Question | 4. In the faraway land of liria, persons who graduate from high school go to work immediately pon graduation at age 18, and earn $100.000 per year for 20 years, and then retire immediately. in onrast, persons who graduate from college go to work upon graduation at age 22, and ean $110,000 per ar for 20 years, and then retire immediately. Jake is considering whether to go to college, and Comments, “Wow! College grads make 10 percent more per year than high school grads. College is Oviously a great investment!” But his brother, Blake, comments: “Not so fast, Jake! There are several mportant things you have overlooked!” What are the things that Jake has overlooked, and why do they matter in determining whether college is a great investment? Explain your answer. S. The widget industry is made up of a large number of perfectly-competitive firms, production or widget output (Q) uses capital (K) and employees (E), and is subject to constant returns to scale. The elasticity of substitution between capital and labor, o, is equal to 1.00; the elasticity of consumer demand, n. is equal to 1.00; labor's share of total production costs, , is equal to 0.75; capital's share of total production costs is 1-S =1-0.75 =0.25. The cost of labor, w, is equal to 100; the cost of capital, r, is equal to 50. Suppose the ratio of w to r (= w/r) rises by 50 percent. At the current level of output, by how much will the ratio of capital to labor (K/E) change? (Give a percentage, e.g. “KE will fall (or rise) by x percent.”) Explain your answer, show all your work. Alternatively, suppose that the cost of capital, r, rises by 10 percent, while w remains unchanged. What will be the substitution effect of the change in r on demand for labor E, and what will be the scale effect of this change in r on the demand for labor E? (Be sure to calculate both the substitution effect and the scale effect. Explain your answer, show all your work.) B. 6. Professor Cambridge has performed an analysis of the annual earnings in 2018 in $ thousand (EARNINGS) of a large number of persons who all received their undergraduate degrees in 2010. All of these persons majored in economics; none of them received an advanced degree (e.g., MA, MBA, or PhD degrees). Prof. Cambridge has obtained the following results: EARNINGS = 42.09 + 12.21 IVYLEAGUE + Other variables + U (12.11) (49 E) where IVYLEAGUE equals 1 if the individual attended an Ivy League college (Harvard, Yale, or Princeton), and equals 0 (zero) otherwise; the “other variables” include sex, race, and years of work experience after graduating; and U is the error term. Entries in parentheses are the standard errors of the estimated coefficients immediately above them. Taken at face value, and ignoring omitted-variables bias, what does the estimated coefficient on the IVYLEAGUE variable tell us? Explain your answer. Assume that the only missing variable is “earnings of parents, in $ thousand.” Is there any basis for expecting that the estimated coefficient on IVYLEAGUE is affected by missing-variables bias? If not, explain why not. If so, explain why, and discuss whether you believe that the bias is likely to be either upward or downward. A. B. |
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Subject | economy |