1. In the context of investments in human capital, perfect capital markets imply

Question

1. In the context of investments in human capital, perfect capital markets imply all of the following, except that:

a. An individual weighs the costs against the benefits based on certain ways of calcuating them.  

b. An individual can base his/her human capital decision on total lifetime income.

c. An individual faces no liquidity constraints as they can borrow against expected future income.

d. An individual makes an investment decision based on his/her current income.

2. The decision to invest in human capital does not involve which of the following?

a. The costs of tuition and books

b. Forgone earnings

c. Projected earnings

d. None of the choices are correct.

3. The rule for optimal human capital investment is that:

a. the individual should increase years of education until the discounted present value of the benefits of an additional year of education equals the discounted present value of the additional costs.

b. the individual should increase years of education until the discounted present value of the benefits of an additional year of education is less than the discounted present value of the additional costs.

c. the individual should increase years of education until the discounted present value of the benefits of an additional year of education is greater than the discounted present value of the additional costs.

d. the individual should increase years of education until the discounted present value of the benefits of all of the years of education equals the discounted present value of all of the associated costs.

Explanation / Answer

1. The correct answer is: D)

Reason: the first three options are valid while making decisions on human capital. The option D is not correct while making Human Capital decision as the lifetime income is considered rather than only the current income

2. The correct answer is: D)

Reason: All the first three choices are an important variable while deciding to invest in human capital. Thus, the correct answer here is D).

3. The correct answer is: a)

Reason: it is a trivial microeconomic principle that at equilibrium, the marginal gain from an investment must be equal to the marginal loss. Thus, while deciding to invest in human capital, the marginal gain I.e the discounted present value of the benefits of an additional year of education must equals the marginal cost i.e. discounted present value of the additional costs.

Thanks!

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