Chapter 4 Case Study - Setting Tuition and Fees

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Analyzing Managerial Decisions: Setting Tuition and Financial Aid Managerial Economics, MBA 540 March 17, 2013 Abstract In the year 2000, the Board of Ursinus College raised tuition 17.6 percent to $23,460. Inasmuch as 200 more students applied to the college than the year before, the president of the college surmised that applicants assumed the school must be better if it cost more. This school of thought (no pun intended) had been proven at other institutions of higher learning such as the University of Notre Dame, Rice University and the University of Richmond. In contrast, North Carolina Wesleyan College lowered its tuition and fees by 22 percent 10 years ago and saw its number of applicants decrease. Susan Hansen, an Admissions Director at liberal arts college in the East, has recommended to her president that the college needs to increase its tuition and reduce financial aid to students in order to solve the school’s financial problems. Last year, the college enrolled 400 new students who each paid an effective tuition of $15,000 totaling $6,000,000. Hansen projects with her plan of charging an effective tuition of $25,000 (by increasing tuition fees and lowering the amount of financial aid offered), the college will enroll 600 new students (of equal or better quality), totaling $15,000,000. Law and Elasticity of Demand Demand curves historically slope downward, which means individuals purchase less (or certainly no more) of a product as the price increases (Brickley, Smith & Zimmerman, 2009). This negative slope of the demand curve is known as the law of demand and has proven to be a practical assumption for managers when determining the price of a product. Using only the slope of the demand curve as a measure of the responsiveness of quantity demanded has limited usefulness, in part because it depends on the particular dimensions in which

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