Labor Econ: Jim is a 17-year-old high school junior who is considering how long

Question

Labor Econ:

Jim is a 17-year-old high school junior who is considering how long to remain in school. Answer the following questions assuming that Jim makes his education decisions on the basis of the perceived costs and benefits. (a) Suppose Jim's marginal rate of return to education is equal to 21% minus the number of years of education acquired; that is, if Jim goes then his rate of return to his 10th year of schooling is 21%-10%-11%). If Jim's discount rate is 5%, what is to school for 10 years, his optimal level of schooling? (b) What is his rate of return to the last year of school? (c) Jim's friend Sarah has a marginal rate of return equal to 24% minus the number of years of education she acquires. Her discount rate equals 5%. A few years after Jim and Sarah have entered the work- force, an education researcher named Rodney, sees that Sarah earns considerably more than Jim does each year. Rodney concludes that her greater earnings reflect the causal effect of education on earnings. Define what is meant by the causal effect of education on earnings, and explain why the researcher's reasoning is either correct or incor- rect

Explanation / Answer

a) The optimal years of schooling for Jim are when his marginal returns are just equal to hi discount rate.Thus at 5% disc rate, the optimal number of years are =21-5 = 16

b) The rate of return for last year of school are 5%

c) Sarah's optimal years of schooling are 19 years. So she will go to school 3 years longer than Jim.

Her higher income is not just because of schooling. It is because she could afford to self-select herself for more years in education. This attribute of lower opportunity cost of education is her inherent advantage because of which she is earning more than Jim.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.