Analyzing Managerial Decisions: Tuition Increase

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Admission Director, Susan Hansen recommended the college increase tuition costs and reduce financial aid to the students. Hansen argues that recent data from competing colleges shows that a demand curve for colleges slope is upward. Well-known universities increased tuition realizing an increased number in applications. A college president concluded that people expect to pay a premium. Hansen further argues that the increase will provide revenue. Last year, the college enrolled 400 new students who paid $15,000.00 after financial aid totaling $6,000,000. Susan proposes increasing tuition to $25,000.00, with a projected enrollment of 600 new students totaling $15,000,000.00. Hansen’s assessment is not indicative of the law of diminishing returns because educational costs and its’ impact on enrollment have not substantially declined with increased output but rather the decrease is marginal as suggested by studies.

Demand Function

Hansen’s proposal suggests an increase will attract students of equal or better quality. Her proposal includes a 60% tuition increase. Based on her projections, student applications will increase by 50%. In view of the demand function, the tuition increase represents the product, tuition at similar schools is the related products and the students’ incomes and/or the income of their parents are customer’s income. A student will shop for a school based on certain factors such as cost, location, and reputation, the order of preference contingent on individual needs. Gary Becker’s model on the demand for and the supply human capital has proved effective in explaining why different students and groups choose to invest in higher education (Paulsen & Smart, 2001, pg. 68). However, in the real business world, tuition increases may be unjustified because colleges fail to prepare students for office work (White, 2013).

Hansen’s proposal raises one concern ─ will the education tuition increase augment revenue and increase student enrollments? A recent study conducted on tuition costs and enrollments figures at public and private four-year schools from 1991 to 2006 suggested that student applications will decline however; increased revenue should offset the loss (Hemelt & Marcotte, 2011, p.453). The authors suggested in their 2011 study that an increase in tuition ($210) would result in a 5% decrease in enrollment however; the resulting loss should be mitigated by $2.24 million dollars increase in revenue (Hemelt & Marcotte, 2011, p. 453). That said, an increase in tuition would clearly increase revenue to the school (Hemelt & Marcotte, 2011, p. 453). Tuition increases are prime sources of generating revenue especially in an economy when federal and state funding is lean. However, another study conducted in the same year addresses factors aside from tuition which impact enrollment. Such factors include the regional price index, the Consumer Price Index and unemployment figures; trends of high school graduates, availability of financial aid, the cost of tuition as compared to other colleges and universities and the number of competitive colleges (Huang & Bing, 2011, pg. 5). Sufficient historical data for studies on tuition increases effect on enrollment is limited (Huang & Bing, 2011, pg. 6). The authors’ analysis “focused only on the relationship between tuition and enrollment growth under the influence of limited factors” (Huang & Bing, 2011, p. 6). Finally, another study conducted in 1991, based on socio-economic backgrounds found that increased tuition net costs had a serious impact on the college affordability of students from lower-income families rather than affluent families (McPherson & Schapiro, 1991, p.68).

Conclusion

The cost of higher education is a significant investment for a student. There is little doubt that the cost of education is expensive. Hansen’s proposal is reasonable for today. If the college needs to increase revenue in the future, the college should seek other means of balancing budgets. Competitive prestigious schools have been unaffected in hard times but access to a middle tier college has become easier because of lower enrollments (Perez-Pena, 2013).

References

Hemelt, S.W & Marcotte, D.E. (2011). The impact of tuition increases on enrollment at public colleges and universities. American Educational Research Association and Sage Publications, 33, 435-457. Retrieved from http://epa.sagepub.com/content/33/4/435

Huang, T & Ning, B. (2011, November 2011). An analysis of the impact of tuition increase on university enrollment. Michigan Association for Institutional Research. Retrieved from http://www.miair.org/web_documents/an_analysis_of_the_impact_of_tuition_increase_on_university_enrollment.pdf

McPherson, M.S. & Shapiro (1991). Does student aid affect college enrollment? New evidence on a persistent controversy. The American Economic Review, 81(1), 309-318. Retrieved from http://links.jstor.org/sici?sici=0002-8282%28199103%2981%3A1%3C309%3ADSAACE%3E2.0CO%3B2-Q

Paulsen M.B & Smart, J.C. (2001). The economics of human capital and investment in higher education. The finance of higher education: theory, research, policy, and practice. (pp. 55-94). Retrieved from http://books.google.com/books

Perez-Pena, R. (2013, July 25) College enrollment falls as economy recovers. The New York Times. Retrieved from http://www.nytimes.com

White, M. (2013, November 10). The real reason why new grads can’t get hired. Time Magazine. Retrieved from http://business.time.com/2013/11/10/the-real-reason-new- college-grads- cant-get-hired/