Question

a)Explain in detail (using graphs) on how differences in the marginal cost of capital (MCC) between two people lead to di¤erences in schooling (the persons have identical ability).

b) Explain in details (using graphs) on how differences in abilities between two people lead to di¤erences in schooling (the persons have identical MCCs)

Answer 1

a) In the first case, AR and MR lines will be same for two consumers due to their identical abiities. MC₁ and MC₂ lines represent different marginal cost for the two consumers.

For Consumer I,

Quantity = OQ₁ (Because MC₁ = MR)

Price = OP₁ (derived from AR line, because Price = AR)

For Consumer II,

Quantity = OQ₂ (Because MC₂ = MR)

Price = OP₂(derived from AR line, because Price = AR)

Hence, the quantity of schooling for two consumers with different MCC is different.

b) In the second case, AR and MR lines will be different for the two consumers due to their different abilities. However, the MC line will be same for the two consumers due to identical Marginal Cost pf Capital (MCC).

For Consumer I,

Quantity = OQ₁ (Because MC = MR₁)

Price = OP₁ (derived from AR₁ line)

For Consumer II,

Quantity = OQ₂ (because MC = MR₂)

Price = OP₂ (derived from AR₂ line)

Hence, the quantity of schooling for two consumers with different abilities is different.