Question

A major issue of contention at many colleges concerns the cost of meals that is rebated when a student does not sign up for the meal plan. The administration usually says that it should rebate only the marginal cost of the food alone, which is calculated at, say, $1.25 per meal. Students say that the marginal cost should include more costs, such as the saved space from fewer students using the facilities and the reduced labor expenses on food preparation. This can raise the marginal cost to $6.00.

• Who is correct, the administration, or the students?
• How might your answer differ if this argument were being conducted in the planning stage before the dining hall is built
• If you accept the $1.25 figure of a person not eating, how could you justify using a higher figure of about $6.00 for the cost of feeding a guest at the dining hall, as many schools do?

Answer 1

Answer

The Administration is correct in saying that the Marginal Cost to be rebated should be $1.25 per meal. This is because the costs that the students pointed out, such as space facilities and labor expenses, are Fixed Costs. The labor has to be paid the same salary/wage for cooking and the same amount of space has to be rented out even though some students may not want to eat on a particular day. Thus, the Marginal Cost is only the cost of food and does not include the other fixed costs.

The Answer might differ if this argument came at the planning stage before the dining hall was built because at that time, a smaller dining hall would have been built, whose cost would have been borne only by the students eating in the dining hall and not by the students who don't sign up for the meal plan.

A higher figure of $6.00 for feeding a guest at the dining hall is the right thing to do as the hall has a limited capacity and the workers are paid for preparing food for a limited number of students. Thus, any upper-side deviation from this limit would lead to additional Fixed Costs apart from the additional marginal costs. And, hence, the figure of $6.00