Problem #3: Benefits of Schooling
Andrea is about to graduate high school and must decide whether she will go to college or go directly to the labor market. Her annual income will be $38, 000 with a highschool diploma, but this increases by $17, 000 with a college diploma. If she decides to go to college, she has to attend school for one period and pay $10,000. Assume that Andrea lives for 4 periods and her discount rate is 15%. 1. What is Andrea’s direct cost of attending college and her opportunity cost of doing so. 2. Will Andrea attend college? 3. Now, suppose Andrea receives a full scholarship that covers her tuition. Will her decision not to go to college change? 4. Since Andrea is receiving a full scholarship fo her undergrad degree, she is now thinking about going to graduate school. If she decides to pursue her PhD, she must go to school in the first period for her undergrad at zero cost, and attend PhD in the second period, also with zero cost. With a PhD, Andrea can make $90, 000 a year. Will Andrea pursue her PhD? (Hint: You only need to compare college and PhD payoffs.)
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