Business Economics

Case Number 3
Topic : Elasticity of Demand

Objective:
a) To apply the concept of elasticity of demand
b) To correlate elasticity with decision making

University fees – part 1

President Jones of Dana International University (DIU) in is concerned about the financial
state of his institution. Last year there was a loss of Rs.1.5 million and the trustees are
getting restless. Currently there are 1000 full-time students, 700 of whom are degree
students and 300 of whom are study-abroad students from the US. The present level of
fees, including tuition,room and board, is Rs. 1,80,000 and Rs. 2, 00,000 for foreign
students per year, and Jones is proposing a 10% increase for next year. On the basis of
past experience he has estimated that the price elasticity of demand for degree students is
-1.2 and for study-abroad students is -1.6. He is particularly worried about the effect of the
fee increase. Jones is also considering a change in promotional expenditure. This currently
amounts to 2% of total revenues and it is estimated that the promotional elasticity of
demand is 0.1. It is also estimated that variable costs per student are Rs.8,000.
Questions
1. Why might Jones’s estimates of the relevant price elasticities not be very reliable?

2. Estimate the effect of the proposed fee increase on the number of degree students
and revenues from these students, stating any relevant assumptions.
3. Estimate the effect of the proposed fee increase on the total number of students and
on total revenues.
4. Estimate how much would have to be spent on promotion to restore revenues to their
current level after the increase in fees.
5. Compare the level of profit after the fee change, both with and without the change in
promotion, with the current situation.