Suppose the following data represent the market demand for college education:
Tuition (per year) $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000
Enrollment demanded 8 7 6 5 4 3 2 1
(In millions per year)
(a) If tuition is set at $3,000, how many students will enroll?
Now suppose that society gets an external benefit of $1,000 for every enrolled student.
(b) Draw the social and market demand curves for this situation on the graph below.
(c) What is the socially optimal level of enrollment at the same tuition price of $3,000?
(d) How large of a subsidy is needed to achieve this optimal outcome?