a high fire-risk area like the Berkeley-Oakland hills, there would be no problem to have a fire department run by a private firm because everybody would be willing to pay for it. 5. The costs of National Parks should be covered by charging admission fees, because we shouldn’t have National Parks if the people who use them are not willing to pay enough to cover these costs. II. REGULATION OF NATURAL MONOPOLY As you well know, food service in campus is a monopoly. Let us suppose that increasing returns to scale (IRTS) exist, such that the provision of food on campus is a natural monopoly. (There are people who believe that IRTS do not exist and that a competitive market could provide food service. That is, lots of vendors could set up operations in dorms and on-campus locations. I actually see no reason this cannot occur. But, for the sake of
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This note was uploaded on 12/27/2009 for the course ECONOMICS intro econ taught by Professor Glennworoch during the Spring '07 term at Berkeley College.

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ec1ps3 - Department of Economics University of California,...

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