Question

A recent study at a liberal arts college concluded that demand elasticity is 0.91 for college courses. The administration is considering a tuition increase to help balance the budget. An economist might advise the school to: A. decrease tuition in order to increase revenue by boosting enrollment B. increase tuition in order to increase revenue C. leave tuition unchanged as a change in tuition is unlikely to enhance the school budget by increasing revenue D. decrease tuition because demand for courses is elastic

Answer 1

Answer:

B. increase tuition in order to increase revenue

Explanation:

Price elasticity of demand is a concept that seeks to measure the sensitivity of demand to the price of a good or service. Thus, if demand is elastic, it means that even small variations in price have a strong impact on demand. Conversely, if demand is inelastic, variations in the price of the good will not greatly affect demand, meaning consumers will continue to demand that particular good or service. The calculation of the price elasticity of demand consists in the division between the variation of the quantity demanded by the variation in the price practiced. If the result is greater than 1, demand is considered elastic (price sensitive). Conversely, if elasticity is less than 1, demand is considered inelastic (little price sensitive). If elasticity equals one, then the change in demand is exactly the same as the price change.

In the case of this faculty, the demand for courses is 0,91, so it's less than 1, therefore inelastic demand. This way, the college can maximize its revenue by increasing the tuition fee.