Exam 5: Using Supply and Demand

Many state governments support higher education through subsidies.(A subsidy is like a negative excise tax).Consider the following supply and demand for college education at State U, which shows the equilibrium that would prevail without subsidies: annual tuition is $20,000 with Q₀ enrolled students.Suppose the state provides a $10,000 per year subsidy paid to State U for each student enrolled.What impact will this subsidy have on the equilibrium tuition level and number of enrolled students? Explain.

Start by drawing a supply and demand equilibrium situation.Using your diagram, demonstrate graphically and explain verbally the impact of a decrease in demand and an increase in supply on equilibrium price and quantity.

Explain the shifts in demand and/or supply that can result in the following observations: (Assume the demand curve is downward sloping and the supply curve is upward sloping.) (a) Both price and quantity rise. (b) Price rises, quantity falls. (c) Price rises, quantity doesn't change. (d) Quantity rises, price doesn't change.