Anecdotally, in European universities, bachelors are the "get in as many people as we can for the tuition fees", while masters are the "let's be as selective as we can get away with".

I assume there's an upper limit on the number of students an university can take in for the first year, determined by staff and classroom availability.

I imagine quite many would be upset if they found out they were not being held to equal standards, and would probably point to foreign students paying more as the reason.

Of course not. You find out when the head of school tells you that it is your fault that all the masters students failed the subject and that you need to fix the situation. If you are dumb enough to ignore the hint the head of school gets someone else to re-mark the exams - either way the cash keeps flowing.