Only need answer for question 3 1. (8 points) A worker is deciding whether to at
ID: 1136801 • Letter: O
Question
Only need answer for question 3
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
3. (a) In order to find the highest value of for which type L worker do not obtain a college degree,
It must be that
60 = w-40
otherwise obtaining a college degree would be better than not obtaining the college degree. Thus it must be that w = 100 to make sure that the low ability worker don't obtain college degree.
b) Similarly, in order to find the lowest value of w for which type H worker obatin a college degree, it must be that
w - 20 = 60
Otherwise not obaining college degree would be better then obtaining college degree. Thus it must be that w = 80 to make sue that the high ability worker obtain a college degree.
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