EC 350 Assignment 2
Instructor: Colin Corbett
Due Wednesday, January 28th
1. Go to the Federal Reserve Economic Data website (http://research.stlouisfed.org/fred2). Using the Civilian Noninstitutional Population (CNP16OV) data series and the Civil-ian Labor Force (CLF16OV) data series, record and calculate the Labor Force Partici-pation Rate for December 2014 (the most recent), March 2009 (in the Great Recession) and March 2000 (the peak of the dot-com boom). How do your answers align with your expectations, given economic conditions at those times? Compare your calculations to the Civilian Labor Force Participation Rate data (CIVPART).
2. Assume a discount rate r = :08( = :926). Calculate the net present net value of the following situations:
(a) You pay $1,000 now for a retirement bond that pays out a lump sum of $10,000 in 35 years.
(b) You take out a loan for $1,000, but have to pay back $300 a year for the next 5 years (starting next year).
3. Education and discounting:
(a) Suppose two people view college as an investment in future wages, with costs and lost income now but increased wages in the future. The rst person has dy-namically consistent time preferences (exponential discounting), while the second person has present-biased time preferences and is thus dynamically inconsistent. Which of these people is more likely to choose to attend college, and why?
(b) Now suppose these two people have the same time preferences, but view college as a fun time to party and make friends, paid for with loans they will have to pay back in the future. Now, which of the two people is more likely to choose to attend college, and why?
4. Personal choices and college:
(a) What is your current major? How much of this decision was based on what you enjoy and are good at, and how much was based on career opportunities? (You can use percentages if you want)
1
(b) If college was twice as hard for you (you had to spend twice as much time studying and doing homework to keep up your current grades), would you still attend? Why or why not?
(c) If you were accepted at a school that was more prestigious but had much higher tuition, would you attend there instead? Why or why not?
(d) If the U of Oregon o ered you a diploma right now with your current GPA without having to take more classes (but still paying for remaining tuition and not getting a job until your normal graduation date), would you accept it? Why or why not?
5. Is college worth it? (Note: using Excel or other tools may be very useful here)
(a) List the occupation you hope to enter after you graduate (or some possibility)
(b) List the occupation you would enter if you did not have a college degree (or some possibility). This could be the same answer as part a – if it is, let us know why you’re going to college, and pick another possibility for part a.
(c) Go to the Bureau of Labor Statistics website, which includes wages for most occupations (http://www.bls.gov/oes/current/oes stru.htm). Find the average annual earnings for those two occupations or the closest you can nd to them.
(d) Assuming a 5% discount rate, (r = :05), calculate the present value of a 24-year career in the occupation from part b (starting in year 1), versus a 4 year college education starting in year 1 (assuming a cost of $10,000 per year) and a 20-year career in the occupation from part a, starting in year 5.
To clarify the time sequence:
Year 0 (with a discount factor of 1): nothing happens
Years 1-4: Attending college versus earning the non-college wage Years 5-24: Earning the college wage versus the non-college wage
If you’re not using Excel, this might be a useful equation: the present value in year 0 of a constant stream of income, starting in year 1:
n
C
1 (1 + r)n
PV =
= C[
]
=1
(1 + r)
t
r
Xt
You can calculate the present value of the college career as if it started in year 1, then discount it back four additional years.
2