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Econ 147 Final Solutions W!06

Econ 147 Final Solutions W!06 - NAME STUDENT ID Economics...

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NAME: ___________________________ STUDENT ID #: ____________________ Economics 147: The Economics of Education Professor Nora Gordon Winter 2006 UC San Diego FINAL EXAMINATION SOLUTIONS There are a total of 80 points on this examination. I suggest you allocate one minute per point, but you may use the full 180 minute exam period. You may use calculators; you may not use notes, readings, or any other outside materials. Only exams written in ink will be considered for regrades. Please read the questions carefully and answer completely. For quantitative problems, show all your work and do not use any scrap paper. Your short-answer responses should be specific and concise. Points will be deducted for extraneous incorrect information. Good luck. Problems (44 points) 1. To go to college or not? (16 pts.) Consider a world in which all people have three productive years. In year 1, everyone chooses to either work or attend college. In years 2 and 3, everyone must work. Tuition for the one year of college is $1200 for all students. High ability people can go to school and pass without a tutor, but low ability people need to hire a tutor in order to pass. A tutor costs $500 for the one year. There are two types of workers in this world, high ability and low ability. Firms can give each job candidate a one-minute quiz (think of this as costless to both the worker and the firm) that is perfectly accurate is revealing the candidate’s ability level. A worker’s productivity depends both on her ability level and whether she has gone to college. The marginal revenue product of each worker per year, depending on ability and education, is summarized in the table below. Education level Ability level No college College Low $28,000 $44,000 High $42,000 $60,000 Workers are paid their annual marginal revenue product as their annual salary. a. True/False/Uncertain, explain . Because high ability workers do not need a tutor, college is cheaper for them. Use evidence from your answer to part (a) to support your answer. (2 pts.)
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¾ False, the opportunity cost of college is higher for high-ability workers. b. Calculate the net present value (NPV) of attending college and not attending college for both high and low ability workers. Who will go to college? (9 pts.) NPV(nocollege, low) = 28,000 + 28,000/1.025 + 28,000/(1.025) 2 NPV(college, low) = -1700 + 44,000/1.025 + 44,000/(1.025) 2 NPV(nocollege, high) = 42,000 + 42,000/1.025 + 42,000/(1.025) 2 NPV(college, high) = -1200 + 60,000/1.025 + 60,000/(1.025) 2 ¾ Only Low ability workers go to college c. After employers observe the performance of their first employees, will they continue to offer the same wages in the future to workers based on their quiz scores and education levels? Will they want to change who goes to college? Why or why not? (2 pts.) They will be happy as it is, because they are paying MRP. d. Now assume all high ability workers have a discount rate greater than 0.025. How will this affect their decision to attend college? Why? Your explanation should be intuitive rather than mathematical. (3 pts.) ¾ Higher discount rate means less patient. They are already consuming as much as they can immediately by working in period 1, so they will continue to work in period 1 and not to go to college.
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Econ 147 Final Solutions W!06 - NAME STUDENT ID Economics...

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