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

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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
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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.

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

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