Human Capital Theory
The Human Capital Theory suggests that individuals invest in education when the present value of the investment is positive, therefore comparing the present value of the associated costs and benefits.
Let's suppose that Julia just finished High School. She must choose between three alternative career paths. There are only three periods of (working or studying) life after high school, for simplicity reasons. The three choices Julia faces are the following:
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Work as a cashier in a large supermarket chain with a salary of 12,000 euros for each of the three periods.
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Study Marine Biology at the University. She will have to study for one period with a tuition fee of 7,000 euro. After graduation, she will earn 30,000 euros for each of the remaining two periods.
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Study at Philosophy the University and receive a Doctoral Degree in Philosophy (DPhil). She will have to study for two periods with tuition fees of 5.000 euros per period. After graduation she will earn 60,000 euros for the remaining period.
Suppose the interest rate per period is set at 10%. Answer the following questions:
(a) (10 rp) Which of the three choices is best in terms of economic benefits for Julia?
Ответ
(a) We must calculate the Present Value for each of the three career paths, taking into account of both costs and benefits and see which career path has a positive or the higher present value:
Julia will have to choose to study Marine Biology since this career choice (10 points)
(b) (10 rp) If Julia has a passion for Philosophy and always wanted to get a DPhil in that subject, will she have to sacrifice consumption to follow this career path? If yes, what is the present value of consumption she will have to sacrifice?
Ответ
(b) If Julia decides to undertake studies in Philosophy she will have to sacrifice the economically better choice of studies in Marine Biology, that will bring her a higher income overall. In this case she will have to sacrifice the monetary value of the difference between the choice with the higher income and the choice she made due to her personal preferences, namely she will have to sacrifice the consumption of euros. (10 points)
- 8 points for correct process using wrong calculations
(c) (10 rp) Should the State finance tuition for Philosophy studies? Justify your answer.
Ответ
(c) Investment in education is accompanied with significant positive externalities for the whole society. The social benefits from a more educated workforce are numerous, ranging from increased labour market participation, higher productivity, less need for social compensation and welfare benefits up to active and educated political participation and higher social involvement. Therefore, the Government should finance studies in a specific field when the social benefit exceeds the private (individual) benefit from studying and it is possible that the market cannot produce the optimum amount of workers educated in this field. (10 points)
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3 points if a few positive externalities are mentioned
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8 points if answer is correct, but missing something or includes something wrong