As you know, getting an education can be an expensive proposition.
That's especially true for anyone who needs to spend years at university,
like economists do.
How does someone figure out if something is worth
spending the money on? Well, an economist would compare the thing's cost with
the thing's benefit. This is called a "cost-benefit analysis."
Below
is an excerpt from an introductory economics text. It is a cost-benefit analysis
on going to college!
Read the excerpt. Ask yourself what you would
do in the same situation and why. Would your answer be different if you were
unemployed? Explain your reasons using economic and non-economic terms.
"Suppose
you are currently employed at $25,000 per year. You expect your income to
grow by a couple thousand dollars a year, but the prospects of moving ahead
rapidly are limited. You have looked into going to business school for a master's
of business administration degree (MBA). Tuition plus books are $6,000 per
year for each of the two years it will take to earn the degree.
"Because
you will have to be away, the estimated cost of board and other incidentals
is $12,000 per year -- which is about what you currently spend on rent, food
and so on. Finally, let us suppose you have learned that with the MBA from
the good business school you are considering you can expect to start working
at a salary that should be at least $5,000 per year higher than what you would
be earning if you stayed in your current job.
"The non-economist is
likely to reason like this: The cost of the two-year MBA is $12,000 for tuition,
plus $24,000 for living expenses. The benefits are at least $5,000 per year
for, let us say, 40 years. The cost is therefore $36,000 and the benefit at
least $200,000. There is little doubt that the MBA is a good idea.
"The
economist thinks very differently. To begin with, the cost of the MBA is not
$12,000 tuition plus $24,000 living expenses. The tuition is actually $6,000
plus the present value of $6,000 in a year's time, the latter being worth
$5,455 if we stick with a 10 percent discount rate. Therefore, the present
value of tuition is $11,455. But what about the living expenses? The economist
reasons that living expenses are incurred whether you go to business school
or not. They do not, therefore, represent a cost of going for the MBA and
should not be included in the calculation of the cost.
"This does not
mean the economist considers the total cost of the MBA as $11,455 -- far from
it. The economist recognizes another important cost of being in school. This
is the opportunity cost resulting from leaving your job. By being at school
you give up $25,000 in the initial year and an estimated $27,000 in the second
year. This is definitely a cost of getting a degree, because if you didn't
go to school it wouldn't be borne.
"The economist reasons that the
costs to which we should compare the benefits of an MBA are $11,545 for tuition,
plus the opportunity cost of foregone income. The latter is $25,000 plus the
present value of $27,000 which is $24,545, providing an opportunity cost of
$49,545. When added to the tuition, the total present costs of getting the
degree is $61,090. This is a lot more than the cost that most non-economists
would associate with the degree.
"The extra income we expect from the
MBA is a steady $5,000. We can say that the benefit is the present value of
a steady $5,000 per year for, say, 40 years. However, as you must wait two
years for this, the value is a little lower than $5,000 extra per year starting
immediately. For this calculation, the economist can look at a present value
table or make a quick calculation. The present value of $5,000 per year for
40 years starting in two years' time and discounted at 10 percent is $40,410.
If this seems rather small, recall that as we look at the value of amounts
further and further into the future these values fall off quickly, and that
$5,000 per year projected well into the future has very little present value.
The economist finds a cost of about $60,000 and a benefit of $40,000 for an
MBA."
Source: Thinking Economically, by Maurice Levi
Now,
write your paragraphs. Given the above analysis, would you go to school for
the MBA or not? Why? If you lost your job, would you change your mind?