Question: In the Optimal-Stopping Model assume that there are two types of workers: high-ability worker (a = 20) and low-ability worker (a = 10). The schooling-wage

In the Optimal-Stopping Model assume that there

In the Optimal-Stopping Model assume that there are two types of workers: high-ability worker (a = 20) and low-ability worker (a = 10). The schooling-wage profile is given by w (s) = 20+ axs where s is the number of years of schooling. The real interest rate is 10%. An econometrician tries to estimate the rate of return to schooling from the data, ignoring the fact that there are two types of workers. He runs the regression of Inw = a + Bs, where represents the rate of return to schooling. a. Why B should represent the rate of return to schooling? b. Calculate the rate of return that the econometrician will find? c. What is the true rate of return? d. Will the econometrician be overestimating or underestimating the rate of return

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