QUESTION:
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 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 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. Evaluate Susan's analysis and recommendation. Include the equation in your analysis and find the school's elasticity coefficient.