Question

Assume that in country A college tuition is $10,000 per year, citizens save 5% of their income for retirement, and there is a mandatory retirement age of 60 years old. In country B, the tuition for college is $5,000 per year, citizens save 10% of their income for retirement, and there is no mandatory retirement age. According to human capital theory, in which country will citizens be more likely to go to college? Explain how the presented facts determined your response.

Answer 1

According to human capital theory , investing in education as a private investment choice, leads to increased lifetime earnings for those with more years of schooling. In country B citizens will be more likely to go to college, because the the tuition for college there is lower while savings are higher, and mandatory retirement age is not limited.