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 price and charge a tuition premium to those few individuals who are not star students, athletes, or from low-income backgrounds. (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.

Answer 1

a) A recipient of a scholarship who pays the college the discount price sees this as perceived gain since it is minimising its losses for not paying the list price(full tuition). Because as per prospect theory, individual try to choose the gain instead of losses from perceived situation since gain is sure and joyful and loss is painful and pain feeling is always larger than joy feeling.

b) College prefers to frame the two prices in terms of scholarships because students will perceive scholarships as perceived gains and tuition premiums as perceived losses and as per behavioral prospect theory an individual value gains more than its losses because gains are certain and this is the risk aversion situation for the given individual rather opposite situation which is uncertain and has chances of pain and feeling of pain is always perceived more than the joy gained/feeling of joy.