Question

Market equilibrium occurs when the amount of people that are willing to buy equals the amount of people that are willing to sell. A steadfast tenant in economics. As students here at Post let’s surmise that right now Post is at market equilibrium. We have enough Instructors to match the number of students. However, two scenarios occur; first, student enrollment falls, so Post decides it must now raise tuition. Not good…. Or, enrollment increases! And Post decides to, you guessed it, increase tuition. Why in each scenario would the University raise tuition and, why should tuition NOT be raised, in either scenario? Talk to this from both your point of view as well as if you were on the Board of Directors for the University. What’s the right thing to do, and why???

Answer 1

When the enrollment is reduced tuition should fall so that a new and lower equilibrium is established. But this does not result in a profit maximizing choice for the colleges because they have to hire and pay to the same faculty. They will raise tuition because they see that now there are fewer students so to recover there (fixed) cost, they need to find a source of revenue. This comes in the form of higher tuition.

Ideally, when enrollment rises, there is already a higher revenue earned by the college so there is no need to raise tuition. But this does not happen. Colleges and universities find that they might need to hire more professors, or spend no construction for new classes, building, etc. So they may increase tuition to finance this

From the view of students, tuition should never increase. From the view of colleges, tuition should never reduce. Both views are a reflection of the incentives they receive. The correct answer depends on the given situation. If the new enrollment can be easily accomodated, the tuition should not be raised. In case the revenue is just enough to pay all the expenses, the tuition should not be raised when enrollment falls.