Question

Suppose the University of Oklahoma decides to alter its tuition schedule by separating its students based on how many credit hours they have accumulated. Students with fewer than 15 credit hours get a 13% reduction in tuition while students with 45-90 and more than 90 credit hours face an increase in tuition of 22 and 71%, respectively. Fully explain whether this pricing strategy is rooted in a sound understanding of the price elasticity of demand, or not.

Answer 1

Well you kind of see that happening right now. Upper division courses are more expensive than lower division and graduate courses are more than undergraduate courses.

You can say that the under 15 course hours are elastic to price change while the more courses you complete the more inelastic the price change.

The lower price so that freshmen can think the price of college is cheap and then rise it as the student progresses because what can a person do without a college degree?

Answer 2

YES

Step-by-step explanation:

Price elasticity of demand is a concept that aims to measure the sensitivity of demand in the face of price changes. When price goes up and demand goes down a lot, we say that demand is elastic (sensitive) to price change. When price increases and demand varies little, we say that demand is inelastic (little price sensitive).

In the exercise, the university sought to separate students according to the elasticity of demand in each group. The first group, who attended less than 15 credits, is a young group at the university, who has not attended much and may be more likely to drop out if the price increases. Therefore, it is an elastic demand group. When a group has elastic demand, lowering the price also has the effect of increasing demand, so students tend to stay at university.

On the contrary, the group that took many credits has no incentive to give up, as they have already spent a lot of time in the activity, and that would be a big loss. Thus, this group tries to be inelastic, not sensitive to price increase. Thus, the school made a strategy based on the elasticity of demand of each group.