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Wages Final Cheat Sheet - Midterm 2-Practice Problems 3 I...

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Midterm 2-Practice Problems 3 I. High School Choice Degree (HS) or drop out (No). Two types of individuals, Type 1=rate (r1) increase, Type 2= (r2); where r1>r2. Given a base earnings B, PV1 HS=B(1+r1) PV 2 HS=B(1+r2), PV No=B, cost=C no matter the worker type. B=100, r1=0.35, r2=0.2, C=22 1.) Optimal schooling choice both types : PV HS=B(1+r1)-C , PV HS=B(1+r2)-C PV1 HS=100(1+.35)=135 , PV 2 HS=100(1+.2)=120, PV No=100 [TA did not take Cost out] T1=135-22=113, T2=120-22=98, T No=100 [With Cost taken out] 2.) Earnings of HS & No HS to determine rate of return of HS: [Earnings do not involve cost in this problem] PV HS=(1+r) B=B+Br ; PV No HS=B ; r= PV HS-PV No HS = 135-100 =.35 PV No HS 100 3.) Gov. gives cash prize P=3, HS incentive to graduate, is this sufficient? Yes, b/c now if Type 2 receives P=3, cost=(22-3)=19 Earnings-Cost=120-19=101 No School=100; Type 1 always goes to school, Type 2>100 =goes to school 4.) Market perf. comp. & earnings reflect productivity. Social returns= earnings-costs. Is prize desirable from social planner view? No, in terms of signaling model, education is wasteful & individuals over-invest in it. Prize artificially increases returns to education and makes people invest more into a wasteful activity. In HC model, undesirable b/c person makes optimal choice given costs & returns to education. Prize viewed as a transfer & not real return to education. II. On-the-job training : 2-period problem, Training takes full period, Untrained=MPL^NT=100 for all firms if train=MPL 10%; Trained=30%>Untrained; Training costs=10 in 1 st period; Future period r=.05; Output P=1 both periods; Pay worker W nt=100 both periods. Trained=WT1 in 1st and
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