Question

1. At times we all regret decisions. Does this necessarily mean we did not use the economic decision rule when making the decision?
2. Research shows that after-school jobs are highly correlated with decreases in grade point averages. Those who work 1 to 10 hours get a 3.0 GPA and those who work 21 hours have a 2.7 GPA. Higher GPAs are, however, highly-correlated with higher lifetime earnings. Assume that a person earns $8,000 per year for working part-time in college and that the return to a 0.1 increase in GPA gives a 10 percent increase in one's lifetime earnings with a present value of $80,000.
   • What would be the argument for working rather than studying harder?
   • Is the assumption that there is a trade-off between working and grades reasonable?

Answer 1

The argument that can be made in favour of working rather than studying harder even after knowing that person working part time will earn $8000 while the return of 0.1 increase in GPA gives a 10 percent increase in one's lifetime earnings with a present value of $80,000 is that some people values the current consumption very highly relative to the future consumption.

As we can see the present value of future earnings with higher GPA Score is 10 times more than the part time earnings of a college student. If the person still chooses to work instead of studying hard then he must be valuing today's consumption which comes from today's part time earnings very highly compared to future consumptions which comes from future income by studying hard.

And people who values current consumption more than future consumption, in economics we say that there discount rate is very high. A discount rate is the rate by which people discount future income to calculate their present value, and for people with very high discount rate their present value of future income becomes very low as result of which they choose to work rather than studying hard to improve their GPA Score.

The assumption that there is a trade-off between working and grades is very reasonable since the resource which is involved in here is limited, that is time. So, if a college student chooses to work part time then he or she is dedicating a part of their time in working instead of studying which is precisely a trade-off, losing something in order to get something.

Working today as part time costs time in which a student can potentially study hard to improve his or her GPA Score which can result in higher future earnings. But when someone chooses to work instead of studying he or she is sacrificing an opportunity to improve their GPA Score. And similarly when a student choose to study instead of working part time to improve their grades, he or she is sacrificing the income that a part time worker earns.

So given that fact that time as resource is limited, the choice between working and grades is very reasonable.