# EconHW1.pdf - Econ 155 Homework 1 Due Oct 12th in Class (20...

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Econ 155 Homework 1 Due Oct 12thin Class (20 possible points)`11.Occasionally, I will use the homework assignments as a space to teach a concept that wecovered in class with more quantitative detail. In our classroom discussion of the monetarybenefits of schooling in the next class, I will define the human capital premium as:Human Capital Premium = Present value of your lifetime earnings having made the humancapital investment – Present value of your lifetime earnings if you did not make the humancapital investmentIn this homework assignment, we are going to formalize the concept of net present value.Let’s give potential students the following decision rule:If Net Present Value (NPV) of schooling > 0, the student goes to school.Some useful identities:r: market interest rate, also referred to as the discount ratet: time period being considered (1= next year, 2 = two years from now, T = the last period)Future value:!"!=!"(1+!)!Present value:!"!=!"!(!!!)!C: today’s costsBt: in-period benefitExample:LetFV = \$1 (individual assumes she will receive \$1 tomorrow)r= 0.5 (market interest rate is 5%)t= 1 (next year)We can solve for the Present Value today:!"!

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