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Author Question: The university you attend needs to increase total revenue. The president suggests that by raising ... (Read 29 times)

leilurhhh

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on: Jun 29, 2018
The university you attend needs to increase total revenue. The president suggests that by raising tuition by 5, total revenue will increase. However, after the tuition increase, total revenue actually fell.
 
  What can you infer about the price elasticity of demand for an education at your university? Why is this likely to be true? What did your university president assume to be true about the price elasticity of demand for an education at your university?

Question 2

Explain whether the following are examples of externalities.
 
  a. Alisha did not sleep well because her neighbor was playing loud music.
  b. Rochelle was late for a job interview because her alarm did not go off.
  c. Jos, who is allergic to pollen, is sick from the flowers that grow in his garden.


livaneabi

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Reply #1 on: Jun 29, 2018
Answer to Question 1

If after tuition increased total revenue fell, then the demand for an education at your university must be price elastic. It is likely to be price elastic because there are many substitutes for an education at this particular university and tuition represents a large share of an individual's income. The university president assumed that the demand was price inelastic.

Answer to Question 2

a. This is an example of a negative externality. Loud music played by her neighbor has a spillover effect on Alisha as she is unable to sleep.
b. This is not an example of an externality. Rochelle was late because her alarm did not go off. There is no spillover cost here that is affecting someone who is not involved in the activity.
c. This is not an example of an externality. Since Jos is sick from the flowers that grow in his own garden, he is directly engaged in the activity. Note that if his neighbor got sick, then it would qualify as an externality.


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