Friday, October 08, 2010

How About $57,556 For A Year Of College?

That is what it would cost at Sarah Lawrence College and it includes tuition, room and board, and fees. See
America's Most Expensive Colleges and Universities. Last week in my micro class we read a chapter about college costs in the book The Economics Of Public Issues. It mentioned that colleges compete over, among other things, their amenities like the quality of dorms, dining halls and rec centers.

Sarah Lawrence does offer alot of seminar type classes where students get one-on-one attention. Many of these schools offer financial aid but the article actually did not say how big the typical discount was. Surprisingly, costs at private schools are still rising and their enrollments are up. Could be the demand curve shifting to the right.

The financial aid amounts to basically charging different students different prices based on their ability and willingess to pay (a discount). Economists call this price discrimination.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2. If a firm can lower the price for others who might not have bought the product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount).

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

The article also said that "The University of Chicago estimates that a year's study will cost $56,640." Luckily it was not that high when I went there nearly 30 years ago. I might not be able to afford it now. But it was also one of the 25 best colleges besides being one of the top 25 most expensive.

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