Consider the following 2 period model of optimal schooling with periods P1 (school or work) and P2 (work)
- If they attend school, earn no income in P1, and earn WH in P2.
- If they do NOT attend school, earn income WL in each period.
- At first, there are no costs to schooling, no intrinsic benefits, and people do not discount future earnings.
- "Net Income" refers to total (expected) wage earnings minus any costs paid
( ) If WH = 10 and WL = 7, will they choose school or not?
Set WH, WL and back to arbitrary parameter values (letters not real numbers) and add a cost of schooling C to the model. . Now also suppose that, after schooling, the individual will only get a job paying WH in period 2 with probability J (0 ≤ J ≤ 1), otherwise they get a job at the un-skilled wage WL.
( ) If J = 0, what is the expected wage in the second period if the individual goes to school