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1. The Opportunity Costs of Education and Capital Markets: An individual is consid- ering pursuing an education as a doctor in a rural area. To simplify the analysis, suppose the individual's time is split into two periods: today and tomorrow. If she skipped school and started working, she could make $30,000 each period. If she pursues an education, she will earn $10,000 today and $75,000 tomorrow. Suppose that consumption today (c1) and tomorrow ((32) are perfect complements at a ratio of 1:1. That is, for every unit she consumes today, she wants to consume one units tomorrow and any additional consumption yields no benet. Further, she prefers consuming more rather than less (in these xed proportions). For simplicity assume the rate of ination is zero and the price of a unit of consumption is $1. (60 Suppose capital markets are imperfect and the individual is unable to borrow funds. However, she can save at the current interest rate of 50%. Draw her budget sets under the situations of attending school or entering the work force. Given the above information, will she opt to pursue an education or to begin work right away? Why? What type of external effects exist regarding this individual's education? From the standpoint of efciency, should the individual obtain an education or enter the work force? Suppose that average income in the economy is $30,000 and the government wants to reduce income inequality. If the government equalizes annual incomes to the average, will the individual choose to become educated? (Argue from the standpoint of her changing endowment and incentives.) Suppose the government wants to reduce inequality by equalizing opportunities. What type of policy might the government engage in to encourage this person to obtain an education? (e) Suppose capital markets are perfect. That is, she can borrow or save at an interest rate of 50%. Draw her budget sets under each situation. Will she choose to attend school or work? Explain how access to capital markets can serve as a means of equalizing opportunities