TBChap 006

Chapter 06
Human Capital
Multiple Choice Questions
1.
In 2013, approximately what percent of adults in the United States had not graduated from high school?
A.
2%
B.
5%
C.
10%
D.
15%
E.
20%
6-1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2.
In 2013, approximately what percent of adults in the United States had received more education than a high
school degree?
A.
15%
B.
25%
C.
35%
D.
60%
E.
90%
3.
Which group of workers tends to have the highest unemployment rate among high school dropouts?
A. Men
B. Women
C. Blacks
D. Hispanics
E. Whites
6-2
4.
Labor force participation rates tend to
A.
increase with education level for both men and women.
B.
decrease with education level for both men and women.
C.
decrease with education level for men but increase with education level for women.
D.
be unrelated to education level for both men and women.
E.
be unrelated to education level for men but increase with education level for women.
5. Present value calculations allow one to determine
A. the return to an uncertain asset.

B. the present-day costs and/or benefits of various options.
C. the utility value of a particular option.
D. the social cost of financial calculations.
E. the real wage.
6. Paula is considering going to law school. If she does, she will spend $60,000 on tuition and books to get a
college education (during the first time period), $120,000 on tuition and books to get a law degree (during
the second time period), and her law degree will earn her $620,000 during the remainder of her work-life
(during the third time period). Paula's time preference for money is associated with a per-period interest
rate of 20 percent. Approximately what is Paula's present value of obtaining a law degree?
A. $100,100
B. $210,400
C. $270,500
D. $440,000
E. $621,900
6-3
7. The wage-schooling locus is
A. downward sloping because education is generally productive.

B. upward sloping because education is generally productive.
C. backward bending.
D. horizontal because wages are unrelated to schooling.
E. vertical because education is a public good.
8. The slope of the wage-schooling locus provides an estimate of
A. the average years of education as a function of age.

B. the average wage or salary of workers for a given level of schooling.
C. the economic return to an additional year of schooling.
D. the economic cost of an additional year of schooling.
E. the marginal cost of an additional year of schooling.
9. What does not enter into the present value calculation of a college degree?
A. The cost of college tuition.

B. The cost of books.
C. Wages of college graduates.
D. Lifetime wages of non-college graduates.
E. The value of one's scholarships.
10. What is the stopping rule for choosing one's years of schooling?
A. End one's schooling when the return from more schooling is zero.
B. End one's schooling when the cost of one more year of schooling is zero.
C. End one's schooling after college.
D. End one's schooling when the rate of return to one more year of schooling equals the worker's rate of
discount.
E. End one's schooling when the worker's rate of discount equals zero.
11. Why do workers typically pursue their education while young?
A. Because there is more time to benefit from the higher wages that are typically associated with more
education.
B. Because all of their friends pursue education while young.
C. Because living expenses are low for a younger person.
D. Because parents force their children to attend college immediately after high school.
E. Because they are more likely to receive a scholarship.
6-4
12. Which statement about human capital is false?
A. Human capital gives firms a way to differentiate between workers.

B. Workers accumulate human capital during formal education and through life experiences.
C. There is more human capital in the U.S. now than there was 100 years ago.
D. Human capital has a low rate of return.
E. Human capital tends to be an important determinant of one's wages.
13. What is implied when the wage-schooling profile is drawn as a concave (i.e., increasing at a decreasing
rate) function?
A. The marginal return to schooling increases as years of schooling increases.

B. The marginal return to schooling is positive but falling as years of schooling increases.
C. Average wages fall as years of schooling increases.
D. The cost of schooling increases, but at a decreasing rate.
E. The cost of schooling decreases, but at an increasing rate.
14. People decide how much schooling to receive based on:
A. Their discount rate.

