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Case Two: The Case of Reed College
 
Read the case study about Reed College below and answer the questions below.
 
Reed College Case Study
 
Peculiarities of higher-education demand
 
Before we examine some elasticity estimates, we need to consider some aspects of higher education that make it a unique product. First, the process of buying higher education involves multiple steps and decisions of both sellers and buyers. Prospective students at selective colleges and universities must apply for admission to their institutions of interest and, depending on their academic credentials, may not be granted the privilege of purchasing the product.
 
Second, colleges and universities often offer price discounts to a large share of their admitted applicants through financial aid. These discounts can be based on measured ability to pay ("need," as at Reed) or on the basis of perceived academic "merit" (as at many other colleges). Subsidies and subsidized loans are offered by federal and some state governments for the purchase of this good as well. These "financial aid" factors make it very difficult for someone studying the demand for higher education to measure the appropriate "price."
 
Finally, a college education is purchased over a period of (more or less) four years. While it is easiest to examine the demand decisions of new freshmen, the "persistence" of these new students at the college over the remainder of their four-year college career is equally important for the overall demand for the higher-education product.
 
Approaches and Selected Results
 
All of these factors make an estimation of the demand elasticities for colleges difficult. Nonetheless, some investigators have attempted to try to put numbers on some of the important elasticities.
 
One of the earliest studies by Campbell and Siegel (1967), estimated the price elasticity of demand for higher education overall of -0.44 and an income elasticity overall of 1.20.
 
A later study by Hight (1970) broke the results down by private and public institutions, finding price elasticities of -1.06 for publics and -0.64 for privates and income elasticities of 0.98 for publics and 1.70 for privates.
 
An early study of demand at the level of individual institutions was Hoenack (1967) at the University of California campuses found a price elasticity of -0.85 and income elasticity of 0.7.
 
More recently, in a study that summarizes a Reed College senior thesis, Buss, Parker, and Rivenburg (2004) (BPR) looked separately at the yield for full-paying students and financial-aid students. For full-paying students, they found a price elasticity of -0.76. For financial-aid students, BPR finds a larger price elasticity of -1.18. As suggested by these results, they find that an increase in tuition accompanied by an equal increase in financial aid would lower the quantity demanded.
 
Case Two Instructions
 
Despite the empirical evidence to the contrary, college decision-makers often believe that their price elasticity of demand is essentially zero. Respond to the following questions and justify your answers using the case study above and lessons from class. (1) Is higher education a necessity or luxury? (2) Does it differ between private and public institutions? (3) Would you expect the price elasticity of demand to be higher for financial-aid students or for non-aid students considering income elasticity?
 
Case Two Point Breakdown - 30 Points
 
Necessity or luxury - 10 Points
 
Differences between private and public institutions - 10 Points
 
Differences between financial-aid and non-aid students - 10 Points

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Related questions

Grade inflation Gone Wild - sTUarTrojsTaCzer

A bout six years ago, I was sitting in the student union of a small liberal arts college when I saw a graph on the cover of the student newspaper that showed the history of grades given at that institution in the past 30 years.

Grades were up. Way up.

I am a scientist by training and I love numbers. So when I looked at that graph, I wondered, How many colleges and universities have
data like this that I can find? The answer is that a lot of schools have data like this hidden somewhere. Back then, I found more than 80 colleges and universities with data on grades, mostly by poking around the Web. Then I created a website (gradeinflation.com) so that others could find this data. I learned that grades started to shoot up nationwide in the 1960s, levelled off in the 1970s, and then started rising again in the 1980s. Private schools had much higher grades than public schools, but virtually everyone was experiencing grade inflation.

What about today?

Grades continue to go up regardless of the quality of education. At a time when many are raising questions about the quality of U.S. higher education, the average GPA at public schools is 3.0, with many flagship state schools having average GPAs higher than 3.2. At a private college, the average is now 3.3. At some schools, it tops 3.5 and even 3.6. A is average at those schools! At elite Brown University, two-thirds of all letter grades given are now A's.

These changes in grading have had a profound influence on college life and learning. When students walk into a classroom knowing that they can go through the motions and get a B+ or better, that's what they tend to do, give minimal effort. Our college classrooms are filled with students who do not prepare for class. Many studies less than 10 hours a week that's less than half the hours they spent studying 40 years ago. Paradoxically, students are spending more and more money on an education that seems to deliver less and less content.
With so few hours filled with learning, boredom sets in and students have to find something to pass the time. Instead of learning, they drink. A recent survey of more than 30,000 first-year students across the country showed that nearly half were spending more hours drinking than they were studying. If we continue along this path, well end up with a generation of poorly educated college graduates who have used their four years principally to develop an addiction to alcohol.

