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.
To determine whether the pricing strategy is based on a sound understanding of price elasticity of demand, we need to define and analyze the concept of price elasticity of demand.
Price elasticity of demand measures how sensitive the quantity demanded of a product is to changes in its price. A product with high price elasticity of demand tends to have a more significant decrease in demand when its price increases compared to a product with low price elasticity of demand.
Now, let's apply this concept to the given scenario. The university has decided to apply different pricing strategies based on the number of years students have completed. Specifically, first-year students receive a 13% tuition reduction, second-year students pay the normal tuition, and third- and fourth-year students face tuition increases of 25% and 41% respectively.
Based only on this information, we cannot definitively determine whether this pricing strategy is based on a sound understanding of price elasticity of demand. To make such a determination, we would need additional information, specifically data on the price elasticity of demand for higher education.
If the university has studied the price elasticity of demand for higher education and designed the pricing strategy accordingly, it would be considered sound. For example, if the university found evidence that first-year students have higher price elasticity of demand compared to second, third, and fourth-year students, they may have implemented the tuition reduction to attract more first-year students who are more price-sensitive.
On the other hand, if the university did not conduct a proper analysis of price elasticity of demand and simply implemented this pricing strategy without relevant information, it could be considered unsound. In this case, the university may have assumed that all students have similar price elasticity of demand, which could lead to unintended consequences such as reduced enrollment or dissatisfaction among students.
To determine the soundness of the university's approach, it would be necessary to explore whether the institution conducted thorough research and analysis to ascertain the price elasticity of demand for its target student population before implementing the new tuition schedule.