Question

1. In 2004, the University of California education system drastically cut enrollment due to significant state budget cuts and asked 7,600 applicants to defer enrollment for two years after completing two years at a community college. Tuition costs remained fixed by the state.
   • Demonstrate the situation described with supply and demand curves, carefully labeling any excess supply or demand for college admission.
   • What is the market solution to the excess demand for college?
   • What is a possible reason the market solution was not pursued?

Answer 1

As the University has drastically cut enrollment due to significant state budget cuts and has asked 7,600 applicants to defer enrollment for two years after completing two years at a community college, we can see that the supply of enrollments seats available has decreased significantly whereas demand has remained constant.

The tuition fee is also fixed by the state.

The equilibrium fee is P, where demand for and supply of enrollment seats in the university is equal.

However, after drastic decrease in supply of the enrollment seats, the equilibrium tutition fee has increased to P1. Now, that the government has put a ceiling on the tuition fee, there will be shortage in the number of enrollment seats available from Q to Q1.

We can see in the graph, if the state hadn't put a cap on tuition fee, the demand and supply of enrollements would have been equal at tuition fee P1 which is higher than before.

Market solution to the excess demand for college is to increase tuition fee as we saw above.

The market solution was not pursued either because the government didn't want to burden those students who were already studying there or the government did not want to increase the tutition fee because doing so will lead to more students dropping out of education after graduating from high-school.