Question

[University Tuitions] FSU (Flint State University) is a leading research/teaching school in Flint, Michigan. It offers a supply chain master degree and charges $80 K for the degree. The expected lifetime earnings increase after getting this degree is $500 K. The cost of educating a single master student at FSU over the 2 year degree is $50 K. On the other hand, FTU (Flint Technology University) offers a similar master degree which leads to an expected lifetime earning increase of $300 K. Suppose that FTU’s cost is also $50 K for educating a master student.

a) FSU competes with FTU for master students and wants to reconsider its $80 K fee for the master degree. FSU knows FTU’s costs and the expected lifetime earnings increase for the master students. FSU does not know how much FTU exactly charges for its master degree but estimates that the charge is about the cost of $50K. What should the new FSU fee be in order not to lose potential students to FTU?

To answer this question, consider the marginal benefit of getting a master from FSU as opposed to FTU.

b) FSU quickly learns that FTU charges $70 K for its master. Given this price, what is the maximum price FSU can charge and remain competitive?

Answer 1

a)

For FSU

Increase in earnings: $500 K

Fees paid by student: $ 80K

Marginal benefit for the student: $500 - $80 = $ 420K

For FTU

Increase in earnings: $300 K

Fees paid by student (estimated to be around costs): $ 50K

Marginal benefit for the student: $300 - $50 = $ 250 K

Thus FSU can increase fees till the marginal benefits are equal:

New fees: Increase in earnings – Marginal benefit of FTU = $ 500 - $ 250 = $250 K

b)

For FTU

Increase in earnings: $300 K

Fees paid by student: $ 70K

Marginal benefit for the student: $300 - $70 = $ 230 K

Thus FSU can increase fees till the marginal benefits are equal:

New fees: Increase in earnings – Marginal benefit of FTU = $ 500 - $ 230 = $270 K