ECONOMICS OF EDUCATION

Bachelor in Economics
Problem Set 5: Topic 4 - Educational Costs

1. Mr López is a 20-year old student, enrolled in Biology in a local college and he has incurred in the
following expenditures: tuition fees 1000 e; books 250 e; school material 200 e; transportation
400 e; clothing 500 e; food (…rst month) 100 e; leisure (…rst month) 90 e. Tuition fees pay
for just 15% of total educational costs, average annual labor income of an individual who have
completed upper secondary education is 13.567,01e and the unemployment rate of 20-29 years-
old individuals who have completed upper secondary education is 20%. Compute the annual
private and social educational costs of the university studies in Biology.
2. Interpret the following estimated cost function for upper secondary education institutions in
United Kingdom:
C = 68489 + 93:87E + 0:05E 2
where E is the number of students.
3. There exists two schools with the same educational costs function in a given school district:

C= 0 + 1E
CM a = 1

Initially, there are 200 students enrolled in school A and 400 students in school B. If 50 addi-
tional students are to be enrolled, in which school should they be allocated so as to minimize
the additional increase in educational costs?
4. There exists two schools in a given school district. There are 270 students enrolled in school
A and 370 students enrolled in school B. There are 30 new students to be enrolled the next
academic year while all students already enrolled in both schools do not plan to move out the
school district. Both schools have the same educational cost function (C), which depends on
the number of students enrolled (E), and is given by the following functional form:

Cme = 2109 0:8 E + 0:001 E 2 (1)

Explain why the following sentences are true or false (write down the computations required
to provide your answers):

(a) It is more e¢ cient to enroll all students of the school district in one school because of the
existence of economies of scale in the provision of education.
(b) The additional increase in total educational costs is lower if all 30 new students are enrolled
in school A.
(c) If all 30 new students are enrolled in school B, at least one of the schools is of an e¢ cient
size.

5. In a given school district there are two schools in which 400 students are enrolled. While 100
students are enrolled in school A, the other 300 students are enrolled in school B. In the next
academic year, 100 new students are to be enrolled in the school district, to be added to the 400
students already enrolled in. Both schools have the same educational cost function (C), which
depends on the number of students enrolled in the school (E), and is given by the following
functional form:
C = 400 + 10 E (2)

(a) Explain why the following sentences are true or false (write down the computations re-
quired to provide your answers):

1
 1. If the 100 new students are enrolled in school B, at least one of the schools is of an
e¢ cient size provided that its average educational cost is 10% higher than its marginal
educational cost.
2. If the 100 new students are enrolled in school A, which is the school with higher
average educational costs, then the decrease in average costs of school A is higher
than the corresponding decrease in that costs if the new students are enrolled in
school B.
3. The increase in total costs is the same in both schools, no matter in which school the
new students are enrolled, provided that the marginal educational cost is constant in
the number of students.
(b) Assume now that average educational costs (2) (Cme) in each school in the school district
is given by the following equation:

ln(Cme) = 7:154 0:1103 ln(E) (3)

Explain why the following sentences are true or false (write down the computations re-
quired to provide your answers):
1. It is more e¢ cient to enroll all students in the district in the same school provided
that there exists economies of scale in the provision of education.
2. The increase in total educational costs is lower if the 100 new students are enrolled
in school A.