ProblemSet7-AK - Economics 3203 Fall 2010 Problem Set 7...

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Economics 3203 Fall 2010 Problem Set # 7: Human Capital, Signaling, & Migration ANSWER KEY 1. Depending on how you read the question, you may have assumed that in the first period the person was compensated based on their education choice, or that they were paid as an uneducated person in that period. Since this affects the answers, I will provide the answer key for each reading of the question. First, if person is compensated based on their educational choice: a. PV no college = 20,000 + (20,000/1.1) + (20,000/(1.1) 2 ) ≈ $54,700 PV college = 30,000 + (30,000/1.1) + (30,000/(1.1) 2 ) ≈ $82,100 b. Yes, the wage structure and educational costs will sort the workers by skill. For H types, the net benefit of attending college is ($82,100 - $24,000) = $58,100, which is a higher return than if they choose not to attend college and receive only $54,700. On the other hand, L types have a net benefit of college equal to ($82,100 - $32,000) = $50,100, so they are better off choosing not to go to college. This means the H types will go to college and
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ProblemSet7-AK - Economics 3203 Fall 2010 Problem Set 7...

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