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Suppose two young people graduate from high school. One start
working immediately and earns $1500 per month. The other continues
his education for 7 years to train as a physician, costing him $18,000
per year. After graduation, the second student earns $5,000 per month
at his new job.

How long will it take the second student to make up the cost of his
education and surpass the rst student nancially?
After this calculation, explain why considering explicit costs alone is not
an accurate representation of the reality of economic costs.

Expert Answer
This solution was written by a subject matter expert. It's designed to help
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Step-by-step

1st step All steps Answer only

Step 1/2

To calculate the time, it will take for the second student to make up the
cost of his education and surpass the rst student nancially, we need
to consider the accumulated costs of education and compare it to the
additional earnings of the second student.

The cost of  education f or the second student is $18, 000 per year f or 7 years = $18,000 × 7

= $126,000

The rst student, who starts working immediately, does not incur any
additional education costs.

Now let's calculate the time it takes for the second student to surpass
the rst student nancially:

First student's cumulative earnings:

= $1,500 per month × 12 months

= $18, 000 per year

= $18,000 per year × 7 years (time taken by the second student to complete education)

= $126,000

Second student's additional earnings after graduation:

= $5,000 per month − $1,500 per month

= $3,500 per month

To calculate the time, it takes for the second student to surpass the rst
student nancially, we divide the accumulated education cost
($126,000) by the additional monthly earnings ($3,500) :

$126,000
=
$3,500

= 36 months

Explanation:
Therefore, it will take the second student 36 months, or 3 years,
to make up the cost of his education and surpass the rst
student nancially.

Step 2/2

Now let's consider explicit costs alone is not an accurate representation

of the reality of economic costs because - 

1. Opportunity Cost: By choosing to continue education for 7 years, the

second student foregoes or given up the opportunity to work and earn
a salary during that time. The explicit cost of education ($126,000)
does not account for this opportunity cost, which is the value of the
earnings given up. 

2. Time Value of Money: The time taken to complete education and the
subsequent delay in entering the workforce also have an economic
cost. The second student sacri ces potential earnings during those 7
years. The explicit cost calculation assumes that the value of money
remains constant over time, which is not the case. The present value of
future earnings is generally lower than the explicit cost of education. 

Final answer

It will take the second student 36 months, or 3 years, to make up the

cost of his education and surpass the rst student nancially.

Also, explicit costs alone do not provide a comprehensive

understanding of economic costs.

Opportunity costs, the time value of money, and other factors all have a
signi cant role in determining the true economic costs and bene ts of
different choices.

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Practice with similar questions

Q: Suppose two young people graduate from high school. One start
working immediately and earns $1500 per month. The other
continues his education for 7 years to train as a physician, costing
him $18,000 per year. After graduation, the second student earns
$5,000 per month at his new job. How long will it take the second
student to make up the cost of his education and surpass the rst
student nancially? After this calculation, explain why conside...

A: Step-by-step answer

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