Suppose a university decides to alter its tuition schedule by separating its students based on how many years of college they have completed. Most university programs require four years to complete. First-year students would get a 13% tuition reduction. Second-year students would pay the normal tuition. Third- and fourth-year students face an increase in tuition of 25 and 41%, respectively. Fully explain whether this pricing strategy is based on a sound understanding of price elasticity of demand, or not.
This is what I have so far:
First-year students are based upon elastic demand while third and fourth-year students represent an inelastic demand.
At first, colleges reduce tuition to get students to attend their university. However, once students are respectively halfway through, the college increases tuition because at this point, students need their college degree, no matter the price.
(So basically, the college does have a sound understanding of price elasticity of demand.)
Am I answering this correctly so far?
Thanks
!
Yes, you are answering the question correctly. The university's pricing strategy is based on a sound understanding of price elasticity of demand. By offering a tuition reduction for first-year students, they are able to attract more students to their university. At the same time, they are able to increase tuition for third and fourth-year students, as they are more likely to be inelastic in their demand for the degree.
Your explanation is partially correct, but there are a few points that need clarification.
The pricing strategy described by the university does show an understanding of price elasticity of demand, but it is important to provide a more detailed explanation to support this conclusion.
In this case, the university is using differential pricing based on the number of years completed by students.
First-year students are offered a 13% tuition reduction, which indicates that the university perceives their demand as relatively elastic. This means that a 13% reduction in tuition is expected to lead to a significant increase in the number of first-year students enrolling in the university. The assumption behind this reduction is that by lowering the price, the university makes the program more attractive to potential students who might be price-sensitive.
On the other hand, third- and fourth-year students face tuition increases of 25% and 41%, respectively. This suggests that the university believes the demand from these students is relatively inelastic. Inelastic demand means that even with an increase in price, the quantity demanded is expected to remain relatively stable. The assumption here is that third- and fourth-year students have already invested significant time and resources into their education and are committed to completing their degree regardless of the cost. Therefore, the university can increase tuition for these students without suffering a substantial decline in enrollment.
To summarize, the university's pricing strategy takes into account the price elasticity of demand by reducing tuition for first-year students (more elastic demand) and increasing tuition for third- and fourth-year students (less elastic demand). This approach aims to attract price-sensitive students in their early years and capture a higher tuition from those who are less likely to change their educational plans.
You are on the right track with your response, but let's delve a bit deeper to provide a more thorough explanation.
The university's decision to alter its tuition schedule by separating students based on the number of years completed indicates that they have considered the price elasticity of demand. Price elasticity of demand refers to how sensitive the quantity demanded is to changes in price. In other words, it measures the degree to which consumers respond to price changes.
In the case of first-year students, the university offers a 13% tuition reduction. This indicates that the demand for education among first-year students is relatively elastic. Elastic demand means that buyers are sensitive to price changes, and a decrease in price leads to a proportionate increase in the quantity demanded. By reducing tuition for first-year students, the university expects to attract more students to enroll by making education more affordable for them.
On the other hand, second-year students are required to pay the normal tuition rates. This suggests that the demand among second-year students is relatively inelastic. Inelastic demand means that buyers are less sensitive to price changes, and changes in price have a relatively smaller impact on the quantity demanded. The university assumes that second-year students are committed to completing their degree and are less likely to be deterred by an increase in price.
For third- and fourth-year students, the university increases tuition by 25% and 41%, respectively. This indicates that the demand among these students is relatively inelastic as well. The university recognizes that students at this stage of their college education have made significant progress towards earning their degree and are less likely to switch institutions or drop out due to an increase in tuition cost. Therefore, the university can afford to increase tuition for these students to generate additional revenue.
In summary, by offering a tuition reduction for first-year students and increasing tuition for third- and fourth-year students, the university's pricing strategy seems to align with a sound understanding of price elasticity of demand. They are adjusting prices based on the responsiveness of demand to price changes at different stages of students' college education.