Week 9. Education and Skills

Week 9. Education and Skills

Due by 9:20 AM on Friday, Oct 23

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  1. An 30-year-old elementary school teacher earns $50,000 per year. He is deciding if he should go back to school to earn his Master’s degree, which is a two year degree. If he does not get his Masters, he will continue to earn $50,000 per year. If he does go for his Master’s, while he is in school he will have the opportunity to work part-time as a substitute teacher for $15,000 per year. Tuition is $12,000 per year. Once he gets his master’s degree, he will earn $60,000 per year. For simplicity, assume no raises.

You will absolutely need to use excel for this problem. Save the excel workbook and upload it with your answers.

  1. Suppose the interest rate is 3% and he is planning to work until he’s 65. (This means a 36 year time horizon, or t=0 to 35) . Write out the equation you will use to decide if he should go to graduate school.
  2. Now solve for that equation using excel. What is the lifetime net benefit of going to graduate school? Should he go to graduate school (assuming he is basing his decision purely on finances)?
  3. Above, we assumed no raises. Suppose without the masters degree, he will get a 1% raise every year. With the masters degree, he will get a 2% raise every year. (The $15,000 he earns as a sub while in school doesn’t change.) Now what is the lifetime net benefit of going to grad school?
  4. If the interest rate is higher than 3%, is graduate school more or less worth it? Why?
  5. If he is 45 when he considers the masters degree instead of 30 (but he still expects to retire at 65), is the masters degree more or less worth it? Why?
  1. Do you think this is a realistic model of how people make educational decisions? Why or why not?
  2. In your team, discuss the various education and on-the-job training you have received. Give an example of general human capital, firm specific human capital, and partial firm specific human capital. Explain your reasoning.


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