Econ 421: Economics of Reed College
Fall 2007
Mid-Term Exam
Due: Wednesday, October 24

Question #1: To aid merit or not to aid merit

Suppose that in 2009, trustee Harvey Dollar offers to donate $20 million to Reed with the stipulation that the money is to be used to support merit scholarships to help Reed attract the best and brightest high school grads. His donation would yield $1 million per year in funds for the college. A hot debate ensues in the Reed community. Selected quotes are below:

Peter Bergenstein, Dean of the Faculty: "Merit aid goes against everything that Reed College stands for. Our financial aid mission has always been and should always be to provide a quality education to outstanding students who could not otherwise afford it. The pernicious spread of merit aid among liberal-arts colleges undermines the access of less fortunate students to quality education. I passionately urge Reed College to resist joining this regrettable trend."

Marty Paulthers, Dean of Admissions: "Most of our rivals now offer merit aid. The choice is quite simple: we either begin to offer scholarships to outstanding students with no need, or we will continue to see erosion in our ability to attract the best of the full-paying student population. This will force us to choose between lower quality full-paying students and paying even more financial aid to fill our class with those getting need-based aid."

Manfred Milton, Professor of Economics: "Economic efficiency is promoted when resources are paid their marginal products. Outstanding students bring an extraordinary vitality to the Reed classroom. Everyone---faculty, fellow students, and the institution---gains from this. Merit aid is a natural and efficient way of compensating these students for their service to the institution's educational mission."

Edwin Mc Scrooge, Vice-President and Treasurer: "The operations of Reed College must be financially self-supporting. There must be a problem with the pricing of our product or with its quality if we must resort to buying students. I would prefer to see a slower increase in our tuition level."

As the president of the college, you must make a recommendation to the Board of Trustees on this contentious issue. Write a short position paper summarizing your arguments.

Question #2: Early-decision policy

In recent years, a few elite universities (including Princeton and Harvard) have decided to abandon the policy of Early Decision (ED) admissions. Under ED programs, applicants can apply to (only) one school in November or January, promising to attend if admitted. Critics of ED have argued that these policies are biased against poor and minority students because ED applicants cannot compare financial-aid offers at multiple schools. To the extent that schools often accept a higher proportion of ED than regular applicants, this reduces the number of slots available to poor and minority applicants.

Reed's current ED policy is described in the 2007-08 Reed Catalog. We admit ED candidates under two options: ED1 with an application deadline of November 15 and a notification date of December 15 and ED2 with an application due January 2 and notification on Febraury 15. Data on recent ED applications, admissions, and yield are in this spreadsheet.

Reed President D. Vern Collins is strongly in favor of abolishing Early Decision admission at Reed, both for the diversity reasons discussed above and because it would send a strong signal to applicants that Reed belongs to the same category of elite colleges as Harvard and Princeton.

As Reed's admission dean, you are to analyze the impact on Reed's admission process of eliminating Early Decision and write a short memo to the president presenting and supporting your opinions on the issue.