Question

Andrea is about to graduate high school and must decide whether she will go to college or go directly to the labor market. Her annual income will be $40, 000 with a highschool diploma, but this increases by $23,000 with a college diploma. If she decides to go to college, she has to attend school for one period and pay $16,000. Assume that Andrea lives for 4 periods and her discount rate is 12%.

1. What is Andrea's direct cost of attending college and her opportunity cost of doing so.
2. Will Andrea attend college?
3. Now, suppose Andrea receives a full scholarship that covers her tuition. Will her decision not to go to college change?
4. Since Andrea is receiving a full scholarship for her undergrad degree, she is now thinking about going to graduate school. If she decides to pursue her PhD, she must go to school in the first period for her undergrad at zero cost, and attend PhD in the second period, also with zero cost. With a PhD, Andrea can make $90,000 a year. Will Andrea pursue her PhD? (Hint: You only need to compare college and PhD payoffs.)

Answer 1

1. The direct cost of attending college for Andrea is $16,000 and the opportunity cost is $23,000. 2. Andrea will attend college because the additional income outweighs the direct cost. 3. If Andrea receives a full scholarship, the decision not to go to college may change, but the opportunity cost would still exist. 4. Andrea should pursue her PhD because the income with a PhD is higher.

Step-by-step explanation:

1. The direct cost of attending college for Andrea is the cost of tuition, which is $16,000. The opportunity cost of attending college is the lost income that Andrea would have earned if she had chosen to enter the labor market directly. This opportunity cost is the difference between the income she would earn with a high school diploma ($40,000) and the income she would earn with a college diploma ($63,000), which is $23,000.

2. To determine if Andrea will attend college, we need to compare the direct cost of attending college ($16,000) with the additional income she would earn with a college diploma ($23,000). Since the additional income outweighs the direct cost, it would be financially beneficial for Andrea to attend college.

3. If Andrea receives a full scholarship that covers her tuition, the direct cost of attending college would be zero. In this case, the decision not to go to college would change because the direct cost is no longer a factor. However, the opportunity cost would still be $23,000, as she would still be forgoing the additional income she could earn with a college diploma.

4. To determine if Andrea should pursue her PhD, we need to compare the income she would earn with just a college degree ($63,000) with the income she would earn with a PhD ($90,000). Since the income with a PhD is higher, it would be financially beneficial for Andrea to pursue her PhD.