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assignment8.pdf - Part I 1 a The value of her income and...

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Part I 1) a. The value of her income and costs if she becomes a marine biologist is the present value of \$472,000 with 5% discount rate (which is \$472,000/(1+0.05) minus the education cost, \$15,000. Therefore, the value is \$434,523.8. On the other hand, the value of her income and costs if she becomes a pianist (with the same calculation) is \$436,190.5. She will choose to become a pianist since its value is higher. However, if the rate is 15%, becoming a marine biologist has a higher value (\$385,434.8 for a biologist and \$394,782.6 for a pianist). b. The value of her income and costs if she becomes a marine biologist was \$434,523.8. The value of being a pianist with the new tuition is \$416,190.5 so in this case, she would become a marine biologist. 4) If the rate of depreciation increases, it means that schooling is less valuable because it will be irrelevant quicker. Therefore, the optimal amount of schooling will decline. 8) The low-ability worker will not want to receive education if \$25,000 is higher than K- \$20,000, therefore if K<\$45,000. The high-ability worker will want to receive education if K- \$8,000>\$25,000 so if K>\$33,000. Thus, the range should be \$45,000>K>\$33,000.

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• Spring '11
• sarpca

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