Basic human capital model

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Economics 385 - Economics of Education Assignment -

Section I - The Economist's Rationale for Government Intervention in Markets

Question 1 - Match the concepts below (A-D) with the definitions or examples that best describe them.

A) Positive Production Externality

B) Positive Consumption Externality

C) Negative Production Externality

D) Negative Consumption Externality

1) Research and development, which can lead to new technology that other firms can benefit from

2) Results in more people buying a good than is socially optimal

3) Hydraulic Fracking - The process of drilling and injecting fluid into the ground at a high pressure in order to fracture shale rocks to release natural gas inside. Up to 600 chemicals are used in fracking fluid, including unknown carcinogens and toxins.

4) Getting a flu vaccination.

Question 2 - It can be argued that college education is a consumption good with positive externalities. Graphically represent that below with tuition on the y-axis and years of education on the x-axis. Show the equilibrium price (P*) and quantity demanded (Q*). Show the socially optimal quantity demanded (QS) at the equilibrium price. Show whether there is overconsumption or underconsumption. Label your x- and y-axes.

Section II - Basic Human Capital Model

Question 1 - What is the present discounted value of receiving $100,000 one year from now if the discount rate is 10%?

Question 2 - What is the present discounted value of receiving $100,000 one year from now if the discount rate is 5%?

Question 3 - Cheyenne is considering whether or not to go to an accelerated 1-year law school program. If she doesn't go to law school, she can find work today as a paralegal making $40,000 per year. If she does go to law school she has to pay $10,000 for school in the first year, but she will earn $100,000 per year as a corporate attorney after she finishes school.

A) Thinking only about her earnings over two years (this year and next year), what discount rate would make her indifferent between going to law school or not going? Show your work.

B) What is the present discounted value of her lifetime earnings at that interest rate?

Question 4 - Shelby, an 18 year old, just graduated from high school. He now has two choices:

1) Join the pipefitters local union apprentice program and earn $35,000 for six years while in the apprentice program and then earn $55,000 per year until retirement at age 65.

2) Go to college for four years during which time he earns nothing and has to pay $30,000 per year for school. After he finishes his degree, he can get a job as an architect and earn $80,000/year until he retires at age 65.

Draw Shelby's two different possible age-earnings profiles on one graph. Label the x- and y-axes, label each profile with the educational choice involved, and label the important wages and ages along the axes. Hint: costs for education should be considered negative wages.

Section III - Returns to Education

Question 1 - Callie, a high school graduate, makes $10/hour and is interested in doing something to improve her wages. She observes that an acquaintance of hers, who has a 2-year associate's degree from a community college, makes $15/hour. She concludes that if she gets her associate's degree she can also make $15/hour. Is she correct? Yes, no, or maybe. Explain your answer.

Question 2 -

Referring to the example of a wage-schooling locus above:

A) Why is it upward sloping?

B) Why is it concave?

Section IV - Alternative Human Capital Models

Question 1 - Describe a fundamental difference between the basic human capital model and the Spence signaling model.

Question 2 - Describe a fundamental difference between the basic human capital model and the Bowles and Gintis model.

Question 3 - Between the traditional human capital model, the spence signaling model and the Bowles and Gintis model, which do you think most accurately represents human capital accumulation in the U.S.? Explain.

Reference no: EM132767847

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