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As a policy analyst you have been asked to calculate the elasticity of demand for university courses. Questions 1 to 4 are based on the assumption that the universities that increased their fees by 35% experienced an overall decrease in student applications of 7%.
Questions 5 to 8 are based on the assumption that the 35% fee increase at the universities that increased fees caused an overall increase in student applications of 12% at those universities that did not increase their fees.
Finally, what are some of the factors that might cause the Minister for Education to argue that changes in demand for course are not necessarily related to the fee changes? (3 marks)
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To calculate the elasticity of demand for university courses and conduct a thorough economic analysis of changes and effects based on the following assumptions:
Price elasticity of demand for courses at the universities that increased their fees by 35%
The price elasticity of demand measures the change in quantity demanded in response to a change in the price of a good or service, all other things remaining unchanged. It is computed as the percentage change in quantity demanded divided by the percentage change in price (Pettinger 2015).
According to the assumption made previously, the universities which increased their fees by 35% experienced an overall decrease in student applications by 7% that is the demand for courses decreased by 7%. Thus, the price elasticity of demand for courses in those universities in absolute terms is given by:
P.E.D= 7%/35% = 1/5 = 0.2
Cross-elasticity of demand for courses at universities that did not increase their fees with respect to the price of courses at universities that did increase their fees
Cross-price elasticity of demand measures the change in quantity demanded one good as the price of another good change. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in the price of another good (Hubbard and O’Brien 2008).
According to the assumption made earlier, some universities increased their fees by 35% and the remaining universities experienced an overall increase in student applications by 12%. Let the first kind of universities be in group 1 and the rest be in group 2. Thus, the cross price elasticity of demand for courses at group 2 universities with respect to the price of courses at group 1 universities is given by:
C.P.E.D= 12%/ 35% = 0.34