4. Consider the college that has two prices for its services. It charges list pr

Question

4. Consider the college that has two prices for its services. It charges list price (full tuition) a small portion of their students. Everyone else gets a discount (scholarship). This co not set a low students, athletes, or from low-income backgrounds to only llege does price and charge a tuition premium to those few individuals who are not star (a) In terms of perceived gains and losses, describe how the recipient of a scholarship is likely to perceive the price he or she pays for college. (b) Using what you know about the value of perceived gains and losses, explain why the college prefers to frame its two prices in terms of scholarships rather than tuition premiums

Explanation / Answer

A.  No. If the college sets a single profit-maximizing price, the deadweight loss will equal $2.5 million.

4.4 If college has to finish price discrimination then it can choose two prices

i) $10000 at this price all 1000 students will be ready to pay for course

So profit = 10000*1000 - 5000*1000 = $5000000

ii) $20000 at this price only 500 students will be ready to pay for course

so profit = 20000*500 - 5000*500 = $7500000

So profit is maximum when college is charging $20000. Now at this price 500 students are not studying which will create a dead weight loss i.e. (1000

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