1. Suppose that John’s wage-schooling locus is given by the equation: Wage = 2

Question

1. Suppose that John’s wage-schooling locus is given by the equation:

Wage = 2 ·K ·S

1/2

where K = 5.25 and S is quarters of schooling after the 8

th

grade. It can be shown

that the Marginal Rate of Return schedule for John can be written as:

MRR = (K/S

1/2

) -1

The (-1) appears in this equation to take into account the dollar invested in the

first place. If the market rate of interest is expressed as r = 0.05, determine

John’s optimal quarters of schooling after the 8

th

grade? What is his wage?

Explanation / Answer

1. Suppose that John’s wage-schooling locus is given by the equation:

Wage = 2Â ·KÂ ·S

1/2

where K = 5.25 and S is quarters of schooling after the 8

th

grade. It can be shown

that the Marginal Rate of Return schedule for John can be written as:

MRR = (K/S

1/2

) -1

The (-1) appears in this equation to take into account the dollar invested in the

first place. If the market rate of interest is expressed as r = 0.05, determine

John’s optimal quarters of schooling after the 8

th

grade? What is his wage?

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