Open the SemiLogEarningsFn.xls workbook. Click the button to return the sheet to its default values. Change the length of working life L (in cell A11 of the TwoJobsModel sheet) to 31 and answer the questions below.
a. Because L fell from 41 to 31 years, what will happen to the present values of the earnings streams from the two jobs? Why does this happen?
b. Why does the PV of the Job 2 earnings stream fall by more than the PV of Job 1's earnings stream?
c. Run Solver to create a data set of four observations that tracks Job 2's equilib- rium salary for n = 3, 6, 9, and 12.
In other words, create a data set similar to the Job2(n) sheet.
d. Draw a chart of Job 2's salary as a function of n.
e. Create a new variable, ln Job 2 Salary, which takes the natural log of the Job 2 salary at each value of n. Draw a chart of ln Job 2's salary as a function of n.
f. Use the data set to estimate the rate of return to training. Report your regression results and calculations in coming up with your answer.
In the book, we estimated the rate of return to training as 7.7 percent per year even though the true IRR is 7 percent per year. Your answer (from the previous question) is even farther away from 7 percent. What is going on?