B. The marginal rate of return to schooling.
C. The present value of expected future earnings.
D. Their ability to succeed in education programs.
E. All of the above factors influence how much schooling one receives.
15. Suppose all 18-year-olds are identical in every way except that some have easy access to credit (i.e., they
face a low interest rate when borrowing money) while others have a difficult time accessing credit (i.e.,
they face a high interest rate when borrowing money). Which of the following statements is not true?
A. Those who have easy access to credit have a lower rate of discount than those who do not have easy
access to credit.
B. Those who have easy access to credit will be more likely to go to college than those who do not have
easy access to credit.
C. The present value calculation of college will be higher for those who have easy access to credit than for
those who do not have easy access to credit.
D. Some people who have easy access to credit will not go to college.
E. No one without easy access to credit will go to college.
16. Selection bias is a problem when trying to estimate the return to education in a standard human capital
model. In this context, what does selection bias refer to?
A. Having a non-random data sample.

B. Workers self-select education levels and jobs based on their abilities and preferences.
C. Colleges select who they are willing to accept.
D. The wage-schooling locus does not have a constant slope.
E. The wage-schooling locus is estimated to have a negative slope.
6-5
17. If ability is positively related to schooling, then estimating the returns to education directly from the wage-
schooling profile will likely
A. under-estimate the return to schooling.

B. over-estimate the return to schooling.
C. under-estimate the average wage.
D. over-estimate the average wage.
E. under-estimate the average discount rate.
18. Which of the following reasons is not a likely explanation as to why college completion rates are greater,
on average, for whites than for blacks?
A. Tuition costs are lower for whites than blacks.

B. Whites have access to more financial capital to pay for college than blacks.
C. Post-college wages are higher for whites than for blacks.
D. Whites have greater access to higher quality public education at the elementary and secondary level.
E. Whites are more able to postpone earnings at age 18 than are blacks.
19. Why might people choose to go to college?
A. Because a college education signals to firms that the worker is highly motivated.
B. Because a college education increases one's productivity, which will be rewarded in the labor market
with higher wages.
C. Because someone enjoys the process of becoming educated.
D. Because one cannot find employment.
E.
All of the above.
20. In order to use schooling as a signal:
A. The signal must be more costly for low-skilled workers than for high-skilled workers.
B. The cost of purchasing the signal must not be so costly that high-skilled workers don't value obtaining it.
C. Firms must be able to easily verify each worker's amount of schooling.
D. Some people must choose to not complete schooling.
E.
All of the above are required for schooling to serve as a signal.
6-6
21. Suppose 40 percent of all potential workers are highly skilled and contribute $50,000 to the firm each year.
The remaining 60 percent of potential workers are less skilled and contribute only $30,000 to the firm each
year. When schooling is not used as a signaling device, how much is the firm willing to pay a worker
chosen at random?
A. $30,000
B. $34,000
C. $38,000
D. $42,000
E. $50,000
22. Suppose 40 percent of all potential workers are highly skilled and contribute $50,000 to the firm each year.
The remaining 60 percent of potential workers are less-skilled and contribute only $30,000 to the firm each
year. Schooling costs a highly skilled worker y per year, while it costs a less-skilled worker 2y per year.
What range of y will support a signaling equilibrium?
A. $0 < y < $50,000

B. $5,000 < y < $10,000
C. $5,000 < y < $20,000
D. $10,000 < y < $20,000
E. $20,000 < y < $50,000
23.
The data suggest that wages increase more with age for the highly educated compared to the less educated.
This is evidence that
A.
the return to education is low for all education levels.
B.
the return to education is constant with respect to age.
C.
on-the-job training is unrelated to the level of formal schooling.
D.
less-educated workers invest in on-the-job training more so than do the highly educated.
E.
highly educated people also invest more in post-schooling human capital compared to the less educated.
6-7
24. What is an example of specific job training?
A. Learning word-processing skills.

B. Learning how to use the firm's payroll system.
C. Obtaining a GED.
D. Becoming stronger.
E. Passing the CPA exam.
25. What is an example of general job training?
A. Learning how to use a forklift.

B. Learning how to weld.
C. Reading a book on techniques for managing large groups of workers involved on team projects.
D. Attending an industry convention on "best practices."
E.
All of the above.
26. Why is it that a firm will typically not pay for general training?
A. General training is free.

