Question

The room-and-board price of a college is set separately from the tuition portion of the fees. At a board meeting the administration of a midwest college suggested a 5% raise in both areas. Then a problem was discussed regarding student responses to pricing. After the discussion, one board member moved to lower the room-and-board price increase to 2% and raise the tuition increase to 6%

a. What was the problem with student choices that led to the proposal.

b. What was the board member(an economist) assuming about the demand functions for each of the two categories?

Answer 1

Answer A: On Increasing the 5% in room and Board prices, Many students may opt out from registering for the Boarding of the Hostel and may opt for paying guests close to the colleges, which will hamper the economies of scale of the Hostel services.

So, by raising tuition fees by 6%, it has very low chances of student opting different college but increasing board price by 5% may force students to opt Board services somewhere else. That's why it make sense to reduce Room and board price so that students don't change their decision.

Answer B. Increasing price by 5% for board services may reduce demand significantly, impacting the economies of scale for the Hostel. on the other hand, Increase in price in tuition fees doesn't hamper demand much that's why increasing it to 6% makes economical sense.