Human Capital

# Human Capital - Chapter 07 - Human Capital Chapter 7 Human...

This preview shows pages 1–2. Sign up to view the full content.

Chapter 07 - Human Capital Chapter 7 Human Capital 7-1. Debbie is about to choose a career path. She has narrowed her options to two alternatives. She can either become a marine biologist or a concert pianist. Debbie lives two periods. In the first, she gets an education. In the second, she works in the labor market. If Debbie becomes a marine biologist, she will spend \$15,000 on education in the first period and earn \$472,000 in the second period. If she becomes a concert pianist, she will spend \$40,000 on education in the first period and then earn \$500,000 in the second period. (a) Suppose Debbie can lend and borrow money at a 5 percent annual rate. Which career will she pursue? What if she can lend and borrow money at a 15 percent rate of interest? Will she choose a different option? Why? Debbie will compare the present value of income for each career choice and choose the career with the largest present value. If the discount rate is 5 percent, PV Biologist = – \$15,000 + \$472,000/(1.05) = \$434,523.81 and PV Pianist = – \$40,000 + \$500,000/(1.05) = \$436,190.48. Therefore, she will become a pianist. If the rate of interest is 15 percent, however, the present

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 11/20/2010 for the course ECONOMICS 331 taught by Professor Mj during the Fall '10 term at University of Alberta.

### Page1 / 2

Human Capital - Chapter 07 - Human Capital Chapter 7 Human...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online