B.
General training is too expensive.
C. The benefits of general training depreciate quickly.

D.
General training usually doesn't increase worker productivity.
E. The skills gained from the general training are transferable to other firms.
27. Temporary layoffs are common in the United States especially among workers who are heavily invested
with specific training. Why?
A. Specific training deteriorates quickly, so a laid-off worker with specific training is not valuable to any
firm.
B. The laid-off worker with specific training is more valuable to the firm that laid her off than she is to any
other firm. Thus, it is in the worker's best interest to remain unemployed until recalled to work at her
original firm.
C. Workers without specific training are never hired in the first place.
D. Workers with specific training know they don't need to work hard when employed.
E. Unemployment benefits are tied to specific training.
6-8
28. Suppose Amy has 100 efficiency units of labor; Bill has 50 efficiency units of labor; and Chris has 20
efficiency units of labor. Which of the following is true?
A. A firm will always hire Amy over Chris, regardless of wages.

B. A firm will hire Amy if her wage is at least twice that of Bill's and at least five times that of Chris's.
C. A firm will hire Amy if her wage is at most double that of Bill's and at most five times that of Chris's.
D.
A firm will never hire Bill, regardless of wages.
E.
A firm will never hire Chris, regardless of wages.
29. The Mincer earnings function is used to estimate
A. ability bias.
B. the signaling effect.
C. the social return to schooling.
D. the value of the marginal product of labor.
E. the age earnings profile.
30.
What is the main selection issue researchers must address when trying to estimate the effectiveness of
government training programs?
A.
The true cost of government training programs is unknown because unemployed workers also receive
welfare benefits.
B.
The most motivated unemployed workers are the ones who are also most likely to take advantage of
government training programs.
C.
Government training programs are usually geared toward developing general skills rather than providing
specific job training.
D.
Most government training programs are only offered to the unemployed and not to workers who would
like to switch jobs.
E.
Evaluation schemes tend to lose track of participants once they start a new job after the training.
6-9
Chapter 06 Human Capital Answer Key
Multiple Choice Questions
1.
In 2013, approximately what percent of adults in the United States had not graduated from high school?
A.
2%
B.
5%
C.
10%
D.
15%
E.
20%
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Topic: Education in the Labor Market: Some Stylized Facts
6-10
2.
In 2013, approximately what percent of adults in the United States had received more education than a
high school degree?
A.
15%
B.
25%
C.
35%
D.
60%
E.
90%

Blooms: Remember
Difficulty: 01 Easy
3.
Which group of workers tends to have the highest unemployment rate among high school dropouts?
A. Men
B. Women
C. Blacks
D. Hispanics
E. Whites

Blooms: Remember
Difficulty: 01 Easy
6-11
4.
Labor force participation rates tend to
A.
increase with education level for both men and women.
B.
decrease with education level for both men and women.
C.
decrease with education level for men but increase with education level for women.
D.
be unrelated to education level for both men and women.
E.
be unrelated to education level for men but increase with education level for women.

Blooms: Remember
Difficulty: 01 Easy
5. Present value calculations allow one to determine
A. the return to an uncertain asset.

B. the present-day costs and/or benefits of various options.
C. the utility value of a particular option.
D. the social cost of financial calculations.
E. the real wage.

Blooms: Remember
Difficulty: 01 Easy
Topic: Present Value
6-12
6. Paula is considering going to law school. If she does, she will spend $60,000 on tuition and books to get
a college education (during the first time period), $120,000 on tuition and books to get a law degree
(during the second time period), and her law degree will earn her $620,000 during the remainder of her
work-life (during the third time period). Paula's time preference for money is associated with a per-
period interest rate of 20 percent. Approximately what is Paula's present value of obtaining a law
degree?
A. $100,100
B. $210,400
C. $270,500
D. $440,000
E. $621,900
AACSB: Analyze
Blooms: Apply
Difficulty: 03 Hard
Topic: Present Value
7. The wage-schooling locus is
A. downward sloping because education is generally productive.

