Problem sets:

Human Capital investment

1. Suppose you are offered $100 now or $125 in five years. Let the interest rate be 4 percent. Calculate the
present value of the $125 option. Which option should you take if your goal is to choose the option with the
larger present value?
2. Prepaid college tuition plans, also known as Prepaid Education Arrangements (PEAs), allow you to prepay
college tuition at present-day prices. The value of the investment is guaranteed by the state to cover public
college tuition, regardless of its future cost. You are considering the purchase of an education certificate for
$25,000, which will cover the future tuition costs of your 8-year-old daughter. You expect the tuition costs
of your daughter’s bachelor’s degree to total $50,000 in 10 years. What would your personal discount rate
need to be in order for it to be worthwhile for you to make the investment and purchase the certificate?

3. Theodore is considering a 1-year training program, which charges $20,000 in tuition, to learn how to install
airport-screening equipment. If he enrolls in the program, his opportunity cost in forgone income is the
$100,000 per year he can now earn. After completing the program, he is promised a job for 5 years, with a
yearly salary of $130,000. (After 5 years, the equipment is expected to be obsolete, but Theodore plans to
retire at that time anyway.) Assume Theodore’s personal discount rate is 5 percent. Should Theodore enroll
in the program? Why? (Show your calculations.)

Migration
1. Clare lives in France and earns $30,000 per year at her job. She is considering a job offer in the United
States, which would give her a salary of $32,000 per year for the next 4 years, after which she will return to
France and start her university education. Moving costs (to the United States and back) would be $6,000,
living expenses are similar in both places, and her personal discount rate is 6 percent. If she moved to the
United States for this 4-year experience, what is the present
value of her net gain or loss?
2. The following table summarizes the market for labor in an occupation. “Demand” is the number (in
thousands) of employees firms would be interested in hiring at particular wages. “Domestic supply” is the
number (in thousands) of native workers who are interested in working in the occupation at particular
wages, and “immigrant supply” is the number (in thousands) of immigrants who are interested in working
at particular wages.
a. Graph the following curves for this labor market: demand for labor, domestic supply, and total supply of
workers.
b. What is the equilibrium wage rate before immigration? How many workers would be hired?
c. What is the equilibrium wage rate after immigration? How many workers would be hired? How many
domestic workers would be hired? How many immigrant workers would be hired
d. Comparing your answers in parts band c, has immigration caused a change in the number of domestic
workers hired? What was the change, if any? Why did the change, if any, occur?