Question:
Gaby's rate of return to years of education follows the following equation:
R = 0.5 - 0.07S + 0.01A
where is her the rate of return to education, is years of schooling, and ! is a measure of ability.
3.a) Based on this equation, explain whether Gaby is experiencing increasing or decreasing returns to years of education.
3.b) Based on this equation, explain whether ability increases or decreases the return to years of education.
3.c) If the interest rate is = 0.1, and if Gaby's ability is ! = 75 (meaning that 75% of the population has a lower ability than her), use the equation to find Gaby's optimal number of years of schooling .