Need answer for question 2 please 1. (8 points) A worker is deciding whether to

Question

Need answer for question 2 please

1. (8 points) A worker is deciding whether to attend school. Assume that there are two periods Let r denote the discount rate between periods. Let k denote the cost of tuition. If the worker does not attend school, then she earns 10 in period 1 and 10 in period 2. If the worker attends school, then she earns -k in period 1 and 25 in period 2 (a) Suppose that k 0. For what values of r will the worker attend school? (b) Suppose that r0. For what values of k will the worker attend school? 2. (8 points) A worker is deciding how long to stay in school. Assume that the only cost of schooling is foregone earnings and that the worker lives forever. Let r denote the discount rate per year. Let b denote the increase in earnings with each year of schooling. If a worker attends school for k years, then her annual earnings are 10+b.k (a) Explain whether the optimal level of schooling is increasing or decreasing inr (b) Explain whether the optimal level of schooling is increasing or decreasing inb 3. (8 points) There are two types of workers:low ability L and high ability H. The cost of Suppose that obtaining a college degree is 40 for a type L worker and 20 for a type H worker. the wage is 60 for work ers without a college degree and w for workers with a college degree (a) What is the highest value of w for which type L workers do not obtain a college degree? (b) What is the lowest value of w for which type H workers obtain a college degree?

Explanation / Answer

2) The worker has to decide between either to go for higher education and continuing the school or to find a job and start earning.By continuing the education,the worker will increase his earnings by b but if he decides to take a job,he will earn r as interest on the money invested from his salary.

When the worker decides to continue the school years by k years then his earnings will increase by 10+b . k and he will earn bk additional income.But if he decides to go for a job for these k years,then he will earn 10 and does not earn bk units as before and earning r interest on 10 units the foregone earnings would be k(10+10r/100) after k years.

These two alternatives will decide what the person will choose given k years-

a = k(10+10r/100)

b = bk

when the discount rate r is higher,the worker would choose to work and give up education as he will earn more.

But,if the value of b is higher,the worker would choose to go for higher education as this will add more income after finishing education.

So, in a, the optimal level of schooling decreases with increase in r and increases with increase in b.

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