1. Alice works in sales but is considering quitting work for 1 year to earn her MBA. Her current job pays $40,000 per year, but with her MBA, she could earn $70,000 per year. Suppose tuition for a MBA is $50,000. Further suppose that Alice's discount rate is 5% and she anticipates retiring in exactly 4 years. This means that she will either work in sales for 4 years, or she will quit her job, spend 1 year obtaining her MBA, and work at the higher-paying job for 3 years.
a. What is Alice's net present value of a MBA?
b. Will Alice obtain her MBA?
Now suppose that Alice's current employer has adopted an internal company policy where it will pay 50% of the tuition when an employee pursues a MBA. This means that Alice will only have to pay $25,000 out of her own pocket to obtain her MBA.
c. Now, what is Alice's net present value of a MBA?
d. Given the internal company policy, will Alice obtain her MBA?
2. Jack and Jill recently graduated from high school and they are each contemplating whether to go to college. Jack and Jill know there are two permanent job openings at a local warehouse that produces natural toothpaste for infants. One or both of them could begin work there immediately. Workers at the local warehouse earn $20,000 per year. Alternatively, one or both of them could go to the local community college, where it takes a student 2 years to graduate with a degree. Tuition is $10,000 per year and it is not possible to work while attending community college. Nevertheless, graduates of the local community college earn annual salaries of $50,000 in higherpaying jobs.
Jack and Jill each expect to be able to work for at most 5 more years. Hence, they each individually must choose whether to work for 5 years at the local warehouse, or go to community college for 2 years and afterwards work for 3 years at the higher-paying job. Finally, Jack and Jill are identical but for a difference in their discount rates. In particular, Jack's discount rate is 20%, while Jill's discount rate is only 6%.
a. What is Jack's net present value of going to community college? (Remember, he must forgo earnings for the first two years.)
b. Will Jack go to community college?
c. What is Jill's net present value of going to community college? (Remember, she must forgo earnings for the first two years.)
d. Will Jill go to community college?
e. Describe intuitively how Jack and Jill probably differ in their current attitudes towards smoking cigarettes, committing crimes, and environmental sustainability. (Hint: consider only their discount rates.)
3. Harry is considering whether to enroll in a 1-year training program, which costs $20,000 in tuition, to learn how to design airport-screening equipment. He currently works as a technician, servicing airport-screening equipment that is designed by others. His current salary is $100,000 per year, but if he completes the training program, his salary will increase to $140,000 per year. Unfortunately, if he enrolls in the training program, he will not be able to work during its 1-year duration. Harry's discount rate is 8%. Harry suffers from a chronic condition, and given the current quality of medical care, he only expects to be capable of working for at most 3 more years. Hence, he can either work as a technician for 3 years, or alternatively, enroll in the training program and work as a designer for 2 more years afterwards.
a. What is Harry's net present value of the training program?
b. Will Harry enroll in the program? Now suppose that recent technological advancements in medical care permit Harry to be able to work for at most 5 more years. Hence, he can either work as a technician for 5 years, or alternatively, enroll in the 1-year training program and work as a designer for 4 years afterwards.
c. Given the recent advancement in medical care, what is Harry's net present value of the training program?
d. Now, will Harry enroll in the program?
e. In your own words, describe why access to high-quality medical care is important to human capital acquisition.