ECON 306 Lecture Notes - Lecture 7: Marginal Cost, The Employer, Progressive Tax
24 May 2017
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Method b: compare the mc and the mb directly. If the net present value is 0, the extra cost of education is equal to the extra benefit of taking it. Pv of direct costs + pv of earnings forgone for ages 18-21 (4 years) The extra benefits is the increase in earnings for the subsequent eyears: Irr is the discount rate at which the net present value = 0. The return on our investment i that generates benefits is the internal rate of return for t-18 yh t+18)/(1+r)t. T 18(yu an extra year of education. You invest as long as the return is better than the rate of interest you can get from somewhere else, ie: You go untile the irr(i) = market rate (r) It does(cid:374)"t reall(cid:455) (cid:373)atter (cid:449)hether (cid:455)ou ha(cid:448)e to (cid:271)orro(cid:449) or (cid:374)ot to go to s(cid:272)hool. Shows that mb is decreasing with increased years in education: Because the annual increase in earnings gets smaller each year.
