Question

Consider the college that has two prices for its services. It charges list price (full tuition) to only a small portion of their students. Everyone else gets a discount (scholarship). This college does not set a low list price and charge a tuition premium to those few individuals who are not star students, athletes, or from low-income backgrounds.

(a) Assume that the two prices are framed in terms of full tuition and scholarships. In terms of perceived gains and losses, describe how students who receive scholarships and those who do not receive scholarships are likely to perceive the price that they pay for college.

(b) Assume that the two prices are framed in terms of low list price and a tuition premium. In terms of perceived gains and losses, describe how students who pay the low list price and those pay the tuition premium are likely to perceive the price that they pay for college.

(c) 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 in terms of tuition premiums.

Answer 1

a.

Recipients of scholarship is likely to perceive the price they are paying for college as loss and a gain, because they consider a full tuition as a price they were expected to pay, which is technically their IRP, and the scholarship they consider as a gain they get.

c.

Because if the college would frame its two prices in terms of scholarship rather than tuition premium, the first category of students that would pay the full amount would consider it as two losses and the second category would see their discounted price as a one loss. So, instead of having some students that perceive the price as loss and the others that perceive it as a loss and a gain, the college would get groups with the perception of two losses and one loss respectively.