You are thinking about going to graduate school. It costs $3,000 a year for tuition and books. Room and board is $5,000 a year. If you complete four years of graduate school, your yearly earnings will be $60,000 as a professor and 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 $45,000 as a manager and 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 graduate school).
What should be included in your calculation of the opportunity costs of grad school and why?
Calculate the present value of your earnings in the two proposed occupations. Which occupation should you choose to maximize wealth?
What other considerations, besides yearly earnings, might enter into your occupational choice?
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 there are two types of employees in a competitive industry: smart and 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 each unit of output is $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 effect education has on the productivity of workers if education is purely a signal of the marginal product of 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.
