Question 1

In the context of investments in human capital, perfect capital markets imply all of the following, except that:

Accepted Answer

In a perfect capital market, individuals can borrow against their future income to invest in human capital, meaning their decisions are not constrained by their current income but rather based on expected total lifetime income. Choices A, B, C, and E are true implications of perfect capital markets, making D the exception.

Question 2

According to the signaling theory of education,

Accepted Answer

The signaling theory of education posits that education itself may not directly increase a worker's productivity but serves as a signal to employers about the worker's abilities, such as intelligence, diligence, and capability to complete tasks. This theory suggests that education acts more as a screening or filtering mechanism for employers rather than directly enhancing productivity.

Question 3

Which of the following regarding "education as a signalling device" is correct?

Accepted Answer

In the signalling model, education serves as a signal to employers about a worker's potential productivity, rather than directly increasing productivity.

Question 4

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
-The essence of human capital theory is that:

Accepted Answer

Human capital theory posits that investments in human resources (such as education, training, and health) enhance productivity and earnings potential. This theory suggests that individuals and societies can improve economic outcomes by investing in people.

Question 5

Private costs and benefits are those that are:

Accepted Answer

Private costs and benefits are those directly incurred or received by the individuals or entities making the investment, such as investing in human capital (e.g., education, training). These are distinct from societal or external costs and benefits.

Question 6

In the context of discounted present value, under what conditions can the sum of the income earned in each period divided by the discounting factor be replaced by the payment divided by the rate of interest?

Accepted Answer

When the stream of payments is collected over a long period of time, it allows for the simplification of the present value calculation to payment divided by the rate of interest, assuming a perpetuity or a very long-term annuity where the present value of the terminal value becomes negligible.

Question 7

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
-The opportunity cost of obtaining human capital is:

Accepted Answer

The opportunity cost of obtaining human capital includes the income that Mary foregoes by choosing to pursue further education instead of taking the job that pays $30,000. This is because opportunity cost refers to the benefits one misses out on when choosing one alternative over another.

Question 8

When some important variables that enter into economic decision making are not observable until after a decision has taken place, firms are said to operate in an environment of:

Accepted Answer

When firms make decisions without having access to all relevant information, particularly about important variables that will only become observable after the decision is made, they are operating in an environment of imperfect information. This scenario describes situations where the lack of complete, accurate, and timely information affects decision-making processes.

Question 9

Which of the following statements regarding pecuniary costs is true?

Accepted Answer

Pecuniary costs are included in the calculation of social costs and benefits because they represent the value of resources used in production.

Question 10

It is indisputable that the degree of inequality in the distribution of wages has risen drastically in North America over the past 25 years or so. The most widely accepted explanation is that:

Accepted Answer

The increase in wage inequality is often attributed to the rising returns to education and skills, meaning that individuals with higher education and skills are earning significantly more than those without.

Question 11

What is the idea behind the income-contingent loan financing scheme?

Accepted Answer

The idea behind income-contingent loan financing schemes is that while tuition may be increased to improve the quality of education, the repayment of student loans is adjusted according to the income level of the graduates, making it a more flexible and potentially fairer system for loan repayment.

Question 12

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
-What is Mary's present value of earning $30,000 a year from age 18 to 20 (3 years in total)?

Accepted Answer

The answer of Mary is an 18-year-old high school graduate...

Question 13

The human capital model has strong neo-classical underpinnings. Why might a heterodox economist disagree with this approach?

Accepted Answer

A heterodox economist might disagree with the human capital model because it assumes individuals have a wide degree of choice in their education, which may not account for social, economic, and institutional constraints that limit such choices.

Question 14

A problem may arise while estimating the return of education. This is called:

Accepted Answer

The answer of A problem may arise while estimating the...

Question 15

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
-Now assume that after completing a one-year post-secondary program, Mary would earn $60,000 than if she had stopped her education right after high school. Should Mary complete the post-secondary program and what is the internal rate of return?

Accepted Answer

The return on Mary's investment in education is calculated by comparing the increase in her earnings to the cost of the education. If she can earn $60,000 more per year after completing the program, compared to the $30,000 she would earn without further education, this effectively doubles her income. Therefore, the return on her investment in the post-secondary program is 100 percent, making option A correct.

Question 16

A human capital earnings function is:

Accepted Answer

The answer of A human capital earnings function is:
...

Question 17

The shape of the "age-earnings" profiles reflect all of the following, except that:

Accepted Answer

The answer of The shape of the "age-earnings" profiles reflect...

Question 18

Earnings _______with age, and thus with labour market experience, until age ________ is reached, and then ______.

Accepted Answer

Earnings typically increase with age and labor market experience until a certain point, often between 40 to 50 years, after which they tend to decline as individuals approach retirement age.

Question 19

Which of the following refers to general training?

Accepted Answer

General training refers to skills and knowledge that are transferable and can be utilized across different firms and industries, unlike firm-specific training.

Question 20

The rule for optimal human capital investment is that:

Accepted Answer

The optimal rule for human capital investment, such as education, is to continue investing until the discounted present value of the benefits from an additional year equals the discounted present value of its costs. This ensures that the investment is worthwhile up to the point where the marginal benefits equal the marginal costs.

Quiz 9: Human Capital Theory: Applications to Education and Training