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Jill is planning the timing of her on-the-job training investments over the life cycle What happens to Jills OJT investments at every age if the market-determined rental rate to an efficiency

Jill is planning the timing of her on-the-job training investments over the life cycle. What happens to Jill?s OJT investments at every age if (a) the market-determined rental rate to an efficiency unit falls?

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University of California, Berkeley Fall 2007 Department of Economics Professor Andrea Weber Economics 152 ? Wage Theory and Policy Problem set #5 - Solutions 1. Peter lives for three periods. He is currently considering three alternative education-work options. He can start working immediately, earning $100,000 in period 1, $110,000 in period 2 (as his work experience leads to higher productivity), and $90,000 in period 3 (as his skills become obsolete and physical abilities deteriorate). Alternatively, he can spend $50,000 to attend college in period 1 and then earn $180,000 in periods 2 and 3. Finally, he can receive a doctorate degree in period 2 after completing his college education in period 1. This last option will cost him nothing when he is attending graduate school in the second period as his expenses on tuition and books will be covered by a research assistantship. After receiving his doctorate, he will become a professor in a business school and earn $400,000 in period 3. Peter?s discount rate is 20 percent per period. a. What are Peter?s opportunity costs versus his direct costs of schooling in both options where he invests in further education? b. Assume Peter?s discount rate is 20 percent per period. What education path maximizes Peter?s net present value of his lifetime earnings? c. What is the maximum value of Peter?s discount rate so that he chooses to get more education over no further schooling? (a) If Peter goes to college in period 1, the direct cost of schooling is $50,000. The opportunity cost is the lost wage income in period 1 $100,000. (b) The present discounted values of Peter?s earnings associated with each of the alternatives are 110,000 90,000 PV = 100,000 + + = $254,167 , HS 2 1.2 1.2 180,000 180,000 PV = -50,000 + + = $225,000 , COL 2 1.2 1.2 and 0 400,000 PV = -50,000 + + = $227,778 . PhD 2 1.2 1.2 Thus, the best option for Peter is to start working upon completely...

Apr 30 2020 View more View Less

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