Managerial Economics & Organizational Architecture (Irwin Economics)
Case Studies
Case 1: ANALYZING MANAGERIAL DECISIONS: Setting Tuition and Financial Aid
The Board of Ursinus College in Pennsylvania raised its tuition and fees 17.6 percent to $23,460 in 2000. It subsequently received 200 more applications than the year before. The president of the college surmised that “applicants had apparently concluded that if the college cost more, it must be better.” Other colleges that raised tuition to match rival colleges in recent years include University of Notre Dame, Bryn Mawr College, Rice University, and the University of Richmond. They also experienced an increase in applications. In contrast, North Carolina Wesleyan College lowered their tuition and fees about 10 years ago by 22 percent and attracted fewer students. The college president concluded that “it didn’t work out the way it had been hoped. People don’t want cheap.” You are hired as a consultant to a President of a liberal arts college in the East. You are asked to evaluate a recommendation by the college’s Admissions Director, Susan Hansen, to increase tuition and to reduce financial aid to students. Susan argues that the data from competing colleges suggest that the demand curves for colleges slope upward—the quantity demanded increases with price. Susan projects that the increase in tuition and reduction in financial aid will solve the school’s financial problems. Last year, the college enrolled 400 new students who each paid an effective tuition of $15,000 (after financial aid), totaling $6,000,000. She projects that with the increased demand from charging an effective tuition of $25,000, the college will be able to enroll 600 new students (of equal or better quality), totaling $15,000,000.
Question:
Evaluate Susan’s analysis and recommendation.
Source:
J. D. Glater and A. Finder (2006), “In Twist on Tuition Game, Popularity Rises with Price,” nytimes.com (December 12).
Smith Jr., Clifford W. Managerial Economics & Organizational Architecture (Irwin Economics) (p. 124). McGraw-Hill Higher Education. Kindle Edition.
Case 2: ANALYZING MANAGERIAL DECISIONS: Rich Manufacturing
Gina Picaretto is production manager at the Rich Manufacturing Company. Each year her unit buys up to 100,000 machine parts from Bhagat Incorporated. The contract specifies that Rich will pay Bhagat its production costs plus a $5 markup (cost plus pricing). Currently, Bhagat’s costs per part are $10 for labor and $10 for other costs. Thus, the current price is $25 per part. The contract provides an option to Rich to buy up to 100,000 parts at this price. It must purchase a minimum volume of 50,000 parts. Bhagat’s workforce is heavily unionized. During recent contract negotiations, Bhagat agreed to a 30 percent raise for workers. In this labor contract, wages and benefits are specified. However, Bhagat is free to choose the quantity of labor it employs. Bhagat has announced a $3 price increase for its machine parts. This figure represents the projected $3 increase in labor costs due to its new union contract. It is Gina’s responsibility to evaluate this announcement.
Questions:
1. Why do many firms use cost-plus pricing for supply contracts?
2. What potential problems do you envision with cost-plus pricing?
3. Should Gina contest the price increase? Explain.
4. Is the increase more likely to be justified in the short run or the long run? Explain.
5. How will a $3 increase in the price of machine parts affect Gina’s own production decisions?
Smith Jr., Clifford W. Managerial Economics & Organizational Architecture (Irwin Economics) (p. 185). McGraw-Hill Higher Education. Kindle Edition.
Respond to the required questions (about 200 words per case = 400 Total), double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references, including the textbook (included below).
Textbook reference:
Smith Jr., Clifford W. Managerial Economics & Organizational Architecture (Irwin Economics) (p. 103). McGraw-Hill Higher Education. Kindle Edition.
(This Assignment Box maybe linked to Turnitin.)