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EDPE 4056 – Microeconomic Theory: Applications to Education

Problem set 1

Due 2022-09-24, at 11:59pm EST

Question 1:

A (7 pts): In no more than six sentences, summarize the research questions and main findings of “The (Perceived) Returns to Education and the Demand for schooling”, by Robert Jensen, published in the Quarterly Journal of Economics in 2010.

B (7 pts): Using either https://scholar.google.com/ or https://academic.microsoft.com/, find a paper that cites the Jensen paper. Provide the citation details here. Then, in no more than six sentences, summarize the research questions it poses and its main findings.

Question 2:

Imagine a new company enters a market selling tutoring. The firm does some experimentation in the market, and it reports the following data points. At $75 per student, 2,250 students sign up for tutoring. At $30 per student, 9,000 students sign up. At $150 per student, no students sign up.

A (2 pts): Assuming demand is linear from Q=0 to Q=9,000, draw the demand curve.

B (3 pts): Write the equation representing this demand curve.

C (2 pts): Relax the assumption that demand is linear; instead, assume only that the law of demand holds. Given this assumption and the data you observe, what can we say about the number of students who sign up at prices greater than $75?

The school’s accountants determine that when the price per student is $15 it can supply 1,500 spots for tutoring, and that when the price is $45, it can supply 7,500.

D (2 pts): Assuming supply is linear from $0 to $100, use these data points to draw the supply curve.

E (2 pts): Assuming supply is always linear, write the equation representing this supply curve.

F (2 pts): Relax the assumption that supply is linear; instead, assume only that the law of supply holds. Given this assumption and the data you observe, what can we say about the number of student slots the school supplies at prices greater than $400?

G (4 pts): Find the equilibrium price and quantity. Show your work!

H (3 pts): Now imagine the government decides to encourage uptake of tutoring. To do so, it provides a $10 rebate (in other words, a subsidy) to every student who buys tutoring. Under this policy, find the new equilibrium quantity and price. Show your work!

Question 3:

The market demand and supply curves for private schools in suburban Connecticut are given by Q^D = 6000 - P and Q^S = 30P, where P is price and Q is the number of students in the district who choose to go to private school.

A (2 pts): what is the equilibrium price per hour of tutoring and equilibrium quantity of hours of tutoring purchased? Show your work.

B (3 pts): What is the price elasticity of demand for private school at the market equilibrium? (you can use a one unit increase in price) Show your work.

C (3 pts): Is demand elastic or inelastic at this point? Why or why not? Show your work.

D (3 pts): What is the price elasticity of supply at the market equilibrium? (you can use a one unit increase in price) Show your work.

E (2 pts): Calculate consumer surplus at the market equilibrium. Show

your work.

F (4 pts): Assume prices are in dollars. Now imagine that the government places a $300 tax on every student who goes to private school. Draw a graph showing the supply and demand curves and the equilibrium both prior to the introduction to this tax and the subsequent equilibrium resulting from this tax. Highlight the deadweight loss.

G (2 pts): Calculate the loss of consumer surplus resulting from introduction of this tax. Show your work.

H (2 pts): Calculate the loss of producer surplus resulting from introduction of this tax.

Question 3: Government intervention

Education technology is often seen as a social good – its creation may generate positive benefits, including knock-on innovation in related markets, that accrue to many who do not immediately consume it (i.e., positive externalities). In this discussion, your job will be to engage with different potential ways government might try to reach the socially optimal volume of consumption of a given tech app.

A (3 pts): If the government had perfect information about the value of the externality, describe the first-best way to internalize this externality, and describe how the government would set the value of any taxes/subsidies/quotas/price controls.

B (2 pts): Now, imagine the government does not have information on the externality. One interest group proposes setting a quota for the number of subscriptions sold; in other words, they would set a value, and buy any subscriptions up to this amount not purchased in the market. Graphically, show under what circumstances this would and would not generate a deadweight loss.

Question 5:

In this question, we study the market for tablet computers. When you begin observation, the market is in equilibrium. Note in this question you do not need to give exact numbers, just graphical representations of the market and explanations in words.

A (3 pts): Suppose you observe that the equilibrium price for tablets increases and the equilibrium quantity increases. Describe a scenario that would have led to this, and depict it graphically.

B (3 pts): Suppose instead you observe that the equilibrium price decreases but the equilibrium quantity rises. Describe a scenario that would have led to this, and depict it graphically.

C (3 pts): Suppose someone tells you that they’ve seen a dramatic increase in quantity, but the price is about the same. Describe a scenario that would have led to this, and depict it graphically.

Part d (3pts): Now suppose Apple has a 50% off sale on iPads, a direct competitor for tablet computers. Describe what will happen to the equilibrium price and quantity for tablet computers, and depict it graphically.