Suppose the chartered banks decide to greatly reduce the availability of student

Question

Suppose the chartered banks decide to greatly reduce the availability of student loans that are guaranteed against default by the Canadian government.

a. What would you expect to happen to the demand for credit cards by students?

b. What would you expect to happen to the quantity of credit cards issued to students? To the willingness of students to incur debt at the much higher rates of interest charged on credit cards?

c. Are credit cards a substitute, albeit an imperfect one, for student loans? What sign (positive or negative) would you expect for the cross-price elasticity of demand for credit cards with respect to interest rates charged to students for other forms of credit?

Explanation / Answer

The demand for credit cards by students will increase.

As the demand has increased so will the quantity of credit cards issued (supplied) will increase to cater to the increasing demand for credit cards by students.

Yes. Credit cards are a substitute for other forms of credit. The cross elasticity will have a negative sign as it is a substitute product.

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