Q3.Please answer all the questions with steps, thank you !!!! 3. Suppose the wag

ID: 1104193 • Letter: Q

Question

Q3.Please answer all the questions with steps, thank you !!!!

3. Suppose the wage-schooling locus for Wong and Carpenter is given by Wong's earnings $18,500 $20,350 $22,000 $23,100 $23,900 $24,000 Carpenter's earnings $20,500 $23,350 $26,000 $28,100 $29,900 $31,000 Years of schooling 10 12 13 14 a. Derive the marginal rate of return schedule for both workers. b. When will Wong quit school if his discount rate is 3 percent? What if the discount rate is 9 percent? years of schooling and the earnings for Wong and Carpenter? earnings. What is the rate of return calculated from this information? c. Suppose the discount rate for both Wong and Carpenter is 4 percent. What would be the d. What we observe in the data is the years of schooling of Wong and Carpenter and their realized

Explanation / Answer

a) Marginal Rate of Return Schedule (MRR):

Years of Schooling

Wong’s earnings

Wong’s MRR

Carpenter’s earnings

Carpenter’s MRR

$18,500

$20,500

$20,350

10.0

$23,350

13.9

$22,000

8.1

$26,000

11.3

$23,100

5.0

$28,100

8.0

$23,900

3.5

$29,900

6.4

$24,000

0.4

$31,000

3.7

(Workings for Wong’s MRR: 10 yrs= 20,350-18500=1850/18500*100=10, 11 yrs= 22000-20350=1650/20350*100=8.1, for 12 yrs=23100-22000=1100/22000*100=5, for 13 yrs 23900-23100=800/23100*100=3.5, for 14 yrs=24000-23900=100/23900*100=0.4)

(Workings for Carpenters MRR 10yrs=23350-20500=2850/20500*100=13.9, 11yrs=26000-23350=2650/23350*100=11.3, 12yrs=28100-26000=2100/26000*100=8.0, 13yrs=29900-28100=1800/28100*100=6.4, 14yrs=31000-29900=1100/29900*100=3.7)

Formula for calculating marginal value is Additional - Previous=ans/previous*100

b) Wong will quit school when his marginal rate of return falls below his discount rate. As the discount rate is 3 percent, Wong will quit school after 13 years of schooling (as the mrr after that is 0.4 which is < 3 percent)

c) If the discount rate is 4 percent for both then: Wong will have schooling till 12 years and Carpenter will have 13 years of schooling. Wong’s earning will be $23,100 and Carpenters earning will be $29,900.

d) The rate of return calculated from this observation is called as the Marginal Rate of Return.