1. Assume agents i have wealth W, which can be invested in HC in the form...

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1. Assume agents i have wealth W, which can be invested in HC in the form of schooling or in physical capital. Schooling costs ps per unit of schooling and returns lifetime earnings of BS-B2 S. All individuals can save and earn a return on physical capital, r. However, households with W< W* borrow at a rate r > r. Households with W > W* can borrow at rate r. Households have linear utility over earnings. (a) Write down and solve the investment problem for households with W > W*. (b) Write down and solve the investment problem for households with W< W. This is a bit trickier since there will two possible solutions: one where these households save and one where they borrow. 1. Assume agents i have wealth W, which can be invested in HC in the form of schooling or in physical capital. Schooling costs ps per unit of schooling and returns lifetime earnings of BS-B2 S. All individuals can save and earn a return on physical capital, r. However, households with W< W* borrow at a rate r > r. Households with W > W* can borrow at rate r. Households have linear utility over earnings. (a) Write down and solve the investment problem for households with W > W*. (b) Write down and solve the investment problem for households with W< W. This is a bit trickier since there will two possible solutions: one where these households save and one where they borrow.

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1 a For households with W W Max U B pS rW I st I pS Where B BS B2S2 lifet... View the full answer