A small private university normally charges the same price –$200–per credit-hour for all courses and for all students

Question

While the university is pretty near capacity in the fall and spring, it finds that its classrooms are only about 60 percent occupied during the summer session. A student of operations management wonders if revenue management might be useful to both the university and its students alike. This student, with help from some economics majors, estimates a demand curve for summer course enrollment. Points on this demand curve include 9000 credit-hours at the current rate of $200, 12,000 credit hours at $180, 15,000 credit-hours at $160, and 18,000 credit-hours at $140. Based on this demand curve, what price point would best serve the university, if its objective is the greatest revenue for the summer session?

Answer 1

The student must consider that since 9000 hours is 60 percent of capacity there is a classroom capacity of 15,000 credit-hours during the summer session. The lowest price generates the most revenue, but it is based on 18,000 credit-hours, which is beyond capacity. At $200 per credit hour, revenues would be $1,800,000; at $180, revenues would be $2,160,000; at $160, revenues would be $2,400,000; and at $140, demand exceeds capacity. The $160 price point yields the most revenue of the feasible price points.