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. Estimate the number of students at the university next year, and revenue, if the president keeps the present marketing mix unchanged.
2. Estimate the level of fees that would have to be charged next year in order to maintain the number of students at its current level, assuming no change in promotion.
3. Estimate the level of fees that would have to be charged next year in order to reach the president’s target of 1,200 students.
4. If fees are maintained at their current level, estimate the amount that would need to be spent on promotion to achieve the target.
5. Determine which of the strategy options above is more profitable, assuming that these are the only alternatives under consideration.

f. Briefly outline other marketing mix options for achieving the target (50 words

Answer 1

A)Yed(income elasticity)=%change in demand/% Change in income

2.2=%change in demand/-2%

% Change in demand=-4.4%

∆Q=950*-4.4/100=-41.8

Ced( cross elasticity)=(∆Q/∆price of competer)*price of competer/Q

0.8=∆Q/-2000)*14,000/950

∆Q=0.8*-2000*950/14,000=-108.57

New Q( number of students)=950-41.8-108.57=799.63~800

B)The reduction due to decrease in income and Decrease in price of competer=950-800=150

Price elasticity ={∆q/∆p)*p/q

-1.6=(150/∆p)*(16,000/950)

∆P=150*16,000/(950*-1.6)=-1578.9~ -1579

New price=16,000-1579=14,421

C)new change in quantity (∆q)=1200-800=400

-1.6=(400/∆p)*16,000/800

∆p=400*16000/(-1.6*800)=-5000

New price=16,000-5000=11,000

D) total revenue=950*16,000=15,200,000

Promotion expenditure=10% of total revenue=1,520,000

Aed={∆q/∆A)*A/q

Target=1200

∆Q=1200-800=400

1.8=400/(∆A)*1,520,000/800

∆A=400/1.8)*1,520,000/800=422,222.22

New promotion expenditure=15,200,000+422,222.22=15,622,222.22