Options Age 1 Age 2 Age 3 Age 4 A. Primary school 0 600 800 1000 B. Secondary 0 0 1200 1500 School C. College 0 0 0 4000 a. Consider Susan, a secondary school graduate who must decide whether to invest in a college education or enter the job market. College costs $1000, but the government pays for half of it, so the cost to Susan is only $500. What is the private rate of return to investing in a college education for Susan? (Hint: Remember that Susan makes her decision at age 3, and that current expenditures and/or benefits don't need to be discounted, while costs and/or benefits one period in the future must be discounted by (1+r). b. Suppose Susan had a discount rate of 40% - would she invest in a college education or not? c. What is the PRIVATE rate of return to investing in a college education? d. What is the SOCIAL rate of return to investing in a college education? e. One of the pitfalls of cost benefit analysis is that current data is often not a good indicator of future payoffs. Suppose the high private rate of return on a college education causes an excess of college grades in the labor market, and wages for college grads in Age 4 to fall to $3700. In this case, what will be the private and the social rate of return to investing in a college education? f. Another problem is that education, while strongly correlating with higher earnings, may not be the cause of higher earnings. A research economist in Studentaria argues that people who attend college are more "industrious" than people who don't, and these people would command a higher wage anyway, even without a college education. He concludes that part of the observed wage difference does not reflect an actual productivity gain, but the "screening" effect of a college education. He calculates that the same people, if the skipped college, would earn $1300 and $1700 without a degree, compared to $0 and $3700 If they did