Question

Suppose person A's marginal rate of return to schooling is higher than person B?s, but they have the same discount rate. Who is more likely to attend school longer?

• A. A

• B. B

• C. Cannot be determined.

Walter earns $50,000 per year working as an accountant, Jessica is unemployed. Both want to go to college. The direct costs of enrolling in college are $25,000. Walter and Jessica face the same direct costs. The opportunity cost of going to college is

• A. the same for both of them.

• B. higher for Jessica.

• C. higher for Walter

Answer 1

1.Option A i.e A

The marginal rate of return to schooling is the percentage change in earnings resulting from one more year of schooling. The MRR gives the percentage increase in earnings per dollar spent in educational investment. A worker maximizes the present value of lifetime earnings by going to school until the MRR to schooling equals the rate of discount. Since person A has higher Marginal Rate of reurn to schooling, so A will attend school longer.

2.Option C i.e higher for Walter.

Opportunity Cost is the cost of foregone alternative. Opportunity Cost is when in making a decision the value of the best alternative is lost. Opportunity costs is the sum total of Explicit Costs and Implicit Costs. Explicit Costs are the monetary payments a firm makes to those from whom it must purchase resources that it does not own. Implicit Costs are the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash.

In this case Explicit Costs for both Jessica and Walter are the direct expenses for enrolling in college which amount to $25000. Implicit cost for Walter is the cost of foregone salary as accountant if he goes to college which will be equal to $50000.

Opportunity Cost for Walter = Explicit Costs + Implicit Costs = $25000 + $50000 = $75000.

Opportunity cost for Jessica = $25000 + $0 = $25000. The implicit cost for Jessica is $0 as she is not earning any money in some alternative project.

So, opportunity cost of Walter is higher than Jessica.