B. upward sloping because education is generally productive.
C. backward bending.
D. horizontal because wages are unrelated to schooling.
E. vertical because education is a public good.

Blooms: Remember
Difficulty: 01 Easy
Topic: The Schooling Model
8. The slope of the wage-schooling locus provides an estimate of
A. the average years of education as a function of age.

B. the average wage or salary of workers for a given level of schooling.
C. the economic return to an additional year of schooling.
D. the economic cost of an additional year of schooling.
E. the marginal cost of an additional year of schooling.

Blooms: Remember
Difficulty: 01 Easy
6-13
9. What does not enter into the present value calculation of a college degree?
A. The cost of college tuition.

B. The cost of books.
C. Wages of college graduates.
D. Lifetime wages of non-college graduates.
E. The value of one's scholarships.

Blooms: Remember
Difficulty: 01 Easy
10. What is the stopping rule for choosing one's years of schooling?
A. End one's schooling when the return from more schooling is zero.
B. End one's schooling when the cost of one more year of schooling is zero.
C. End one's schooling after college.
D. End one's schooling when the rate of return to one more year of schooling equals the worker's rate
of discount.
E. End one's schooling when the worker's rate of discount equals zero.

Blooms: Remember
Difficulty: 01 Easy
11. Why do workers typically pursue their education while young?
A. Because there is more time to benefit from the higher wages that are typically associated with more
education.
B. Because all of their friends pursue education while young.
C. Because living expenses are low for a younger person.
D. Because parents force their children to attend college immediately after high school.
E. Because they are more likely to receive a scholarship.

Blooms: Remember
Difficulty: 01 Easy
12. Which statement about human capital is false?
A. Human capital gives firms a way to differentiate between workers.

B. Workers accumulate human capital during formal education and through life experiences.
C. There is more human capital in the U.S. now than there was 100 years ago.
D. Human capital has a low rate of return.
E. Human capital tends to be an important determinant of one's wages.
6-14
Blooms: Remember
Difficulty: 01 Easy
13. What is implied when the wage-schooling profile is drawn as a concave (i.e., increasing at a decreasing
rate) function?
A. The marginal return to schooling increases as years of schooling increases.

B. The marginal return to schooling is positive but falling as years of schooling increases.
C. Average wages fall as years of schooling increases.
D. The cost of schooling increases, but at a decreasing rate.
E. The cost of schooling decreases, but at an increasing rate.

Blooms: Understand
Difficulty: 02 Medium
14. People decide how much schooling to receive based on:
A. Their discount rate.

B. The marginal rate of return to schooling.
C. The present value of expected future earnings.
D. Their ability to succeed in education programs.
E. All of the above factors influence how much schooling one receives.

Blooms: Understand
15. Suppose all 18-year-olds are identical in every way except that some have easy access to credit (i.e.,
they face a low interest rate when borrowing money) while others have a difficult time accessing credit
(i.e., they face a high interest rate when borrowing money). Which of the following statements is not
true?
A. Those who have easy access to credit have a lower rate of discount than those who do not have easy
access to credit.
B. Those who have easy access to credit will be more likely to go to college than those who do not
have easy access to credit.
C. The present value calculation of college will be higher for those who have easy access to credit than
for those who do not have easy access to credit.
D. Some people who have easy access to credit will not go to college.
E. No one without easy access to credit will go to college.

Blooms: Understand
6-15
16. Selection bias is a problem when trying to estimate the return to education in a standard human capital
model. In this context, what does selection bias refer to?
A. Having a non-random data sample.

B. Workers self-select education levels and jobs based on their abilities and preferences.
C. Colleges select who they are willing to accept.
D. The wage-schooling locus does not have a constant slope.
E. The wage-schooling locus is estimated to have a negative slope.

Blooms: Understand
Topic: Education and Earnings
17. If ability is positively related to schooling, then estimating the returns to education directly from the
wage-schooling profile will likely
A. under-estimate the return to schooling.

