This study presents an estimate of departmental cost functions at selected private liberal arts colleges. Longitudinal data for seven academic departments at 31 institutions were analyzed separately by a multiple regression data analytic procedure. The general least squares estimates are then used to calculate average and marginal costs at the average value for each department. These latter estimates indicate that departmental costs are relatively inelastic, a finding that indicates that the financial problems will be compounded by increases in average departmental costs in an era of enrollment decline.
The study of the cost structure of the postsecondary institutions has been confined almost entirely to "descriptive" cost analyses (Carlson, 1977;Adams et al., 1978). These studies, while useful for some purposes, have their limitations (Balderston, 1975;Hopkins, 1971). For instance, such studies incorporate historical inefficiencies in departmental operations. To the extent that past practices deviate from the most efficient combination of resources, these studies are unable to determine "efficiency" of any given department operations. Aside from such problems associated with determining "efficient" costs, these studies provide little guidance when the level of operations is changing substantially.
In periods of enrollment growth, such deficiencies are less serious than in periods of enrollment decline. For instance, public institutions that receive state appropriations according to a funding formula are offered an implicit, economic incentive to employ these descriptive cost analyses (Boutwell, 1973). Specifically, tying state appropriations to historical, average costs will generally result in the generation of discretionary income. This increase in discretionary income is true as long as each additional student enrolled is added at less than average costs.