Question

In providing for children, parents may consider how to best allocate resources. Suppose r_h is the rate of return on the next increment of human capital and r is the rate of return on saving. How does the relationship between r_h and r influence the decision of parents to either invest in their children’s education or provide monetary transfers to their children? Explain using an example.  

Answer 1

If Rh as rate of return on next increment of human capital, is higher than the r that is rate of return on savings, then parents would invest in children's education. In reverse case, when Rh is smaller than the R, then parents will save money and make monetary transfer to the their children.

For example, if parents identifies that their kids learning a skill going to pay hike in the job market, that will give a return of 15% upon the investment, but saving the same amount of money, will give a return of only 6%, then parents will go to spend money on skill development of their kids so that they will get superior return on their investment in human capital.