It is estimated that over 100000 students will apply to the

It is estimated that over 100,000 students will apply to the top 30 M.B.A. programs in the United States this year. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an M.B.A. degree. What would you expect to happen to the number of applicants if the starting salaries of managers with M.B.A. degrees remained constant but salaries of managers without such degrees decreased by 20 percent? Why?

Solution

a). An individual would have to analyze the opportunity cost of the moneythey pay for school,and compare that with the future value in the expectedincrease in salary.If the outcome of NPV = PV-Current Cost is a positive number,then the future benefits outweigh the lost current opportunity costs, and it wouldbe a rational action.

b). As salaries decrease, opportunity costs would increase for those withoutthe degree.Therefore, applicants for an M.B.A. program would increase as morepeople would see the opportunity to make more money if they had the degree,rather than the 20% lower salary that has resulted from not having a degree