In this age of austerity, ambitious universities are now confronted with some serious tradeoffs. Even the very best universities are wrestling with these challenges. For evidence, read this about Yale. To an economist, the obvious solution here is more price discrimination. This Yale article says that 43% of the undergraduates pay the "full price" of roughly $53,000 per year. Why not charge them $106,000 per year and sketch out the demand curve for Yale? The university has an undergraduate enrollment of roughly 5,000. If .43*5000 each pay $53,000 more than this equals $113 million more dollars in revenue per year for the University and the $40 million dollar deficit vanishes. I realize that this is an extreme experiment but the readers of this blog know something about differentiated products and inelastic demand. In English, if you offer a high quality product you can get away with price gouging. Why not gouge? Is the 43rd percentile of Yale's student body "middle class"? Can their parents afford $106,000 per year? There are other schools to attend. You could come to UCLA and take my class. Note that my pricing regime generates a serious revenue inflow that would allow for more generous financial aid for the 57%. We all want a sweet deal and I want my hair back but that's not going happen.
The Deans of our Universities needs to start acting like Bill Gates (when he ran Microsoft) rather than acting like Bill Gates (now that he runs his non-profit foundation).
