Logan is about to decide which career path to pursue. She has narrowed her optio

Question

Logan is about to decide which career path to pursue. She has narrowed her options to two
alternatives, mechanical engineer or economist. Assume she lives for two periods. In the rst, she
gets an education. In the second, she works in the labor market. If Logan becomes an economist,
she will spend $12,000 on tuition and 3,000 on books in the rst period and earn $472,000 in
the second period. If she becomes a mechanical engineer, she will spend $37,000 on tuition and
3,000 on books in the rst period and then earn $500,000 in the second period. Assume Logan
must borrow enough money to pay for tuition and books, she can borrow money at a 5% rate per
period and her discount rate is also 5% per period.

What are the direct, and indirect costs of education faced by Logan? Discuss in general and
give her specific costs from this example.

What is the net present value of Logan's earnings as an economist, and as an engineer?

What is the net present value of Logan's earnings as an economist, and as an engineer?

Explanation / Answer

The direct costs of education by Logan are: Tution fees, books etc. From society's perspective, the direct costs of education include the salaries of teachers and the cost of the physical resources (books, materials, rental value of buildings and equipment, etc) used in the education process. From the individual's perspective, the direct costs are the fees students actually pay, plus other out-of-pocket expenses for books, transportation, school uniforms, etc.

Indirect cost of education faced by Logan is the earnings foregone.

Indirect costs of education are also called opportunity costs. Indirect costs are the value of the student

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