Question1.

The Board of trustees of a leading state university is faced with a

critical financial problem. At Present tuition rates, the University is losing $ 7.5
million per year. The President of the University urges that tuition be raised $750
over the present $3000 rate- a 25% increase. Based on the 10000 students now
attending the school, he projects that this increase would cover the $7.5 million
shortfall in revenues. Student leaders protest that they cannot afford a tuition
hike; the president responds that the only alternative is cut back significantly on
programs and faculty. The faculty supports the tuition increase as a means of
preserving their jobs.The students quickly realize that any appeal that involves
compassion for their plight is likely to fall on deaf ears. Their only hope is to
demonstrate that the tuition hike is not in the best interest of the university. (A
journal articles reveals that the elasticity for enrollment at state university is
– 1.5 with respect to the tuition charges)

Convince the management that the fee hike is not the best course of action to
increase the revenue?

ANS 1: Fee hike is not the best course of action to increase the revenue as:
 Rising college costs haven’t necessarily driven students away from pursuing a
degree, but many are chasing that goal in new ways. As a result of increase in
enrolment as economic troubles and sky-high tuition fees have put traditional
schools out of many students’ reach.
 Today’s college grads often don’t have the luxury of waiting for a great job in
their field to come up or taking on a wealth of unpaid internships. Loans
generally start needing to be paid after graduation, and more students are
feeling the pressure to get into the working world any way they can to make
ends meet. With a job market that’s already tight, this often means taking on
work that’s in a different field or sometimes accepting jobs that don’t even
require a college degree. It’s a phenomenon that many, though not all, young
adults find frustrating and can have significant impacts on their career
prospects, dreams, and finances for years to come.
 When you’re carrying tens of thousands of dollars in school debt, saving up the
money to buy a home often just isn’t a possibility. As tuition rises and students
are forced to take out bigger loans to pay for school, fewer young people are
able to fulfil the long-standing dream of home ownership.
 A recent survey found that debt, largely from college, was causing 20% of
young adults to delay having children, even if they wanted them. Kids can be
pricey, and college debt may mean that many young couples have to hold off
on adding to their family until they can get loan debt under control. While
waiting to have children may be part of a larger social change, it’s clear that
college debt hasn’t made it any easier to start a family, with the average age of
having a first child at about 30 for college graduates.
 Can’t afford an expensive business degree? That’s OK, because you don’t
actually need one to start a business. While young adults still start businesses
 at lower rates than other age groups, their share of entrepreneurship has been
growing steadily. With tuition debt running tens of thousands of dollars and
jobs scarce, young people have to make ends meet somehow. Many young
grads even start businesses before they graduate, working on their degrees
and a business endeavour at the same time.
 While college costs are high, it seems that most students still see school as a
good investment and are willing to go in debt, to get a degree they think will
help them get ahead.
 Why aren’t more college students choosing a degree in much-needed fields
like social work, elder care and teaching? Because often they can’t make
enough working in these fields to pay back the loans they got so they could
work in them in the first place. Public service jobs often pay little compared to
private sector jobs, making it difficult, if not impossible, to keep up on loan
repayments. In fact, nearly one quarter of grads from public universities carry
debt that would be unmanageable with the starting salary of a public service
worker. The numbers are even higher for those who went to a private college
or university.
 Growing numbers of grads move back in with parents after graduation and
very often these moves back home are preceded by several months of
unemployment, as a tough job market makes it increasingly difficult for new
graduates to find work. Without a job, many must move home and get
financial help from parents or guardians in order to make even minimum
payments on loans.
 High tuition rates may not have affected how many students head to college,
but they may be playing a big role in how many students drop out partway
through their college education. For many young students, the costs of tuition
can often become too much to bear, especially if a parent or the student
himself loses a job.
 Usually, a highly competitive job market and high unemployment drive
students in droves to getting more advanced degrees. While some are heading
back to school, grad school application rates are actually on the decline, and
part of it may be due to high tuition.
 Research shows that college debt may actually cause a jump in self-esteem.
Researchers in the nationwide study found that instead of feeling stressed out
about their debt, many students felt empowered, in control, and reported a
boost in self-esteem.
 High college costs seem to be driving away low income students at greater
rates than those in the middle and upper income ranges. Even with a wide
range of aid programs from the government and private sources that can often
cover much of the costs associated with going to college, low-income students
are increasingly seeing college as something out of their reach.
As a result, following are some things to keep in mind before making any changes:

 Treating price as a long term strategic question, not a short term cost issue
 Don’t assume what works for your competitor will work for you
 Use the right analytical tool for the right questions
 Over the long run, work to enhance the value proposition of the institution
 To defuse political and other resistance to price changes, pay attention to the
process

Question 2: Forey, Inc., competes against many other firms in a industry. Over the last
decade, several firms have entered this industry and, as consequences, Forey is earning
a return on investment that roughly equals the interest rates. Furthermore, the four-
firm concentration ratio and Herfindahl Hirschman index are both quite small. Based
on this information, which market structure best characterizes the industry in which
Forey competes? Explain the characteristics this market structure and what happens to
the Forey Inc’s profit in the short-run and long-run.

Ans 2: Based on information provided, perfectly competitive market structure best

characterizes the industry in which Forey competes, because its returns decrease with
the entering of new firms, also four-firm concentration ratio and Herfindahl Hirschman
index are both quite small, so no one has significant market power to set or even
influence the market price. In the short-run Forey Inc’s profit will decrease as more and
more new firms enter the market and in the long-run Forey Inc will receive only normal
(zero) economic profit.

Question3: A certain town in Kerala obtains all of its electricity from one company,
South Electric. Although the company is a monopoly, it is owned by the citizens of the
town, all of whom split the profits equally at the end of each year. The CEO of the
company claims that because all of the profits will be given back to the citizens, it
makes economic sense to charge a monopoly price for electricity. Do you agree with the
CEO? Why or Why not? If the gains of the producers from monopoly power could be
redistributed to consumer, would the social cost of monopoly power be eliminated?
What are the important measures you suggest to control monopoly power?
Ans 3: I disagree with CEO's argument because the argument is not rational from the
view of the citizens, because they would charge the higher price for electricity. But from
the view of CEO the argument is rational, because he wants to maximize monopolist's
profits. The decrease of output and increase of price are the social costs of monopoly
power. If the company charges the monopoly price then it will be producing a smaller
quantity than the competitive equilibrium.

An important difference between monopoly and perfect competition is that whereas

under perfect competition allocation of resources is optimum and therefore social
welfare is maximum, under monopoly resources are misallocated causing loss of social
welfare. When a product is produced and sold under conditions of monopoly, the
monopolist gains at the expense of consumers, for they have to pay a price higher than
marginal cost of production. This results in loss of consumer's welfare.