Eco 102 Essay

Khai Cao
Economics 102
Professor Feiden
Analysis Assignment
Thursday, March 6

“An Ivory Tower of Pricing” is an economic article of Steven Pearlstein, which was written about the changing in tuition and fees of high education. The tuition and fees have risen faster than inflation or household incomes. The cost of living have gotten cheaper over the years due to imports and immigrant labor. But it also lead to another problem, because of the decrease in living cost, the disinflationary pressures are absent from a university, where the biggest expense is for highly educated labor. Therefore, the university costs should rise faster than overall inflation. Base on that, we can recognize the demand for high education is elastic and the supply is inelastic. The College Board data show that even after discounting for increases in aid, inflation-adjusted increases in tuition and fees have been 2 to 3 percent per year over the past decade. By charging customers based on their willingness and ability to pay, the universities use those money to support the poor and middle class students. But it will have the effect on the market, when universities increase their tuition, they quickly reaching the point of diminishing return. At that point, every dollar increase in tuition yields less and less in added avenue, because money from the increase is used as the scholarship. It will affect the demand for education, if they still push the price, the demand for education from the middle class families, who are not eligible for the scholarship as well as inability to pay that increasing price. So that, if schools want more money for the scholarship, they have to give up equivalent quantity of students from the middle class, it can be considered like an opportunity cost. And by giving up those students, their benefit also decrease because now they have fewer students who pay full price.
What is schools can get from that opportunity cost? The answer is schools have figured out that they can attract the best students by offering more “merit scholarships”. There is a shift form needs-based to merit-based scholarships, because the merit scholarships cost a lots of money. That mean they will cut down the money is used for needs-based scholarships and turn it into the merit-based. Therefore by giving up some students, they get another students, who are the best students. Schools have also learned another thing. They usually charge the higher tuition for the majors which are much more expensive to provide for. By charging the higher tuition for those fields of study, they can improve the facilities. With the better facilities they can attract more faculty superstars, and the superstars, in turn, attract other good faculty and students. So that, the merit-based scholarships will give them more benefit. But the problem is when every schools try to improve their profit by doing that, no schools is able to improve their position because all of them will go to the higher positions, so the relative positions are not change, but the tuition still increase in overall. They try to improve their position to attract more goods but the only thing was increased is tuition.
When they recognize that they cannot improve their benefit considerably

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