Question

5. Doogie lives for four periods. He has just completed the first period of his life (by getting his high school diploma). Doogie is trying to decide on his future career path. He’s very good at opening things up and fixing them, so he has narrowed his options to two possible paths. He will either become an auto mechanic or a brain surgeon. •If Doogie becomes an auto mechanic, he will earn $25,000 as an apprentice in period 2, $50,000 as a solo mechanic in period 3, and $75,000 as a master mechanic (with apprentice) in period 4. •If Doogie becomes a brain surgeon, he will pay $50,000 to attend college in period 2, another $75,000 to attend medical school in period 3, and will earn $300,000 in period 4. Doogie must make all tuition payments at the beginning of each period, he is paid at the end of every period, and he can borrow and lend at a rate of 8% per period.

c. How would your answer change if Doogie could work for an additional 10 periods after period 4? How would your answer change if the discount rate decreased? (Answer intuitively in terms of whether the surgery track becomes relatively more or less attractive).

d. The actual lifetime earnings of brain surgeons are much higher than those of auto mechanics, yet we observe that the number of auto mechanics is much greater than the number of brain surgeons. How can the human capital model explain these patterns?

Answer 1

c) If Doogie could work for an additional 10 periods after period 4, the surgery path becomes more attractive since it has greater returns in the long run even though the initial investment is rather high. If the discount rate decreased, he would have to pay lesser interest on loans and hence the surgery path becomes more attractive.

d) Since the initial investment is really high and the discount rate on such loans is seldom low, not everyone can invest in becoming a brain surgeon. The return from investment from becoming a brain surgeon starts after a few periods, and is much higher in the later periods. Most people however, think short term and therefore compare the initial higher investment in becoming a brain surgeon to the no cost investment in becoming an auto mechanic.  

Also, brain surgeons have a higher amount invested in their skills whereas auto mechanics do not.