Consider the following data set of earnings and years of schooling. Schooling Ea

Question

Consider the following data set of earnings and years of schooling. Schooling Earnings $17,000 $19,040 $20,944 $22,620 $23,751 $24,226 10 12 13 14 Compute the marginal rate of return for the 1through 14th years of schooling. How many years of schooling are completed if the discount rate is 11 percent? How many years of schooling are completed if the discount rate is 3 percent? . Ceteris Paribus, based on the data what is the relationship between the discount rate and the years of schooling? Why does the marginal rate of return to schooling vary with the years of schooling?

Explanation / Answer

Forumla,

for 11th year, = (19040-17000)/17000 = 12%

2. A student will quit school when the marginal rate of return to schooling falls below the discount rate. For the discount rate of 11 percent, 10 years of schooling will be completed

3. For the discount rate of 3 percent, 13 years of schooling will be completed

4. There is a negative relation between years of schooling and the discount rate as we can see that with the increase in discount rate, the number of years of schooling decreases.
Since the earnings gets reduced with the increase in schooling the MRR decreases for an additional number of years.  

Schooling Earnings MRR 9 17000 10 19040 12.00% 11 20944 10.00% 12 22620 8.00% 13 23751 5.00% 14 24226 2.00%

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