Explicit and Implicit Costs of Education: Context Rich Problem

This page authored by Julie Gallaway, Department of Economics, Missouri State University
This material is replicated on a number of sites as part of the SERC Pedagogic Service Project


This context rich problem asks students to apply economic concepts to a real-world issue. Not only has the cost of higher education been regularly discussed in the news, but it is also a topic to which students can directly relate and observe how economics concepts apply in every day decisions.

Students are asked to write a letter to a roommate who is considering whether to return to the university next semester. In the letter, the student is asked to explain to the roommate the expected benefits and costs of continuing with their education. Specifically, they are asked to specify both the explicit and implicit costs.

Learning Goals

After completing this exercise students should be able to explain and apply the concepts of implicit and explicit costs as they relate to higher education. Students should then be able to extend their analysis to comparing the costs and benefits of higher education enabling them to make a recommendation. A successful student should be able to perform similar analyses to evaluate different educational choices.

Context for Use

This assignment is appropriate for a Principles of Microeconomics class or a Labor Economics class. This assignment can be completed inside or outside the classroom. Students may work on the project individually or in small groups. This could be assigned after the class has covered explicit and implicit costs. This could also be assigned before formally covering explicit and implicit costs as a Just-in-Time Teaching exercise.

Description and Teaching Materials

Your roommate is trying to decide whether to continue going to the university next semester and has asked your advice. You remember from your economics classes that the answer will depend on the expected benefits and the costs of your education. You also remember discussing costs in your microeconomics class and that you need to consider both explicit and implicit costs. Type a letter to your roommate giving him/her your advice. Include a table providing dollar estimates for the costs...this will require you to do a little research about the costs you include. Also provide an explanation for each cost, including both the explicit and the implicit costs. (Your letter should be a maximum of 2 typed pages).
Handout with a Template for the Table(s) (Microsoft Word 2007 (.docx) 16kB May13 13)

Teaching Notes and Tips

- If completed outside the class room, students can be expected to research current information about tuition, fees, and alternatives the roommate has to attending college.
- If completed inside class, the instructor will need to provide some of the information relevant to their College and location.
- An alternative is to have the student write the letter to a sibling who is considering whether to attend college after graduation.
- You may allow the students to assume a fulltime minimum wage job would be an appropriate estimate of the implicit costs.
- Given that many students work while going to school, the students could use their current employment path as a guideline for the implicit costs rather than the suggested minimum wage job mentioned above.
- More advanced versions of the assignment could ask for more specific details about the benefits of the education, specifically examining the expected/average salary of the roommate's chosen major.
- For an upper-level class, students could be asked to use or discuss the net present value of the earnings in their cost/benefit analysis. Furthermore, students could elaborate on the cost of incurring debt to pay for their education.
- Students could be asked to use the College Risk Report website to make some of the more advanced comparisons (see resources below).


The problem asks the student to apply the concepts of explicit and implicit costs to a real world issue. The student should be able to perform a similar analysis if the situation is slightly varied. For example the student could be asked how their answers would change if the roommate takes six years to graduate. Students could also be asked to interpret a report generated from http://www.collegeriskreport.com/ and make a recommendation based on their analysis.

References and Resources

Canon, Maria E. and Charles S. Gascon, "College Degrees: Why Aren't More People Making the Investment?" The Federal Reserve Bank of St. Louis' The Regional Economist, April 2012,5-9. http://www.stlouisfed.org/publications/re/articles/?id=2284

Pew Research Center, "Is College Worth It?" May 15, 2011.

Kapur, Saranya, "Is Your College Degree Worth It? Find Out" Forbes, April 11, 2013. http://www.forbes.com/sites/saranyakapur/2013/04/11/is-your-college-degree-worth-it-find-out/

The "College Risk Report" is discussed in the Forbes article above. It provides an interactive site for students to make comparisons http://www.collegeriskreport.com/. It also provides links to an extensive Reading List on the topic.