ps2LaborEcon_1 - calculations(b What is the internal rate...

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Econ 4531 - Spring 2011 Problem Set 3 Due April 7th (during lecture) 1. (15 points total) Using the data file from problem set 1, replicate figure 7.10 from our textbook. Compare your results with that of textbook. Again, you may want to use R, Gretl, Matlab, Stata, and all other kind of free packages you have available. 2. (10 point each) Review Questions from Chapter 6: Questions 5, and 6; Chapter 7: Question 6, and 7. 3. (15 points) Is it worth going to college? Let’s suppose that a typical college educated professional makes 85,000 dollars per year and a high school graduate makes 45,000 dollars per year. The direct costs of college (tuition, books, and so on) are 16,000 dollars a year (notice that a typical college degree would take 4 years). For the purpose of this exercise, consider that the earnings are constant until the age of 65; and thereafter, the earnings are zero. (a) Suppose that John is now eighteen, and he is contemplating on the possibility of going to college, should he go? Use a discount rate of 10 percent for your
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Unformatted text preview: calculations. (b) What is the internal rate oF return? (c) Now suppose that he is also a great Football player. However, it is a risky sport, and at most he can play until the age oF 30. The contract that he can get is a million dollars a year. What should he do? Show your calculations 4. (30 points) Consider the well-known Cobb Douglas Production Function we studied in class: Q = AK α L 1 − α , where Q is the level oF output, K is level oF capital, L is the level oF working hours, α ∈ (0 , 1)and A is a productivity parameter. Imagine that this production Function represents the aggregate production oF the US economy. (a) Consider the price oF fnal output to be 1. Show the implications For wage w and return to capital r iF there is in²ux oF immigrants to the economy. What would happen to the labor share oF output? (b) Repeat the same exercise with a CES production Function, ie. Q ( K,L ) = ( αK ρ + (1 − α ) L ρ ) 1 /ρ 1...
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