Question

Suppose that colleges are a perfectly competitive industry, and market demand for a college education is somewhat elastic. If the government subsidizes each student, we would expect that with market adjustments, the students will receive ________ of the subsidy in the short run and _______ of the subsidy in the long run.

a) some; some

b) all; some

c) none; none

d) some; all

e) some; none

f) none; some

g) all; none

h) none; all

i) all; all

Answer 1

Colleges are a perfectly competitive industry. So, in the short run, the demand curve for each college is horizontal and they will shift upward because of the subsidy. Since, it is horizontal, all the subidy will go to the colleges, But, in the long run, there is free entry of colleges, so new colleges will enter the market to get profit and thus the supply curve of the market will shift and thus some of the subsidy will go to the college and some will go to the students.

Thus, based on this, the correct option is f) none; some