When State University raises tuition fees to compensate for losses, what does it assume about demand?

When State University raises tuition fees to compensate for losses, it assumes that demand is inelastic. Inelastic demand means that consumers (students and their families, in this case) will still purchase a relatively constant quantity of the good or service (education) despite an increase in price (tuition fees).

This assumption is often based on the idea that education is a necessity for many individuals and that there are limited alternatives available. If demand were inelastic, an increase in tuition fees would not significantly reduce the number of students willing to enroll, allowing the university to generate more revenue even with higher prices.

Conversely, if demand were elastic, one would expect that an increase in tuition would lead to a proportionately larger drop in the number of students enrolling, thus negating the intended revenue boost. Similarly, a perfectly elastic demand would imply a complete responsiveness to price changes, where a slight increase in tuition could lead to a complete drop in student enrollment. Unitary elastic demand suggests that an increase in price would yield a proportional decrease in quantity demanded, again not aligning with the goal of raising funds through higher tuition. Thus, the assumption of inelastic demand supports the decision to raise tuition as a viable strategy for compensating for financial losses.