Answered: Peter lives for three periods. He is…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Q1) 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. What education path maximizes Peter’s net present value of his lifetime earnings? Q2) (a) Is the presence of an underground economy likely to result in a Gini coefficient that over-states or under-states poverty? (b) Consider a simple economy where 90 percent of citizens report an annual income of $10,000 while the remaining 10 percent report an annual income of $110,000. What is the Gini coefficient associated with this economy? (c) Suppose the poorest 90 percent of citizens actually have an income of $15,000 because each receives $5,000 of unreported income from the underground economy. What is the Gini coefficient now? Q3) Explain why the intergenerational correlation of earnings would likely be higher or lower than average for the following groups and factors in the United States: (a) Improved educational outcomes for all populations (e.g., minority, low-income, rural) as hoped for by No Child Left Behind. (b) The elimination of legacy admits to Colleges and Universities. (c) The implementation of a federal inheritance tax. Q4) Explain why the intergenerational correlation of earnings would likely be higher or lower than average for the following groups and factors in the United States: (a) Improved educational outcomes for all populations (e.g., minority, low-income, rural) as hoped for by No Child Left Behind. (b) The elimination of legacy admits to Colleges and Universities. (c) The implementation of a federal inheritance tax.

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