Question

Using a series of data collected quarterly (20 years), XYZ University has modelled the demand and supply function of their program offering as below:

Qd = 16,000 - 4000P

Qs = -9,000 + 6000P

Note: P is fees (,000) per subject

b. At the current equilibrium fees, the government believes that poor people deprive of a good education, and hence, enforce that the university should only charge the fees at RM 2,000 per subject.

i. Based on the above scenario, plot the graph to show the new interactions. [5 marks]

ii. How much is the revenue? [5 marks]

iii. Has the revenue increased or dropped after the intervention and by how much? [5 marks]

I need the answer for b i ?

Answer 1

Given the following information regarding the supply and demand of the program offered by XYZ University,

Qd = 16,000 - 4000P

Qs = -9,000 + 6000P

We find the equilibrium by equating the supply and demand, therefore,

16000 - 4000P = -9000 + 6000P

= 25000 = 10000P

= P = 2.5

Given that P is given in thousands per subject therefore at equilibrium P = Rs. 2500.

Q = 16000 - 4000*2.5

Q = 6000

Now, since the government has fixed the price to be Rs. 2000 therefore the P has been fixed below the equilibrium level. The following graph depicts this situation

At P=2 (fixed by the government)

Qd = 16000 - 4000*2

Qd = 16000 - 8000

Qd = 8000 (point B on the graph)

Qs = -9000 + 6000*2

Qs = -9000 + 12000

Qs = 3000 (point A on the graph)

When price falls below the equilibrium price, suppliers are demotivated to produce since they earn a lesser value and the demand increases since buyers can now afford to buy at a cheaper rate.

Therefore, we can observe a change in the quantity demanded and supplied at this level of price. Evidently the quantity demanded exceeds the quantity supplied by 5000 units thereby creating a shortage in the market.

This shortage can be met only when there is an increase in the supply and the supply curve shifts left or if the demand falls thereby shifting the demand curve leftwards at the same price level of Rs. 2000.