Many say that grade inflation is a complicated issue with no easy fix. But there are solutions. At about the same time that I started to collect data on rising grades, Princeton University began to do something about its grade-inflation problem. Its guidelines have the effect of now limiting A's on average to 35 per cent of students in a class. Those guidelines have worked. Grades are going back down at Princeton and academic rigour is making a comeback. A similar successful effort has taken place at Wellesley College in Massachusetts. And through a concerted effort on the part of faculty and leadership, grades at Reed College in Oregon have stayed essentially constant for 20 years.

Princeton, Wellesley, and Reed provide evidence that the effort to keep grade inflation in check is not impossible. This effort takes two major steps. First, school officials must admit that there is a problem. Then they must implement policies or guidelines that truly restore excellence.

I asked Dean Nancy Malkiel at Princeton why so few schools seem to be following Princeton's lead. Because its hard work, she answered. Because you have to persuade the faculty that its important to do the work.

Making a switch will take hard work, but the effort is worthwhile. The alternative is a student body that barely studies and drinks out of boredom. That's not acceptable. Colleges and universities must roll up their sleeves, bring down inflated grades, and encourage real learning. It's not an impossible task. There are successful examples that can be followed. I am looking forward to the day when we can return to being proud of the education that our nation's colleges and universities provide.

Analyze Stuart Rojstaczer's argument in Grade Inflation Gone Wild, addressing the following questions:
What evidence does Rojstaczer use to indicate that there is a problem?
How would you characterize this evidence (for example, scientific, anecdotal), and to what extent are you persuaded by the evidence he provides to suggest that grade inflation has a profound effect on life and learning?
To what extent does he persuade you that a change in policy is
necessary or that such a change would make a difference?

. Vouchers to Pay Private School
Tuition
Two conditions that justify government intervention in a market are the presence of external benefits and equity concerns. Both of these issues are present in the case of primary and secondary education in the United States. Think about what education without government education would look like. In the absence of government intervention, all primary and secondary education in the US would be private. Public school districts would not exist. Parents would need to pay private firms (schools) to educate their children.

External benefits

If all education were private, it’s likely that people would buy too little education, from society’s point of view. External benefits are one reason. When a child is educated, he or she benefits and we expect his or her parents to take those benefits into account when they purchase education. But there are additional benefits to society which parents may ignore. As people become more educated, they are less likely to be unemployed or be criminals and are more likely to volunteer and vote. The presence of these external benefits is an example in support for the government getting involved in education.

Equity

Many families in the United States have low incomes. Among all children in first through twelfth grades in 2001, 46% were from families with incomes below $40,000. Since the cost of private education would be an important share of these families’ incomes, most Americans would be concerned about the fairness of relying on markets to decide how much education children receive. Current spending by these families on private education provides some support for this concern. Of all children in private school in 2001, only 25% were from families with incomes below $40,000. Therefore, equity concerns are another example in support for government getting involved in education.

Providing vs. producing education

Most economists think external benefits and equity concerns justify government intervention in education. But it is important to distinguish between government production of education and other forms of government intervention. At the level of elementary and secondary education, K- 12 education, government intervention today mostly means production of education by local school districts. To benefit, children must attend public schools. But this is not the only form intervention could take.
There are other markets where government intervention takes the form of subsidizing people’s access to products—think of financial aid to college students, for example. Many people in the US think that government should move from producing education to subsidizing access.

One form that subsidy could take is government providing vouchers to parents. Parents would use the voucher to help pay for their child’s education in a private school. After it receives the voucher, the school would turn it in and be paid by a local or state government.

Today there is a lively debate between people who think K-12 education should be delivered publicly and people who think quality and efficiency would be higher if government provided vouchers and the education was delivered by private schools. Some of these quality and efficiency arguments can be based on material we covered this week. Price competition between private schools will pressure each one to produce efficiently. Competition for students will lead private schools to offer programs of interest to parents and their children.

Answer the questions below and make use of the sources supplied. Be sure to cite you sources in your answers.

1. Explain whether a potential exit by students with vouchers will lead to the improvement of public schools. 2. Discuss whether the implementation of vouchers will lead the best students to leave public school, which could lead to a decline in education for the students left behind in the public schools. 3. Consider what might happen to the students who use vouchers to leave public schools in order to attend private schools. How might their academic performance change as a result of switching? 4. Finally, think about the impact of a voucher system on the students in an urban setting. Describe whether all families would have an equal opportunity to access education.

Your final product will be a paper that: ? Addresses each of the four questions above in total. ? Is APA formatted. ? The body is to be 2 pages minimum.

The requirements for your assignment are: 1. Answer each question fully 2. Define the overall subject of each question. 3. Cite at least three (3) resources from this week’s materials.

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