Question

1. Compare the change in price for an unregulated private enterprise, a regulated private enterprise, and a public enterprise in response to

a. The legislature becoming more proconsumer.

b. An increase in fixed costs.

c. A fall in marginal cost.

Answer 1

a. The legislature becoming more proconsumer would imply that there are no misleading advertisements and adulterated food or any other action which is leading to consumer exploitation as the consumer can easily charge the firm. Thus in the case of unregulated private enterprise, there will be no change in price as they are not affected because they are not accountable as they are not regulated by the state. Whereas a regulated private enterprise will increase the price of its products because it has to ensure that safety is maintained and it charges according to that. In the case of public enterprise, their price will stay the same or increase slightly but not as much as that of the private enterprise as they don't have a much higher marginal revenue expectation.

b. An increase in fixed costs such as rent, taxes, interest expenses will increase the prices of an unregulated enterprise, but which will be lower than that of the regulated enterprise as the regulated enterprise has to ensure that it meets all the regulatory aspects, whereas an unregulated private enterprise can always try to reduce its fixed costs by renting out in an unsafe environment. Public enterprise will try to increase the price by a slight amount which will be lower than that of the regulatory private enterprise cause if it increases the price as much as that of the regulated enterprise, it will expect backlash.

c. A fall in marginal cost will lead to reduction in price of the unregulated private enterprise and also of the regulated private enterpise if it wants to pass on the reduction to the customers, otherwise it can keep the price same if demand is inelastic. A public enterprise will also have to reduce the price by a slight amount.