Assume that private schools form a competitive industry. Suppose the demand for private schools rises because the government initiates a new program to offer income tax rebates to parents with children in private schools. In the short run, what happens to the number of students in private schools? What happens to the profits of each school? Answer by making two clearly labeled graphs (industry and firm-level) with clear explanations.
Assume that private schools form a competitive industry. Suppose the
In a competitive industry firms are permitted to free entry and exit. With government offering income tax rebates to parents whose children are in private schools, the demand for private schools increase. The education is of a superior quality in case of a private school and parents who could not afford earlier due to high fees can now enjoy the tax rebate and send their children to private schools. The following graph depicts what happens with an increase in demand for private schools:
It is seen that as the demand for private schools increase the prices increase from P1 to P2 and the total number of students in amongst all the private schools increase from X1 to X2.
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