Answer to Question #233366 in Civil and Environmental Engineering for Adeel

Question

Suppose that it costs $40,000/yr to get an MBA degree and that non MBAs expect to earn $60,000/yr while MBAs earn $80,000/yr. Assuming an MBA takes two years to finish and that all other costs are negligible, are wages and tuitions in equilibrium (i.e. would your average person strictly prefer one activity (getting an MBA) over another activity (not getting an MBA?). If not, how will markets adjust?

Answer 1

If we were to calculate the opportunity of getting an MBA, we would include two years worth of tuition as well as two years of lost wages. If we assume that the value of your time is $60,000 per year (Non MBA salary), your total opportunity cost would be $200,000. Therefore, the $20,000 per year extra that an MBA earns would be a 10% return. If that makes a MBA strictly preferred, everyone would go back to school. With a shortage of Non- MBAs. The non-MBA salaries would rise, when the new MBAs hit the market, MBA salaries should fall and with higher demand for business school, tuitions should rise. This would lower the return to an MBA.