Prestige University Grants Degrees Only to High Skill Students Who

question 49

Essay

Prestige University grants degrees only to high skill students who perform well for their eventual employers. Mediocre University grants degrees only to low skill students. The market demand for newly graduated high skilled workers is:
= 5,000 -
^p_H. The market demand for newly graduated low skilled workers is:
= 15,000 -
^p_L^. Currently, Prestige University graduates 1,000 students while Mediocre University graduates 5,000. Determine the equilibrium prices for low and high skilled graduates. Suppose that in an effort to cut costs, the State has merged Prestige University and Mediocre University into State University. This merger has eliminated the signal that employers use to rely on to discern graduate quality. As a result, the demand for State University graduates is: Q^D = 10,000 -
P. The number of graduates from State University will be 6,000. Calculate the equilibrium price for State University graduates. Before the merger, would students at both Universities be willing to pay higher tuition in an effort to prevent the Universities from merging? Why or why not?

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