 Your answers should be typed (you may write or draw equations and graphs by hand, if they are needed).
 TOTAL length of answers you submit should be NO MORE than THREE pages, using 12pt font. Graphs / drawings may be attached on an extra sheet at the end, as an Appendix.
 This is an INDIVIDUAL assignment and you must submit your own individual piece of work.

Answer ALL Questions
1a. Jane has to decide whether she should stop her education at the end of high school (age 18)
or continue further study at university. Explain how the human capital model could help Jane
decide whether to go to university. In your answer, you may want to use the idea of ‘Net
Present Value’.

1b. Next, explain how the model predicts whether Jane’s decision changes if there are rises in
one or more of the following: (i) direct university tuition costs; (ii) interest rates; (iii) total years
for which Jane will work in her lifetime; and (iv) a rise in wages for those with a high school
diploma relative to university graduates.

2. Outline the basic model of probation and explain how a suitably designed probation contract
can aid in the selection of high ability workers to a firm.

3. Using the theory of piece rate contracts studied in lectures, explain how a worker decides
how much output to produce under a (i) fixed wage contract and (ii) a piece rate contract. In
the study by Lazear (2000) “Performance Pay and Productivity,” explain the change in wage
policy implemented by the Safelite company. Briefly outline the predicted effects of such a
change in wage policy. Briefly explain whether the empirical evidence supports these

4a. We studied the paper by Katz and Murphy (1992) “Changes in Relative Wages, 1963-1987:
Supply and Demand Factors.” Explain what happened to the wage structure in the US through
the 1980s. What are the possible explanations or hypotheses which might explain these

4b. Explain in detail the analysis undertaken by Katz and Murphy and their main findings. In
your answer you should discuss the kind of data used by the authors and the key outcome
variable(s) they focus on. Explain in detail how they use the supply and demand framework to
address their key question(s).

5. In the paper by Michaels et al. “Has ICT polarised skill demand: Evidence from eleven
countries over 25 years,” the authors seek to test the skill-biased technical change hypothesis.
Briefly explain what is meant by “skill-biased technical change.” Explain in detail the empirical
test proposed by Michaels et al. Briefly explain what they find and what they conclude about
the evidence in favour of the skill-biased technical change hypothesis.

6. In the study by Bertrand et al (2009) “Dynamics of the Gender Gap for Young Professionals in
the Corporate and Financial Sectors,” (i) what is the key question the authors address; and (ii)
what are the key outcomes they measure. Table 6 from this paper is reproduced at the end of
this Assignment in the Appendix. Write down the regression model estimated in column (1).
Write down the regression model estimated in column (2). How do you interpret the results in
columns (1) and (2)?

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