Suppose the decision to acquire schooling depends on three factors-preferences (joy of learning), costs (monetary and psychic), and individual-specific returns to education.
(a) Explain how each of these factors affects one's optimal amount of schooling?
(b) Using these three factors, explain why someone who faces a very steep returns to education function may still opt to obtain very little schooling.
(c) Consider two groups of people - Alphas and Betas. The cost of schooling is the same for each. The average level of schooling and salary for Alpha types is 15 years and $120,000, while the average level of schooling and salary for Beta types is 13 years and $100,000. Why is it that 10%, which is calculated as ($120,000 - $100,000) / (15 - 13), is not a good estimate of the annual return to an additional year of education?
(d) Suppose you know that the actual annual rate of return on a year of education is 5% for both types. Given the numbers in part C, which type (Alphas or Betas) most likely receives more pure enjoyment from education?