ECON 301

PROBLEM TWO

Due:  29 January

The October 10, 2013 issue of the Wall Street Journal contained an article entitled, “Colleges Try Cutting Tuition—and Aid Packages,” by Melissa Corn.  The article asserts that:

(a)   A dozen or so colleges actually are cutting their tuition in order to stimulate enrollment;

(b)  At the same time, the same institutions are diminishing their tuition “discounting”—the practice of giving back to selected students generous hunks of their tuition in the form of financial aid.  When colleges do discount their tuition prices, the actual, effective tuition price that many students pay is less than the “sticker” tuition price that the colleges publish. 

Knowing these facts, please answer the following questions:

(1)  What must be true about the price elasticity of demand of students for college attendance in order for (a) not only to increase enrollment, but also increase tuition revenue?

(2)  What if lots of other colleges join the parade and do the same thing?

(3)  What are these colleges assuming about the sensitivity of students and their families to “sticker” tuition prices versus their sensitive to actual, effective tuition prices (after financial aid)?