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Assume that that students and nonstudents have revealed their group demands for junior college education, a public good, as follows: Q = 1,500 - 0
Assume that that students and nonstudents have revealed their group demands for junior college education, a public good, as follows: Q = 1,500 - 0.25P, (Student demand) Q = 4,000 - P, (Nonstudent demand) where Q is the number of students educated per year and P is the price of tuition at the local 2 year junior college. What is the aggregate demand for college education? Assuming, MC = 1,000 + Q, the marginal cost of college education, what is the socially optimal amount of socially optimal amount of publicly-supported college education ?
Expert Solution
If we assume that the groups are equal and normalized to the size of one for each, we can use horizontal additional to get an aggregate demand curve. by adding the two demand curves get get Q = 5,500 - 1.25P. In a perfectlly competitive market marginal cost is equal to price, so P = 1000 + Q. The market clears when those two curve intersect, so when 5,500 - 1.25P = P - 1000. Or when 6,500 = 2.25P. So price is equal to 2889. We can plug this back into Q = P - 100 to get quantity is equal to 1889.
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