Question

The Board of Ursinus College in Pennsylvania raised its tuition and fees 17.6 percent to $23,460 in 2000. It subsequently received 200 more applications than the year before. The president of the college surmised that "applicants had apparently concluded that if the college cost more, it must be better." Other colleges that raised tuition to match rival colleges in recent years include University of Notre Dame, Bryn Mawr College, Rice University, and the University of Richmond. They also experienced an increase in applications. In contrast, North Carolina Wesleyan College lowered their tuition and fees about 10 years ago by 22 percent and attracted fewer students. The college president concluded that "it didn't work out the way it had been hoped. People don't want cheap."
You are hired as a consultant to a President of a liberal arts college in the East. You are asked to evaluate a recommendation by the college's Admissions Director. Susan Hansen, to increase tuition and to reduce financial aid to students. Susan argues that the data from competing colleges suggest that the demand curves for colleges slope upward-the quantity demanded increases with price. Susan projects that the increase in tuition and reduction in financial aid will solve the school's financial problems. Last year, the college enrolled 400 new students who each paid an effective tuition of $15,000 (after financial aid), totaling $6,000,000. She projects that with the increased demand from charging an effective tuition of $25,000, the college will be able to enroll 600 new students (of equal or better quality), totaling $15,000,000.

Required:
Evaluate Susan's analysis and recommendation

Answer 1

Solution :

The demand curve : The quantity demanded for each price

                                         $D=Q(P)$

The prices goes up, quantity demanded will decreases.

The price goes up, quantity demanded will increase

Board of the Ursinus College in Pennsylvania raised tuition fees : $ 23,460 which is 17.6 % more to 2000.

The applicants : 200 more from previous year.

Therefore the college cost most, then it must be better.

Other rival competitions have also seen same scenarios. When cost goes down, the demand decreases.

Susan's perceptive :

Demand increases with cost increase and the demand curve slopes upwards.

Our understanding is completely different with the understanding of the college administrative officer, Susan.

Our understanding is negative slope of the demand curve other than change in price of any other parameter will lead to shift in demand curve, either in or out.

If all the tuitions fees are increased, then financial aid needs to be sponsored by the 'state'. That will effect reserves which leads to the failure of the sole purpose of aids.

Our recommendation should be to tell the board members the long term effects of the increase in the tuitions fees and no financial aid will create.