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Marginal Productivity Theory

Susan’s analysis is based on the concept of Marginal Productivity Theory. This concept is used
to analyze and evaluate the profit maximizing quantities of inputs (i.e. services of the factors of
production) acquired or purchased by a company during the production of its inputs. Marginal
productivity theory shows that the demand of a particular product for a certain factor of
production is ultimately connected on the marginal output of that factor. A company is basically
willing to spend much more or pay a lot more for an input that they believe is more productive
and that its contribution is higher on the output. The demand for such an input is referred to as
the derived demand.
The effect of raising the fees payable by students of Ursinus College in Pennsylvania by 17.6%
to $23460 in the year 2000 resulted in increase in admission numbers of students by 200
applicants. The head of the college concluded that the more the college cost, the better the
students believed it was. The other colleges, for instance the University of Richmond, the Notre
Dame, Rice University and Bryn Mawr College also experienced the same scenario where the
additionally fee resulted in a large number of admissions. On the other hand the North Carolina
Wesleyan College reduced their fees by 22%, ten years ago but the results were negative i.e. the
number of admissions also dropped. These prompted the college principal to comment that most
people really don’t want cheap colleges.

Economics 2
The effect of increasing the fee impacts a marginal increase in the admission of students. This
marginal increase is positive where the rate of admission increases and its negative where there
is a reduction in the amount of fees and the number of admission reduces, for instance, the case
of North Carolina Wesleyan College where the reduction of fees resulted in a marginal decrease
in admission numbers. This shows a correlation between the fees charged and the number of
enrolment or admissions. ( Sullivan , Sheffrin, 2003) The fee charged varies directly with the
number of admissions.
The Marginal productivity theory is the foundation of the analysis of the major factor market and
this case the fees charged is the input side of the essential short run production whose out put is
the total amount collected after the increase in the admission numbers. These provides and
indicates the inside information on the demand and need for the factors and inputs for the
production mainly based on the concept that the profit maximizing company hires inputs which
are based on particular comparison among the productivity of the basic input and the cost of that
input. Hence Susans recommendation are recommended.

Economics 3

Sullivan , Sheffrin, S (2003). Economics: Principles in action. Upper Saddle River, New Jersey
Pearson, Prentice Hall.

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