Part 1: Consider the imaginary country of Studentaria, where people live for four \"years" and everyone must make decisions regarding their education. During age 1, everyone goes to primary school. At age 2, they can decide whether to go to secondary school or go to work. At age 3, if they went to secondary school they can decide whether to go to college or go to work. At age 4 everybody works. This translates into three alternative lifetime earnings options, summarized in the table below: Lifetime Earning Options (Studentaria 55) m B. Secondary 1200 1500 School EDP-PF 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 benets don't need to be discounted, while costs and/or benets one period in the future must be discounted by (1+r). Suppose Susan had a discount rate of 40% - would she invest in a college education or not? What is the PRIVATE rate of return to investing in a college education? What is the SOCIAL rate of return to investing in a college education? One of the pitfalls of cost benet 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? Another problem is that education, while strongly correlang 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 reect 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