Question 1 only..

1. Suppose that wages are related to education but that this is an uncertain relationship. Pupils considering whether to stay on or leave education consider the costs and benefits associated with leaving and staying. If a student leaves education they know the wage with certainty, w, if they stay on the wage is given by w. The costs of education are given by c. a. Write the decision in terms of the utility associated with staying on or leaving. b. Explain the role that discounting will make to this decision c. What about risk aversion? d. Identify factors that you think might be correlated with: i. The discount rate ii. The expected wage if you choose to become educated iii. The variance of the wage distribution iv. The degree of risk aversion v. Access to credit 2. Read the paper by Murphy Shleifer and Vishny. Explain the main results of the paper. 3. Consider the student group work problem we encountered in the lecture. We will practice this by changing the function a little In the lecture, the quality of the project depends on , ,and : Let's change that a little Each student has a cost function given by: The utility for student is given by: Follow the method used in the lecture to determine the optimal effort levels of each student