Question 1

Which of the following is a cost of going to college?

Accepted Answer

The answer of Which of the following is a cost...

Question 2

For education to serve as a signal,

Accepted Answer

The answer of For education to serve as a signal,
...

Question 3

John is trying to decide whether to go to college or to start working right out of high school.College as an investment is most likely justified when ________ is greater than the cost of going to college.

Accepted Answer

The cost of going to college includes tuition, fees, books, and other expenses, while the return on investment is the difference between what John would earn as a high school graduate and what he would earn as a college graduate, discounted to their present value. Therefore, the present value of the difference between what John would earn as a college graduate and what he would earn as a high school graduate must be greater than the cost of going to college for college to be a justifiable investment.

Question 4

Age/earnings profiles fan out by educational attainment level.According to human capital theory,this phenomenon occurs because

Accepted Answer

Human capital theory posits that workers who invest more in their education will have higher levels of productivity and therefore earn more in the labor market. Moreover,these same workers may also be more dedicated to their careers and willing to invest in post-school job training to further enhance their skills and earning potential. This explains why age/earnings profiles tend to fan out by educational attainment level. It is not related to gender or "signaling" to employers but rather a result of investments in education and training over time.

Question 5

In the signaling model,assume high school graduates are paid a stream of income whose present value is $200,000.College graduates are paid a stream of income whose present value is X.College education costs higher-productivity workers $50,000 and lower-productivity workers $150,000.What value of X will cause higher-productivity workers to go to college and lower-productivity workers to not go to college?

Accepted Answer

In the signaling model, high-productivity workers have a lower cost of education ($50,000) than low-productivity workers ($150,000). This means that high-productivity workers will choose to go to college if the present value of the stream of income from being a college graduate (X) is greater than $50,000 + $200,000 = $250,000.

On the other hand, low-productivity workers will choose not to go to college if the present value of the stream of income from being a college graduate (X) is less than $150,000 + $200,000 = $350,000.

Therefore, the value of X that will cause higher-productivity workers to go to college and lower-productivity workers to not go to college must be between $250,000 and $350,000.

The only choice that falls within this range is D) $275,000. Thus, D) is the best choice.

Question 6

Which of the following would likely,in the long run,reduce the observed rate of return from going to college?

Accepted Answer

If going to college becomes more enjoyable, more people might choose to attend, increasing the supply of college-educated workers. This could lead to a decrease in the wage premium for college graduates, thus reducing the observed rate of return from going to college.

Question 7

A nation shifts from a very progressive tax system (with a higher tax rate on higher incomes)to a tax system that taxes all wages at the same rate.Both systems collect about the same revenues.This shift is likely to

Accepted Answer

A flat tax system reduces the marginal tax rate on higher incomes, increasing the incentive for individuals to invest in education to achieve higher-paying jobs.

Question 8

The market for engineers is initially in equilibrium.The demand curve for engineers shifts up.Assume the naive cobweb model holds such that in the first period,the labor supply is fixed,in the next period,wages are fixed,and so on.In period three,how will the wage rate compare to the new long run level?

Accepted Answer

In the naive cobweb model, the wage rate will adjust gradually towards its long run level as the market reaches equilibrium. However, since the demand curve for engineers has already shifted up in period one, the wage rate will be lower than the long run level in period three as it has not yet fully adjusted to the new equilibrium. Hence, the best choice is A).

Question 9

Mary can take a class that costs $10,000.The class teaches her a skill that will only be useful during the second year after training.What must the minimum pay for the skill in the second year be for Mary to take the class? She could alternatively invest the $10,000 and earn an annual rate of return of 20%.

Accepted Answer

If Mary invests the $10,000 at an annual rate of return of 20%, at the end of the first year, she would have $10,000 * 1.20 = $12,000. If she leaves the money invested for another year, it would grow another 20%, so she would have $12,000 * 1.20 = $14,400 at the end of the second year. Therefore, the skill must pay at least $14,400 in the second year to be worth taking the class instead of investing the money.

Question 10

Which of the following will increase the likelihood a person will go to college?

Accepted Answer

A decrease in the earnings of high school graduates makes college more attractive financially, as the relative earnings potential of college graduates increases compared to high school graduates. This can increase the likelihood of attending college.

Question 11

Which of the following best explains why the most rapid increase in a person's wages usually occurs at younger ages,giving a concave shape to the age/earnings profile?

Accepted Answer

On-the-job training usually declines with age, which means that workers tend to accumulate more human capital earlier in their careers. As a result, they experience more rapid wage growth at younger ages, which gives a concave shape to the age/earnings profile.

Question 12

Suppose an individual expects to receive a payment of $5,000 in 10 years.What is the present value of the payment if the discount rate is 8%? What is the present value of the payment if the discount rate is 4%? What principle is illustrated by this example?

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The answer of Suppose an individual expects to receive a...

Question 13

What is the internal rate of return on an investment in human capital? Suppose the internal rate of return on a particular investment in human capital is 10%.Kate has a discount rate of 5%,and William has a discount rate of 15%.Which individual undertakes the investment in human capital? Explain why.

Accepted Answer

The answer of What is the internal rate of return...

Question 14

Suppose that a technological innovation causes the price of capital to decrease and that,in turn,this causes the demand for college graduates to increase and the demand for high school graduates to decrease.Use human capital theory to predict the effect of the technological innovation on college enrollment rates of 18-year olds.Explain using either the present value method or the internal rate of return method.

Accepted Answer

The answer of Suppose that a technological innovation causes the...

Question 15

The wages paid by two careers,X and Y,have the same present value.Which of the following increase the likelihood that career X will pay more in wages over time (summed over the lifetime without discounting)?

Accepted Answer

If Career X pays the majority of its wages at a later age, this means that the wages increase over time, which results in a larger sum of wages over the course of one's lifetime. Therefore, it increases the likelihood that Career X will pay more in wages over time. The other options (A, B, and C) do not necessarily indicate that Career X will pay more in wages over time.

Question 16

What are the costs of obtaining a college education? What are the benefits of obtaining a college education? In determining whether or not an individual should invest in a college education,why is it not appropriate to compare the total dollar value of the benefits to the total dollar value of the costs.

Accepted Answer

The answer of What are the costs of obtaining a...

Question 17

Suppose that it costs $15,000 per year to obtain a four-year college education.Assume that the real interest rate is 5% and that there are 45 years beyond college graduation during which an individual will work.What after-tax returns on the investment are necessary to justify making the investment on purely monetary grounds? If the post-schooling period were changed by 5 years in either direction,how would your calculation change? What does the latter exercise show?

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The answer of Suppose that it costs $15,000 per year...

Question 18

What is meant by the term present oriented? How is an individual's degree of present orientation captured in the human capital investment model? If,other things equal,an individual is more present oriented,how does this affect the likelihood that the individual will invest in additional schooling? Explain using the present value method.

Accepted Answer

The answer of What is meant by the term present...

Question 19

A college education for Bill,using the market rate of interest of 5%,has a net present value of $50,000.Which of the following is an internal rate of return consistent with this present value?

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. If the NPV at a 5% market rate of interest is positive ($50,000), it means the IRR must be higher than the market rate of 5% to reduce the NPV to zero. Therefore, 6% is the only rate higher than 5% among the options, making it consistent with the given NPV.

Question 20

Studies of federally-sponsored training programs for "disadvantaged" workers show that

Accepted Answer

The answer of Studies of federally-sponsored training programs for "disadvantaged"...

Quiz 9: Investments in Human Capital: Education and Training