Question

3.a) Harry and Hermione are both deciding whether to attend school or not. They both face the same discount rate, but they have different abilities. Hermione is better at school and so her return on schooling is higher than Harry's at every level. Draw a graph with discount rate on the y-axis and years of schooling on the x-axis that illustrates why Harry and Hermione would choose different levels of schooling. Explain your graph.

b) Policy makers decide, if they want to close the wage gap between Harry and Hermione, they need only ensure Harry obtains the same amount of schooling as Hermione, do you agree or disagree with this policy? Explain.

Answer 1

. For every unit fall in discount rate, the years of schooling will increase but it would increase more for Harry as compared to hermoine because hermoine being more efficient at school would get the same level of utility at lesser years of schooling than Harry

b. To reduce the wage gap between Harry and Hermoine, just ensuring same level of schooling would only work if employment is offered only on the basis of years of schooling. Since hermoine is better than harry at all level of schooling, even if they had same years of schooling, hermoine would still be better than harry and could yield a higher wage than harry if skills other than the signal of years of schooling are also tested