The president of Lebanon Valley College proposed the following tuition program:

Question

The president of Lebanon Valley College proposed the following tuition program: provide a 50 percent tuition reduction for those graduating in the top 10 percent of their high school class, 33 percent reduction for those in the top 20 percent, and 25 percent reduction for those who finish in the top 30 percent. All scholarship recipients were also required to maintain a minimum GPA. The comptroller estimated that the elasticity of demand for these students was greater than 1.

a) Economics Professor Paul Heise recommended that the president institute the program, arguing that it would increase revenues. What was his argument?

b) Why did the program distinguish among top-performing students?

c) Why didn't the president reduce tuition for all students?

Explanation / Answer

A) This is third degree price discrimination. The larger tuition reductions are given to the better students because they have more elastic demands because more colleges will accept them and give them scholarships. B) In order to isolate groups with different elasticities of demand. C. Reducing tuition for all students would have increased enrollment, but would not have increased profit as much as reducing tuition based on the schedule provided in the question. It makes sense to reduce tuition less for poorer students because they will be less likely to choose a different school on the basis of price. They have fewer options than the best students.

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