Problem 1

You are thinking about participating in a job training program for 4 years. The program is very affordable and costs $8,000 a year for tuition, plus $1,000 a year for books. If you complete four years of training, your yearly earnings will be $60,000 and your salary will increase at a rate of 10% per annum. If you chose not to take the training, your yearly earnings will be $50,000 and your salary will increase at a rate of 7% per annum. The annual interest rate is 5% (i.e., the discount rate). You plan to retire young, so your working life is 14 years (and 10 years if you take the training). Note the job training takes place in your neighborhood so you plan to stay in your current apartment.

a. What should be included in your calculation of the opportunity costs of the job training described above and why? Should housing costs be included?

b. Calculate the present value of your earnings in the two proposed career paths. Which option should you choose to maximize wealth? Assume either job training or working would start immediately in the current period (i.e., do not discount the first year).

c. Say you don't plan on retiring early. How many years would you have to work for you to be indifferent between the options?

d. What other considerations, besides yearly earnings, might enter into your occupational choice? e. How would you estimate your own personal discount rate? What would it be? (there is no single "correct" answer hereI want to see your approach to thinking about this).

Problem 2

Consider the conditions of work in scented candle factories. In New York scented candle factories, workers dislike the smell of scented candles, while in California workers appreciate the smell of scented candles, provided that the level does not climb above S * . (If it rises above S * , they start to dislike it.) Suppose that there is no cost for firms to reduce or eliminate the smell of scented candles in scented candle factories and assume that the workers have an alternative wage, W* .

a. Draw a diagram using isoprofit and indifference curves that depicts the situation. (HINT: The New York and California isoprofit curves are the same, but their indifference curves differ.)

b. What level of scented candle smell is there in the New York factories? In the California factories?

c. Is there a wage differential between the California and New York workers?