Exercise 11 Human Capital - be covered by a research...

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ECOglyph1197 4616 In-Class Exercises glyph1197AME: Prof. Francisca Antman Exercise 11—Human Capital 1. (Borjas 7-2) Peter lives for three periods. He is currently considering three alternative education-work options. He can start working immediately, earning $100,000 in period 1, $110,000 in period 2 (as his work experience leads to higher productivity), and $90,000 in period 3 (as his skills become obsolete and physical abilities deteriorate). Alternatively, he can spend $50,000 to attend college in period 1 and then earn $180,000 in periods 2 and 3. Finally, he can receive a doctorate degree in period 2 after completing his college education in period 1. This last option will cost him nothing when he is attending graduate school in the second period as his expenses on tuition and books will
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Unformatted text preview: be covered by a research assistantship. After receiving his doctorate, he will become a professor in a business school and earn $400,000 in period 3. Peter’s discount rate is 20 percent per period. How would you determine which education path Peter will take? Be explicit about any calculations you would make. 2. (Borjas 7-8) Suppose there are two types of people: high-ability and low-ability. A particular diploma costs a high-ability person $8,000 and costs a low-ability person $20,000. Firms wish to use education as a screening device where they intend to pay $25,000 to workers without a diploma and $ K to those with a diploma. In what range must K be to make this an effective screening device?...
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