Problem
You learned that price elasticities of demand and supply are important for understanding the response of consumers and producers to changing demand and supply conditions. If any producer faces a perfectly inelastic demand for its products or services, the quantity demanded will not decline with increasing prices due to the fact that consumers cannot react to changes in prices with inelastic demand (see, for example, the cases in Section 2.4 of Pindyck and Rubinfeld, 2017). This means that regardless of the price the producer charges on such products or services, the consumer must get this product or service at the same quantities.
Related to this concept, one of the textbook questions (Question 10 in Ch. 2 in Pindyck and Rubinfeld, 2017) asks the following:
In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic. As evidence, she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number nor quality of students applying has decreased. Would you accept this argument? Explain briefly. (Hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? What else could be going on?)
A. Can there be such a case that producers can charge whatever price they want without any limit? Explain your answer. Try to find some examples.
B. Even if consumers do not react to higher prices in the short run, is there a chance that they may react in the longer run? Explain your answer. Try to find some examples.
C. In addition to inelastic demand, what else may explain increasing demand despite increasing prices? Suggest three possible reasons. Explain your answer and give examples.
D. The coronavirus crisis has started to affect the U.S. economy in March 2020. We are in Spring of 2023 now. During this period, do you think the price elasticity of demand for education has become larger or more inelastic with the coronavirus crisis? Why