The demand for university education is inelastic
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Raise or Lower Tuition? Suppose that, in an attempt to raise more revenue, Nobody State University increases its tuition.
Assess a raise in tuition and if it will necessarily result in more revenue.
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Solution Summary
the demand for university education is normally not elastic based on its tuition rate. Students make decision based on other factors. Once they deiced to enroll to the university of their choice, tuition hike has less impact on the demand. In this case the university revenue could be increased by raising its tuition rate. However, there may be an exception for certain universities whereby their price elasticity of demand is elastic, such as for lower ranking universities. In this case their revenues could be increase by lowering their tuition instead.
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Whether a raise in tuition (price) will result in more or less revenue depends on the elasticity of the product, which is in this case is the university education. Here are three possible scenarios:
1. An increase in price will lead to a decrease in revenue if the price elasticity of demand for university education is elastic (ie. elasticity is greater than 1 - ignoring the negative sign); or
2. An increase in price will lead to an increase in revenue if ...
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