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Economics
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13 Dec 2019

Maria is considering going to law school. If she does, she will spend $50,000 on tuition and books to get a college education (during the first time period), $110,000 on tuition and books to get a law degree (during the second time period), and her law degree will earn her $484,000 during the remainder of her work-life (during the third time period). Maria's time preference for money is associated with a per-period interest rate of 10 percent. What is Maria's present value of obtaining a law degree?

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17 Dec 2019
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Related questions

Logan is about to decide which career path to pursue. She has narrowed her options to two
alternatives, mechanical engineer or economist. Assume she lives for two periods. In the rst, she
gets an education. In the second, she works in the labor market. If Logan becomes an economist,
she will spend $12,000 on tuition and 3,000 on books in the rst period and earn $472,000 in
the second period. If she becomes a mechanical engineer, she will spend $37,000 on tuition and
3,000 on books in the rst period and then earn $500,000 in the second period. Assume Logan
must borrow enough money to pay for tuition and books, she can borrow money at a 5% rate per
period and her discount rate is also 5% per period.

What are the direct, and indirect costs of education faced by Logan? Discuss in general and
give her specific costs from this example.

What is the net present value of Logan's earnings as an economist, and as an engineer?

What is the net present value of Logan's earnings as an economist, and as an engineer?

Suppose you currently earn $19,000 a year. You are considering a job that will increase your lifetime earnings by $190,000 but that requires an MBA. The job will mean also attending business school for two years at an annual cost of $25,000. You already have a bachelor’s degree, for which you spent $80,000 in tuition and books.

Which of the above information is relevant to your decision on whether to take the job?

The relevant cost is the $50,000 tuition you pay for business school. The relevant benefit is the increase in lifetime earnings of $190,000.
The relevant costs are the $80,000 spent for the bachelor’s degree, the $50,000 tuition for business school, and lost wages from full-time employment. The relevant benefit is the increase in lifetime savings of $190,000.
The relevant costs are the opportunity cost of taking the job (forgone earnings from your current job) and other things you could have done with the money you need to pay for business school. The tuition for the bachelor’s degree is a sunk cost and is not relevant. The relevant benefit is the increased lifetime earnings of $190,000.
All the information given in the problem is relevant.

Mary has two possible career paths. She can become either a biologist or a concert pianist. Mary lives for 2 periods. In the first period, she gets the appropriate education for her career. In the second period, she works in the labor market. If Mary becomes a biologist, she will spend $15,000 on education in the first period and earn $475,000 in the second period. If she becomes a concert pianist, she will spend $38,000 on education in the first period, and then she will earn $500,000 in the second period.

a) Suppose Mary can lend and borrow money at a market interest rate of 10 percent between the two periods. Which career will she pursue? Briefly explain your answer. b) Suppose the market interest rate falls to 2 percent. Would Mary choose a different career path than in (a)? Briefly explain why this is the case.

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