When universities announce a large tuition increase and follow it with an announcement that more financial aid will be available, they are assuming that students who pay full tuition
A) have elastic demand and students who use financial aid have inelastic demand.
B) have inelastic demand and students who use financial aid have elastic demand.
C) view a college education as an inferior good and students who use financial aid view it as a normal good.
D) view a college education as a normal good and students who use financial aid view it as an inferior good.

Question

Quizplus · Accepted Answer

When universities announce a large tuition increase and follow it with an announcement that more financial aid will be available, they assume that students who pay full tuition have inelastic demand because they are willing to pay the increased price even though it is higher than before. On the other hand, students who use financial aid have elastic demand because they are more price-sensitive and may not be able to afford the increased cost without aid. Therefore, universities are trying to offset the potential loss of students with elastic demand by offering more financial aid to attract them to still attend.

When Universities Announce a Large Tuition Increase and Follow It