Claire lives for four periods. She just finished the first period of her life (by getting a

high school diploma). In period two, shes now deciding what to do for a career. Claire is really

good at opening things up and fixing them, so shes deciding between becoming an auto

mechanic or a brain surgeon.

As a mechanic, she would earn $25,000 during an apprenticeship in period 2, $50,000 as

a solo mechanic in period 3, and $75,000 as a master mechanic in period 4.

As a brain surgeon, she would pay $50,000 to attend college in period 2, pay another

$75,000 to attend medical school in period 3, and will earn $300,000 in period 4 finally

working as a surgeon.

Tuition payments would occur at the beginning of each period; money earned will be paid out at

the end of every period; she can borrow and lend at a rate of 8% per period.

a. What are the present discounted values (PDV) of Claires two career paths? Which path

should she choose if she wants to maximize the PDV of lifetime earnings?

b. Would her choice change if she was making the decision at birth? Explain.

c. Would her choice change if she started life with a trust fund of $1 million? Explain.

d. How would the answer change if she could work for 10 periods after period 4? Explain.

e. How would the answer change if the discount rate decreased?

f. The actual lifetime earnings of brain surgeons is way higher than that of mechanics, but

we see a much higher number of people working as mechanics than as brain surgeons.

How can the human capital model explain these patterns?