The diagram shows two income streams for Marie between age 18 and retirement age of 25. She gets utility solely from disposable income, with no concern for the type of job and no utility of disutility from studying. Stream A is her earnings stream if she enters the labour force at age 18 immediately after completing High School.Stream B is her earnings stream if she goes to University for 4 years and enters the labour force at age 24. Under both circumstances she intends to retire at age 25 (i.e. 7 years work if she chooses Stream Z and 3 years work if she chooses Stream B)

Stage (i):With reference to the above diagram, provide a detailed explanation of the Present Value approach for comparing the two income streams.

Stage (ii):Still with reference to the diagram, explain Marie's decision whether to go to university. Next, without reference to Marie or the diagram, assume individuals expectto retire at age 65. Id entify the implications for a decision to invest in human capital for (a) someone who will unexpectedly become structurally unemployed at age 50, and for (b) someone who expects to temporarily leave the labour force to care for young children.

Part B Internal Rate of Return

Stage (i):Explain in detail the IRR approach to determining the optimal amount of investment in human capital.

Stage (ii)Explain the above diagram, and how it relates to the analysis you have justpresented.

Stage (iii):Identify and explain the implications of issues with and omissions from the pure PV approach when applied in the real world.

Part A (i): Present Value Stream A = High School Stream B = University Earnings Stream B Area 4 Stream A Area 3 Area 2 Age 18 22 Area 1 25 Fees & Books (retirement)\f