Question

Answer both questions

9.) (ch 6) Suppose that Danielle’s wage-schooling locus is given by

Years of Schooling	Earnings
6	$10,000
7	12,800
8	16,000
9	18,500
10	20,350
11	22,000
12	23,100
13	23,900
14	24,000

a) Derive the marginal rate of return (MRR) schedule. When will Danielle quit school if her discount rate is 10 percent?

b) Suppose the government imposes an income tax of 20% on both labor earnings and interest income. What is the impact ofthis income tax on Danielle’s educational attainment (will itincrease or decrease)? Explain your answer.

10.) (ch 6) Peter has just graduated from HS. He will live for three more periods, and he is considering three alternative education-work options. He can start working right away, earning $100,000 in period 1, $110,000 in period 2, and $90,000 in period 3. He can also go to college in period 1 spending $10,000 in that period, and then earn $150,000 in periods 2 and 3. Finally, he can go to college in period 1 and get an MBA in period 2. This last option will cost him nothing in year 2 (books and tuition are covered by a research assistant position). After getting his MBA, he will earn $300,000 in period 3.

a) If Peter’s discount rate is 0.20, which path will maximize his net present value of his lifetimeearnings?
b) Why is it realistic that his wage for option one decreases to $90,000 in year 3?

Answer 1