Q8. Real (inflation-adjusted) tuitio... [FREE SOLUTION]

Chapter 3: Q8. (page 65)

Real (inflation-adjusted) tuition costs were nearly constant during the 1960s despite a huge increase in the number of college students as the very large Baby Boom generation came of age. What do these constant tuition costs suggest about the supply of higher education during that period? When the much smaller Baby Bust generation followed in the 1970s, real tuition costs fell. What does that fact suggest about demand relative to supply during the 1970s?

Short Answer

Expert verified

The constant tuition costs in the 1960ssuggest that the increase in the supply of higher education was equal to the increase in the number of college students.

The fall in tuition costs in the 1970s suggests that the increase in the demand for higher education was relatively less than the increase in the supply of higher education.

Step by step solution

Step 1:Simultaneous change in demand and supply

A simultaneous change in demand and supply means the demand and supply shifters work together, shifting the two curves (backward or forward) simultaneously. The relative shift in the two curves determines market equilibrium.

Step 2:Explanation for changes in the cost of tuition in the 1960s

The following diagram explains why the tuition costs were nearly constant despite increasing demand for higher education (increase in the number of college students).

The supply of higher education increased from $S_{1} t o S_{2}$ , and the demand increased from $D_{1} t o D_{2}$ . The size of the forward shift in both the supply curve and demand curve was the same, and hence the cost remained at P1. However, the equilibrium quantity increased to $Q_{2}$ . Thus, the equal shift in both demand and supply curves kept the tuition cost constant.

Explanation for changes in the cost of tuition in the 1970s

The following diagram explains why the tuition costs fell even when there was an increase in the demand for higher education.

The supply of higher education increased from $S_{3} t o S_{4}$ , and the demand increased from $D_{3} t o D_{4}$ .The size of the forward shift in the supply curve was more than the demand curve shift, so the cost fell to $P_{4}$ . The equilibrium quantity increased to $Q_{4}$ . Thus, a greater relative shift in the supply curve with respect to the demand curve was the reason why the costs of tuition fell.