Question

SIU is a university in the UK catering for international students. There are currently 950 students. Fees were £16,000 for the last year and the president is concerned that adverse changes in the economic and educational environment are threatening the university’s future. The income of the market is expected to decline next year by 2%, and it is also expected that the average fee of competitive institutions will fall from £14,000 to £12,000. 10% of revenue is currently spent on promotion. The president does some research and estimates that the relevant demand elasticities are as follows:

PED = -1.6, YED = 2.2, AED = 1.8, CED = 0.8.

1. If fees are maintained at their current level, estimate the amount that would need to be spent on promotion to achieve the target.

Answer 1

I understand the objective is to maintain the number of students at 950.

The relevant variables are:

P = 16000; delta P = 0, so delta P / P = 0%

delta Y / Y = -2%

C = 14000, delta C = -2000, so delta C / C = -14.3%

A = 10% x 950 x 16000 = 1,520,000

Required delta A so that number of students stays at 950.

Changes in number of students due to:

Price change = 0, since price change = 0

Income change = 2.2 x -2% x 950 = -41.8 (say -42)

Competition price change = 0.8 x -14.3% x 950 = -122.3 (say -122)

Advertising (promotion) spend change = - ( change due to income + change due to competition price change)

= - ( -42 - 122) = 164

Since AED = 1.8, which is % change in number of students / % change in advertising

1.8 = (164 / 950) / (change in advertising / 1,520,000)

Change in advertising = (164/950)*1520000/1.8 = 145778

So the amount of advertising = initial + change = 1520000+145778 = 1665778 pounds