rents, then there must be more barriers to entry the labor market for physicians than is socially optimal. Analytical problems 11 Fun with IRR. Suppose you have just graduated from college and are deciding on a career. Your four career options, along with your salary in each of the four earning periods, are displayed in Table 5.3. Assume that any career will only last four periods before retirement. Table 5.3. Career options and salary information for Exercises 11 and 12. Salary Occupation Period 0 Period 1 Period 2 Period 3 Ophthalmologist -5 1 10 12 Accountant 2 3 4 5 Starving artist 1 1 Sports superstar O 15 a Assume your discount factor S = 0.95. Interpret this assumption. b Find the value of the interest rate r that corresponds to your discount factor. c Assuming S = 0.95, calculate the net present value (NPV) of becoming an ophthal- mologist and of becoming an accountant. Which career do you prefer? d Will the internal rate of return (IRR) for becoming an ophthalmologist as opposed to an accountant be greater or less than your answer to Exercise 11(b)? e Now assume S = 0.6. Calculate both the corresponding interest rate and the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Now which job do you prefer? f Find the IRR for becoming an ophthalmologist as opposed to an accountant. That is, find a value of r* that equates these two NPVs. [Hint: you will probably want to use a graphing calculator or an online equation solver to find r*. ] 12 More fun with IRR. Refer to Table 5 2