Big State U charges in-state and outstate students different tuition rates. Instate students pay $2000 a term, and respond according to the following demand equation: QI = 23,000 - 2TI where QI = in-state student enrollment and TI = instate tuition. Outstate students pay $4500 a term, and their demand is: QO = 42,000 , 7TO where QO = outstate enrolment and TO = outstate tuition.
a. Calculate the number of each type of student that will enrol, and the total enrolment at Big State. Calculate price elasticity for each type of student.
b. Assume that marginal cost for students is $3000. Is Big State charging an optimal tuition rate for in-state students? Explain.
c. Assume that the school wishes to institute these tuition changes. What might be the response of students? State taxpayers?