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Econ 147 Final Solutions W!06

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

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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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