Question

You have finished college and have a BA in Economics. Congratulations! You already have a job lined up that pays $60,000 per year. You also have an admission offer from the MA program in Economics at BU. The MA program can be finished in 1 year and the program costs you $20,000 with a generous financial aid from the Economics department. After you graduate with an MA, your salary would increase to $100,000. The time point that you are thinking about is 5 years. Use this information to answer the questions that follow:

a) What is your direct cost and indirect cost of pursuing your MA, assuming a discount rate of 8%?

b) Would you work or pursue your MA if the discount rate is 8%? Use Present Value calculations

c) Would you work or pursue your MA if the discount rate is 1%? Use Present Value calculations

d) Compare your answers in (b) and (c). Why do you observe a difference and what does it imply?

e) In general, even though people get a bump in their salary with an MA, many people choose to just get a BA. Why? Explain in the context of the human capital model with as many reasons as you can think of.

Answer 1

A)direct cost is 1,00,000$actual program cost

Indirect cost $20000

If discount value is 8%then cost is 92,592.5 (100000/1+.08)

B) pv =fv /(1+r)n

Pv =present value

Fv=future value

R =rate of interest =8/100=.08

N =no of years

Pv=100000/(1+.08)5

100000/(1.08)5

68493. 15

Pursue MA

C) PV=FV/(1+r)n

=(100000/1+.01)5

=100000/(1.01) 5

=95,238.09

Persue MA

D) Observe a difference because of changing discounts rate percentage from 8to 1 .This implies that with the increase in discount rate decrease present value and if discount rate decrease present value increases

As per policy 4 parts is done