Elasticity and tuition 1. Imagine that tuition for your education has increased

Question

Elasticity and tuition

1. Imagine that tuition for your education has increased by 20%. How do you think it will affect consumer demand and behavior? Why?

2. If there are currently 10,000 students enrolled at your institution and the school decides to raise tuition causing enrollment to fall to 9,000 students. Tuition started at $4,000 per semester but has since gone up to $4,800. What is the price elasticity of demand?

3. How has the change in tuition affected total revenue? Will a change in price always affect total revenue as it did in this example? If not, describe the other possibilities.

Explanation / Answer

1. Consumer's demand for tution decreases when tution fees increases in the market.

2. Ed = % change in quantity demanded / % change in price

% change in quantity demanded = (9000 - 10000)/10000 x 100 = - 10

% change in price or fees of tution = (4800 - 4000)/4000 x 100 = 20

Ed = - 10/20 = - 0.5

3. At tution of 4000; TR = PQ = 4000 x 10000 = 40000000

At tution of 4800; TR = PQ = 4800 x 9000 = 43200000

So, increase in tution fees causes increase in total revenue of firm. NO, change in price does not always affect total revenue. When % increase in price is equal to % decrease in quantity demanded then TR remains unaffected.

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