Human Capital
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1. (Question 5.5-ish) Theodore is considering a 1-year training pro-
gram, which charges $40,000 in tuition, to learn how to install
airport-screening equipment. If he enrolls in the program, his op-
portunity cost in forgone income is the $100,000 per year he can
now earn. After completing the program, he is promised a job
for 7 years with a yearly salary of $135,000. Assume Theodor's
discount rate is 5%. Should Theodore enroll in the program?
Why? (Show your calculations).
2. During the 1980's, the return to a college degree increased a lot
while college enrollment remained steady. During the 1990's the
return to a college degree leveled out - it stopped increasing but
did not decrease - while college enrollment increased by a lot. Use
the signaling model to explain the observed patterns in the data.
A graph may be helpful, but it isn't necessary.
3. (The writing assignment question) Evaluate the following state-
ment: along with the other assumptions of the signaling model,
for a B.A. to be a good signal of worker productivity, college must
be free to all." In the process of answering, be sure to address
why it is typically claimed that educational attainment (e.g. get-
ting a B.A.) is a good signal of productivity. Then, consider how
paying for college does or does not interfere with the `quality' of
the signal.
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