B. over-estimate the return to schooling.
C. under-estimate the average wage.
D. over-estimate the average wage.
E. under-estimate the average discount rate.

Blooms: Understand
Topic: Estimating the Rate of Return to Schooling
18. Which of the following reasons is not a likely explanation as to why college completion rates are
greater, on average, for whites than for blacks?
A. Tuition costs are lower for whites than blacks.

B. Whites have access to more financial capital to pay for college than blacks.
C. Post-college wages are higher for whites than for blacks.
D. Whites have greater access to higher quality public education at the elementary and secondary level.
E. Whites are more able to postpone earnings at age 18 than are blacks.
AACSB: Analytical Thinking

Blooms: Analyze
Difficulty: 03 Hard
Topic: Policy Application: School Quality and Earnings
6-16
19. Why might people choose to go to college?
A. Because a college education signals to firms that the worker is highly motivated.
B. Because a college education increases one's productivity, which will be rewarded in the labor
market with higher wages.
C. Because someone enjoys the process of becoming educated.
D. Because one cannot find employment.
E.
All of the above.

Blooms: Understand
Topic: Schooling as a Signal
20. In order to use schooling as a signal:
A. The signal must be more costly for low-skilled workers than for high-skilled workers.
B. The cost of purchasing the signal must not be so costly that high-skilled workers don't value
obtaining it.
C. Firms must be able to easily verify each worker's amount of schooling.
D. Some people must choose to not complete schooling.
E.
All of the above are required for schooling to serve as a signal.

Blooms: Understand
21. Suppose 40 percent of all potential workers are highly skilled and contribute $50,000 to the firm each
year. The remaining 60 percent of potential workers are less skilled and contribute only $30,000 to the
firm each year. When schooling is not used as a signaling device, how much is the firm willing to pay a
worker chosen at random?
A. $30,000
B. $34,000
C. $38,000
D. $42,000
E. $50,000

Blooms: Apply
Difficulty: 03 Hard
6-17
22. Suppose 40 percent of all potential workers are highly skilled and contribute $50,000 to the firm each
year. The remaining 60 percent of potential workers are less-skilled and contribute only $30,000 to the
firm each year. Schooling costs a highly skilled worker y per year, while it costs a less-skilled worker 2y
per year. What range of y will support a signaling equilibrium?
A. $0 < y < $50,000

B. $5,000 < y < $10,000
C. $5,000 < y < $20,000
D. $10,000 < y < $20,000
E. $20,000 < y < $50,000

Blooms: Apply
Difficulty: 03 Hard
23.
The data suggest that wages increase more with age for the highly educated compared to the less
educated. This is evidence that
A.
the return to education is low for all education levels.
B.
the return to education is constant with respect to age.
C.
on-the-job training is unrelated to the level of formal schooling.
D.
less-educated workers invest in on-the-job training more so than do the highly educated.
E.
highly educated people also invest more in post-schooling human capital compared to the less
educated.

Blooms: Remember
Difficulty: 01 Easy
Topic: Postschool Human Capital Investments
6-18
24. What is an example of specific job training?
A. Learning word-processing skills.

B. Learning how to use the firm's payroll system.
C. Obtaining a GED.
D. Becoming stronger.
E. Passing the CPA exam.

Blooms: Understand
Topic: On-the-Job Training
25. What is an example of general job training?
A. Learning how to use a forklift.

B. Learning how to weld.
C. Reading a book on techniques for managing large groups of workers involved on team projects.
D. Attending an industry convention on "best practices."
E.
All of the above.

Blooms: Understand
26. Why is it that a firm will typically not pay for general training?
A. General training is free.

B.
General training is too expensive.
C. The benefits of general training depreciate quickly.

D.
General training usually doesn't increase worker productivity.
E. The skills gained from the general training are transferable to other firms.

