A college has two types fo students: students from middle-income families who have an estimated price elasticity of demand equal to -1 1/2 and students from lower-income families who have an estimated price elasticity of demand equal to -2 1/2. The colleges marginal cost for providing one-year's academic credit is $4,500 regardless of which student is receiving the education. a. What annual tuition (price) should the college establish for students from middle-income families? b. What annual tuition(price) should the college establish for students from lower-income families?
A college has two types fo students: students from middle-income families who have an estimated
a. What annual tuition (price) should the college establish for students from middle-income families?
b. What annual tuition(price) should the college establish for students from lower-income families?
Given,
Price elasticity of demand for middle-income families = -11/2
Price elasticity of demand for lower-income families = -21/2
Marginal cost MC = $4,500
The price elasticity of demand is the responsiveness of quantity change due to a change in price.
As per the pricing rule:
Here, e is the elasticity, and p is the price that maximizes the profit.
a)
For middle-income families:
Marginal cost MC = $4,500
By putting the respective values, the result is:
Thus, $5,490 as annual tuition (price) should the college establish for students from middle-income families.
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