Suppose a university decides to alter its tuition schedule by separating its students based on how many years of college they have completed. Most university programs require four years to complete. First-year students would get a 13% tuition reduction. Second-year students would pay the normal tuition. Third- and fourth-year students face an increase in tuition of 25 and 41%, respectively. Fully explain whether this pricing strategy is based on a sound understanding of price elasticity of demand, or not.

Question

This is what I have so far:

First-year students are based upon elastic demand while third and fourth-year students represent an inelastic demand.
At first, colleges reduce tuition to get students to attend their university. However, once students are respectively halfway through, the college increases tuition because at this point, students need their college degree, no matter the price.
(So basically, the college does have a sound understanding of price elasticity of demand.)

Am I answering this correctly so far?
Thanks

Answer 1

!

Yes, you are answering the question correctly. The university's pricing strategy is based on a sound understanding of price elasticity of demand. By offering a tuition reduction for first-year students, they are able to attract more students to their university. At the same time, they are able to increase tuition for third and fourth-year students, as they are more likely to be inelastic in their demand for the degree.