The correct measure of the return on human capital investment is the wealth effect of the wage increase which the investment makes possible. A geometric model of this investment decision is examined. The currently pervasive "income difference" measure is shown to contain an upward bias positively related to the size of the investment. Alternative tests for "shortage" and "surplus" conditions are developed which correct for this bias. It is shown that labor supply schedules may bend backward only when the relevant wage changes are incorrectly anticipated. It also is shown that among individuals who differ only in wealth, those with less wealth will elect to invest in human capital at lower wage levels in the relevant employments.

We demonstrate that if consumption is proportional to permanent income, it is necessarily equal to a geometrically weighted average of past realized incomes. Therefore, the relationship between consumption and measured income depends entirely upon the linkage between realized and measured income. Two hypotheses concerning the linkage are tested against 1929-62 U.S. data. The relationship implied by Friedman is not found to be significant, whereas a new hypothesis that the difference between realized and measured income depends upon changes in the unemployment rate does yield significant results.

A mathematical model is analyzed to determine the impact of two alternative monetary policies upon the rate of change of prices and the level of real national income. The first is a once and for all change in the rate of growth of the money supply to a new level; the second is found through an optimization analysis using the maximum principle of postaudit. It is found that the second policy not only leads to a final equilibrium position in less time than the first policy, but it also induces less variability in both prices and real income.