Question

Consider a market for private higher education. This market has the following data:

-Equilibrium annual fees without control: AED 100,000/year

-Annual maximum fees with government control: AED 70,000/year

-Number of students applicants (demand) with control: 110,000 students

-Universities capacity with control: 90,000 students

1.Estimate the value of the initial shortage or surplus due to the fees regulation. (1 Mark)

2. The government price control leads to a reduction in the supply and the new quantity supplied is now 70,000.

What would be the new market situation? (shortage or surplus, is it lower or larger than the previous one).

(1 Mark)

3.Estimate the shortage or surplus value following the decrease in supply. (1 Mark)

Answer 1

Initial situation:

- Equilibrium annual fees without control: AED 100,000/year

- Annual maximum fees with government control: AED 70,000/year

- Number of students applicants (demand) with control: 110,000 students

- Universities capacity with control: 90,000 students

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1.) Value of the initial shortage due to the fees regulation:

Quantity demanded = 110,000

Quantity supplied = 90,000

Shortage = Qd minus Qs

Shortage due to fees regulation = 20,000 students

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2.) New quantity supplied = 70,000 students

Quantity demanded = 110,000

The new market situation will be a shortage.

The shortage will be larger than the previous one.

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3.) New shortage = Qd minus Qs

= 110,000 - 70,000

New shortage = 40,000 students