Economics 421
Spring 2004
LichTyler
Problem Set 3
(
Due 6/10
)
1.
There are three people who must make an optimal human capital
investment decision.
The following table shows what their annual
earnings would be for a given level of schooling
!
in thousands of dollars
"
:
Years of schooling:
12
13
14
15
16
17
18
19
20
A
’
s annual earnings:
$20
$25
$30
$35
$40
$45
$50
$55
$60
B
’
s annual earnings:
$40
$45
$50
$55
$60
$65
$70
$75
$80
C
’
s annual earnings
$25
$30
$35
$40
$45
$50
$55
$60
$65
a.
Suppose the interest rate is 10%.
Using the stopping rule for a
continuous choice of years of schooling
!
hint: involving the
“
marginal
rate of return
”"
, predict how much education each person acquires.
b.
For each person, calculate the change in earnings for a change in
schooling
!
that is,
!
Y
!
S
"
.
c.
Now calculate across the population the difference in earnings for a
difference in schooling
!
for example,
!
Y
A
!
Y
B
" !
S
A
!
S
B
"
"
.
Why is this
not the same answer as in part b.?
!
Hint: why did Bill Gates drop out
of 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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 Spring '08
 KINLAW
 Economics, annual earnings, Springfield Nuclear Power Plant

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