You are thinking about grad school. It costs $3000 a year for tuition and
books. Room and board is $5000 a year. If you complete four years of grad
school your yearly earnings will be $25,000 as a professor; your salary will
increase at a rate of 10% per annum. If you chose not to go to grad school,
your yearly earnings will be $23,500 as a manager; your salary will increase
at a rate of 5% per annum. The annual interest rate is 5%, and your working
life is 20 years (note: you work only 16 years if you go to grad school)
What should be included in your calculation of the opportunity costs
of grad school and why?
Show theoretically how you would calculate the present value of the
income streams for the two occupations.
Employ the formulation in (B) above to calculate the present value of
your earnings in the two proposed occupations; plot the present value
of your yearly earnings over the twenty years in each career. Which occupation
should you choose to maximize wealth?
What other considerations, besides yearly earnings, might enter into
your occupational choice?
Suppose that you are professor, with the potential earnings profile
defined above. However, you have decided to have a child after completing
the tenth year of your working life. This choice will cause you to be
absent from the labor force for two years (years 11 and 12). You can assume
that your salary will not increase by 10% over these two years, since
your are not acquiring human capital while absent from the labor force.
Moreover, your human capital depreciates at a rate of 10% per annum for
every year that you are absent from the labor force (i.e., your research
skills get rusty); thus, your salary declines by 10% per year absent.
What are the opportunity costs of having a child in terms of the present
value of forgone earnings in year eleven dollars?
Analyze the following statement: indicate whether it is true or false and
briefly explain why. "If a college education was a pure signal, self-employed
entrepreneurs would never have more than a high-school diploma".
Suppose that there are two types of employees in a competitive industry:
(1) smart and (2) dumb. Smart employees comprise one third of the population
and have a marginal product of 3, while dumb employees comprise the remaining
two thirds of the population and have a marginal product of 2. The price of
the output $1.
What will a profit maximizing firm pay its smart and dumb employees
if the firm has no means of distinguishing between the two types of employees?
Briefly explain the affect of education on the productivity of workers,
if education is a pure signal for the marginal product of smart and dumb
employees.
Suppose that the cost of education for smart and dumb workers is respectively
equal to y/3 and y/2, where y is the number of years of education. Calculate
the range of educational attainment that will "properly" sort
the workers by their productivity.
Anthropologists have hypothesized that persons in warm climates value the
present more than those who live in cold climates. Suppose that the real rate
of interest in equatorial countries is two percent higher that those countries
north of the Tropic of Cancer and south of the Tropic of Capricorn. Use your
knowledge of human capital theory to explain whether equatorial people are
likely to have more or less education that those that live at a more northerly
or southerly latitude and the possible consequence of those decisions for
economic development.
You are working for the President's Council for Competitiveness and have
been asked to access whether the firms in the computer industry are paying
the competitive wage. The industry claims that it pays the competitive wage,
but you have found that the wage is below the value of the marginal product
for most workers who have worked with the firm for more than a couple of years.
Provide an explanation for the observed relationship between wages and the
value of the marginal product of labor that is consistent with a computer
industry that is competitive in the product market. Use a graph to aid your
discussion.
Bill gets his masters degree as an economist and goes to work for an insurance
company as a financial analyst. He is told that during the first year the
company will train him to be a financial analysis and his salary is $23,000.
However, Bill's training period is over after the first year and he is offered
$46,000 to stay on with the company. Bill, nonetheless, leaves their job and
accepts a job at another firm.
Is the training provide by the insurance firm general or specific? Explain
why.
In the context of the human capital model, explain why it is rational
for the firm to have such a large difference in salary between the first
and second year and why it is not irrational for Bill to leave his current
job for another firm.
