Question 4

Suppose the market for university education is perfectly competitive and begins in long-run equilibrium. Assume universities take tuition fees as determined by market forces. i. Draw an appropriate diagram of this market in long-run equilibrium and briefly describe why the market is in long-run equilibrium (1 mark). ii. Suppose due to COVID-19 restrictions, there is a fall in demand for university education. Describe and show what happens to the market in the short run. Illustrate and explain what happens to the market in the long run, assuming demand remains permanently low (5 marks) iii. Due to COVID-19, the overall costs for universities have increased alongside a fall in demand for university education. Graphically illustrate this scenario (separate from ii), showing what happens to the market in the short run, and in the long run (assuming costs remain high and demand remains permanently low). Explain why some universities will have to shut down and why some might remain in operation (5 marks). iv . Suppose the invention of COVID-19 vaccine helps universities to reduce their costs of operation to pre-COVID-19 level. Assume further that due to the high unemployment in the economy, most people decided to return to university for new skills, increasing the demand for university education above the pre-COVID-19 level. Graphically illustrate and explain what happens to the market in the short run and in the long run