Question

Part 1: Imagine that tuition for your schooling has increased by 20%. How do you think this will affect demand and consumer behavior? Why? How would you describe the elasticity of your tuition? Explain.

Part 2: Imagine that there are currently 10,000 students enrolled at your institution. The school decides to increase tuition, and enrollment falls to 9,000. Tuition started at $4,000 per semester but has since gone up to $4,800. What is the elasticity of demand?

Part 3: How will this impact total revenue for your institution? What inferences can you make from this information?

Answer 1

Ans) Price elasticity of demand is the responsiveness of quantity demanded to change in price.

Elasticity = %change in quantity demanded ÷ %change in price

If change in quantity demanded is more than change in price, demand is elastic.

If change in quantity demanded is less than change in price, demand is inelastic.

1) Though there will be decrease in quantity demanded for education but the change will not be very significant as education is necessity. So, demand for education will be inelastic.

2) %change in quantity demanded = [(final quantity- initial quantity)/initial quantity]×100 = [(9000-10000)/10000]×100 = -10%

%change in price = [(final price- initial price)/initial price]×100 = [(4800-4000)/4000]×100 = 20%

Elasticity = (-10%)/20% = -0.5 (inelastic)

3) In general, when demand is elastic, it is recommended to lower the price in order to increase the revenue as it will attract more buyers.

But when demand is inelastic, it is recommended to increase the price to increase the revenue.

So here, total revenue of the institution will increase by increasing tuition fees.

(Kindly note that value of elasticity will change if mid point method is used.)