What is the opportunity cost of pursuing a PHD study program?
Kay Evans just completed her B.S. degree and is considering pursuing doctoral (Ph.D.) studies in economics. If Kay takes a job immediately a job after graduation, she can earn $35,000 during the first year, with an anticipated raise of $4,000 per year over the next five years. If Kay pursues the doctorate, five more years of school are required. Kay has been offered an assistantship paying $9,500 per year plus tuition. Books and computer purchases needed for her study will cost an average of $1,500 per year. These costs will not be incurred if Kay takes a job immediately. Upon graduation, Kay expects an annual income level of $55,000 during her first year of teaching. The growth rate in Kay’s teaching salary is expected to equal the growth rate of the income she would make if she did not pursue the Ph.D.
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Kay's opportunity cost for pursuing her doctorate will be $175,000.
In order to calculate this, we must first figure out how much money she could have made if she started working full time rather than going to graduate school. She would have started at $35,000 and then had four annual raises of $4,000 each. That would give her $215,000 ($35,000+$39,000+$43,000+$47,000+$51,000 = $215,000) of salary in the time that she would be getting her degree.
But we cannot stop there. We must note that she does make some money. She gets $9500 per year, less the $1500 in expenses. That means she nets $8,000 per year which adds up to $40,000 in five years. We subtract the $40,000 from the $215,000 and find that her opportunity cost is $175,000.
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