Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 13: Problem 14

State whether each of the following, with no other change, would increase or decrease the economic attractiveness of going to college, and give a brief explanation for each. a. A decrease in estimated working life. b. An increase in the earnings of the average high school student. c. Permanently higher interest rates in the economy.

Short Answer

Expert verified
a. A decrease in estimated working life would likely decrease the attractiveness of going to college. b. An increase in the earnings of an average high school student would likely decrease the economic attractiveness of going to college. c. Permanently higher interest rates in the economy would likely reduce the attractiveness of attending college as it would make student loans more expensive.

Step by step solution

01

Analysis of Decrease in Estimated Working Life

A decrease in estimated working life would reduce the time one would be earning a potentially higher income after earning a college degree. So, this is likely to decrease the attractiveness of going to college. The rationale is that longer working life implies more years to recoup the investment in college education through higher earnings.
02

Analysis of Increase in Average High School Student Earnings

If the earnings potential for high school students increases, it may negate some of the perceived income benefit of going to college. Thus, an increase in such potential income could decrease the attractiveness of going to college, as one could opt to start earning immediately rather than investing time and money in college education.
03

Analysis of Higher Interest Rates

Higher interest rates would increase the cost of any student loans taken to finance a college education. This means repayment of student loans would be more expensive in the future. This extra cost could reduce the net economic benefit of the degree, therefore, making college less attractive. The rationale is that student loans are usually repaid over a longer period, and higher interest rates signify higher costs of borrowing in the future.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Your inventory manager has asked you to approve the purchase of a new inventory control software package. The software will cost \(\$ 200,000\) and will last for four years, after which it will become obsolete. If you do not approve this purchase, your company will have to hire two new inventory clerks, paying each \(\$ 30,000\) per year. Answer the following questions: a. Should you approve the purchase of the inventory control software if the relevant annual interest rate is 7 percent? b. Would your answer to part (a) change if the annual interest rate is 9 percent? Explain. c. Would your answer to part (a) change if the software cost \(\$ 220,000 ?\) Explain. d. Would your answer to part (a) change if the software would not become obsolete until the last day of its sixth year?

Suppose that people are sure that a firm will earn annual profit of \(\$ 10\) per share forever. If the interest rate is 10 percent, how much will people pay for a share of this firm's stock? Suppose that people become uncertain about future profit. What would happen to the price they would be willing to pay? (Your answer will be descriptive only.)

In the market for Amazon.com stock, explain how each of the following events, ceteris paribus, would affect the demand curve for the stock and the stock's price. a. The interest rate on U.S. government bonds rises. b. People expect the interest rate on U.S. government bonds to rise, but it hasn't yet risen. c. Google announces that it will soon start competing with Amazon in the market for books, DVDs, and everything else that Amazon sells.

Suppose a risk-free bond has a face value of \(\$ 100,000\) with a maturity date three years from now. The bond also gives coupon payments of \(\$ 5,000\) at the end of each of the next three years. What will this bond sell for if the annual interest rate for risk-free lending in the economy is a. 5 percent? b. 10 percent?

Suppose a risk-free bond has a face value of \(\$ 250,000\) with a maturity date four years from now. The bond also gives coupon payments of \(\$ 8,000\) at the end of each of the next four years. a. What will this bond sell for if the risk-free lending rate in the economy is 4 percent? b. What will this bond sell for if the risk-free lending rate is 5 percent? c. What is the relationship between the bond's price and the level of interest rates in the economy in this exercise?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free