Question

a. What is the economic motive for individuals to go to college and when does is it profitable for them to borrow money for college? b. What happens if the interest rate they face in borrowing is less (perhaps because their parents are lending them the money) or more (perhaps because they have to borrow from a bank)? c. Should government lend students money at a discount or provide college for free? 1. What do financial markets sell? 2. Write an expression for the present value of the future damage from climate change. What happens to the present value if the discount rate is higher? Does this explain why some ignore the dangers of climate change?

Answer 1

a) The economic motive behind going to college is to attain higher education in order to get more income in future . We know that wages of skilled workers is always higher than unskilled workers . So going to college is a part of skill development and educational enhancement for an individual for better prospects of jobs and higher income flows in future . It is profitable for them to borrow money to go to college when the future discounted stream of income is higher than the present money borrowed .

b) If the interest rate is less then it is more profitable to borrow the money since interest rate is the cost of borrowing . The opposite happens when the interest rate is more .

c) Providing college absolutely free of cost would be a huge burden on the government treasury and would lead to high deficit spending . But since education is something that generates positive externality , so government must control the price of education , provide scholarships and lend money at a very low interest rate or a discount .