The marginal cost of educating a college student is $5,000.00 a year. The table
ID: 1178288 • Letter: T
Question
The marginal cost of educating a college student is $5,000.00 a year. The table
below shows the marginal private benefit schedule from a college education. The
marginal external benefit for college education is $2,000.00 per student per year.
Students Marginal Private Benefit
(millions per year) (dollars per student per year)
1 5,000
2 3,000
3 2,000
4 1,500
5 1,200
6 1,000
7 800
8 500
a. With no public colleges and no government involvement in college
education, how many students will enroll and what is the tuition?
b. If the government subsidizes private colleges and sets the subsidy so that
the efficient number of students will enroll in college, what is the subsidy
per student? How many students will enroll?
Explanation / Answer
(a)
With no public colleges and no government involvement in college
education, the number of students who will enroll for college education will be determined by market at the point where Marginal cost is equal to Marginal Private Benefit.
Marginal cost is given as $5,000
When number of student is equal to 1 million
Marginal cost will be equal to Marginal Private Benefit.
So, in the absence of intervention by the government one million student will enroll and tution is $5,000.
(b)
If the government subsidizes private colleges then the subsidy per student should be equal to Marginal External Benefit of $2,000.
New Marginal Beneift=Marginal Private Benefit+Marginal External Benefit
For 1 milliion student New Marginal Benefit=$7,000
For 2 million student New Marginal Benefit=$5,000
For 2 million student New Marginal Profit = Marginal Cost
So,in the presence of subsidy only two million students will enroll .
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