Blooms: Understand
6-19
27. Temporary layoffs are common in the United States especially among workers who are heavily invested
with specific training. Why?
A. Specific training deteriorates quickly, so a laid-off worker with specific training is not valuable to
any firm.
B. The laid-off worker with specific training is more valuable to the firm that laid her off than she is to
any other firm. Thus, it is in the worker's best interest to remain unemployed until recalled to work
at her original firm.
C. Workers without specific training are never hired in the first place.
D. Workers with specific training know they don't need to work hard when employed.
E. Unemployment benefits are tied to specific training.

Blooms: Understand
28. Suppose Amy has 100 efficiency units of labor; Bill has 50 efficiency units of labor; and Chris has 20
efficiency units of labor. Which of the following is true?
A. A firm will always hire Amy over Chris, regardless of wages.

B. A firm will hire Amy if her wage is at least twice that of Bill's and at least five times that of Chris's.
C. A firm will hire Amy if her wage is at most double that of Bill's and at most five times that of
Chris's.
D.
A firm will never hire Bill, regardless of wages.
E.
A firm will never hire Chris, regardless of wages.

Blooms: Apply
Difficulty: 03 Hard
Topic: On-the-Job Training and the Age-Earnings Profile
29. The Mincer earnings function is used to estimate
A. ability bias.
B. the signaling effect.
C. the social return to schooling.
D. the value of the marginal product of labor.
E. the age earnings profile.

Blooms: Remember
Difficulty: 01 Easy
Topic: On-the-Job Training and the Age-Earnings Profile
6-20
30.
What is the main selection issue researchers must address when trying to estimate the effectiveness of
government training programs?
A.
The true cost of government training programs is unknown because unemployed workers also
receive welfare benefits.
B.
The most motivated unemployed workers are the ones who are also most likely to take advantage of
government training programs.
C.
Government training programs are usually geared toward developing general skills rather than
providing specific job training.
D.
Most government training programs are only offered to the unemployed and not to workers who
would like to switch jobs.
E.
Evaluation schemes tend to lose track of participants once they start a new job after the training.

Blooms: Remember
Difficulty: 01 Easy
Topic: Evaluating Government Training Programs
6-21

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Chapter 06

Multiple Choice Questions

5. Present value calculations allow one to determine

A. the return to an uncertain asset.

A. downward sloping because education is generally productive.

8. The slope of the wage-schooling locus provides an estimate of

A. the average years of education as a function of age.

A. The cost of college tuition.

11. Why do workers typically pursue their education while young?

A. Human capital gives firms a way to differentiate between workers.

A. The marginal return to schooling increases as years of schooling increases.

14. People decide how much schooling to receive based on:

A. Their discount rate.

A. Having a non-random data sample.

A. under-estimate the return to schooling.

A. Tuition costs are lower for whites than blacks.

19. Why might people choose to go to college?

20. In order to use schooling as a signal:

A. $0 < y < $50,000

A. Learning word-processing skills.

25. What is an example of general job training?

A. Learning how to use a forklift.

A. General training is free.

C. The benefits of general training depreciate quickly.

A. A firm will always hire Amy over Chris, regardless of wages.

29. The Mincer earnings function is used to estimate

Multiple Choice Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

5. Present value calculations allow one to determine

A. the return to an uncertain asset.

AACSB: Reflective Thinking

7. The wage-schooling locus is

A. downward sloping because education is generally productive.

AACSB: Reflective Thinking

8. The slope of the wage-schooling locus provides an estimate of

A. the average years of education as a function of age.

AACSB: Reflective Thinking

A. The cost of college tuition.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

11. Why do workers typically pursue their education while young?

AACSB: Reflective Thinking

12. Which statement about human capital is false?

A. Human capital gives firms a way to differentiate between workers.

AACSB: Reflective Thinking

A. The marginal return to schooling increases as years of schooling increases.

AACSB: Reflective Thinking

14. People decide how much schooling to receive based on:

A. Their discount rate.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. Having a non-random data sample.

AACSB: Reflective Thinking

A. under-estimate the return to schooling.

AACSB: Reflective Thinking

A. Tuition costs are lower for whites than blacks.

AACSB: Analytical Thinking

AACSB: Reflective Thinking

20. In order to use schooling as a signal: