Question

Please do it by type not write.

1. Suppose we live in a small island country that has just one higher education institution: a private university. The supply and demand for enrollment in this market are given by the equations:

P = 9000 - 3QD

P = 1000 + QS

a.Suppose this market is initially in equilibrium at a price of $3000 and a quantity of 2000 students. The government decides they want more people to get educated, so they set a price ceiling on tuition at $2400. Find the market outcome (using the equations), explain it briefly in words, and sketch a graph of the situation.

b.Suppose the price ceiling is put in place and the market outcome found in part a occurs. If we decided to start our own black market college on the island to avoid this price control, what price would we initially be able to charge? (Note: for the sake of this example, assume the quality of education and value of a degree from our sketchy college will be equivalent to that of the private university).

Answer 1

For Equilibrium price and quantity , Put Q^D=Q^S

=> Price P= $3000 and Quantity is 2000 .(Given)

Price ceiling P'=$2400

At P' ,3 Q^D= 9000-2400

=> Q^D=6600/3

=> Q^D=2200

Q^S =2400-1000=1400

Since P'<P , Therefore there will be shortage due to less supply and more demand. At P' , 200 more students wants to take admission and University is giving 600 less admissions.

Since Q^D>>Q^S , there is excess demand leading to shortage in the market. In such a situation, black marketeers benefit.

Because of shortage people are willing to pay higher prices.

Q^S= 1400 at P'=2400 . Putting this quantity in P = 9000 - 3Q^D ( Demand Equation ).

We get , P=9000-4200=4800

Initially you would be able to charge $4800.