Week 1 Investing in Education :

Question 1

What is Marginal analysis ?

Answer 1

only costs / benefits related to the choice should be considered

Question 2

What is Discounting ?

Answer 2

Costs are usually immediate, gains occur further in the future
Future values / Present values can’t be compared due to time preference
Some are more future orientated rather than present orientated

PV = FV / 1 + r (r = discount rate)
PV = Present value
FV = Future value

Question 3

How do you see if a degree is worth it ? (formula)

Answer 3

Discount MB and MC to see the net present value
NPV = MB - MC and see if its positive
solve for the investments (internal) rate of return to see if its larger than the discount
Then MRR = increase in earnings / cost of another year schooling
MRR - declines as a person gets more schooling

Question 4

Cost benefit analysis formula ?

Answer 4

Net benefit = Benefit - Costs

If there are more benefits than costs we are more likely to carry out this behaviour

Question 5

What is Signalling ?

Answer 5

People are different in terms of innate ability to potential employers.

Question 6

Why is there a graduate wage premium ?

Answer 6

Uni teaches skills which raise productivity.
Employers value these skills
students invest in learning the skills