Economics 421Spring 2004Lich-TylerProblem Set 3 (Due 6/10)1.There are three people who must make an optimal human capitalinvestment decision. The following table shows what their annualearnings would be for a given level of schooling !in thousands of dollars":Years of schooling:121314151617181920A’s annual earnings:$20$25$30$35$40$45$50$55$60B’s annual earnings:$40$45$50$55$60$65$70$75$80C’s annual earnings$25$30$35$40$45$50$55$60$65a.Suppose the interest rate is 10%. Using the stopping rule for acontinuous choice of years of schooling !hint: involving the “marginalrate of return”", predict how much education each person acquires.b.For each person, calculate the change in earnings for a change inschooling !that is, !Y!S".c.Now calculate across the population the difference in earnings for adifference in schooling !for example, !YA!YB" !SA!SB"". Why is thisnot the same answer as in part b.? !Hint: why did Bill Gates drop outof college?"2.Springfield Nuclear Power Plant has two workers, Smithers and Simpson.One of these workers has a productivity of $100,000; the other has a
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