Assume everyone in this Econ of Ed class decided to pursue a PhD in Economics after seeing how
fun research in Econ of Ed can be. The present value economic cost of attending the PhD in
Economics is $162,000 (although tuition is typically zero and students are paid a stipend, PhD
students incur non-pecuniary costs associated with the stress of being in a demanding program, in
addition to lost wages while in school). A quant GRE score is an application requirement for
admission to a PhD in Economics. Each student in the class takes the GRE and they receive scores
uniformly distributed from 130 to 170 on the quant section. Present value future utility (including both
pecuniary and non-pecuniary aspects) are a function of GRE scores for both PhD graduates and non-
graduates, as the GRE score measures on-the-job productivity AND is related to non-pecuniary
benefits of working. Present value payoffs are Y BA =200*GRE for people who choose not to pursue the
PhD, while those that choose the PhD earn YPhD =2000 + 1200*GRE.
a. What is the minimum GRE score of the students who choose to get the PhD?
b. What is the average payoff of each group? (Those who do and do not get the PhD?)
c. What payoff would the person with the average GRE score have with and without the PhD?