Business, 21.02.2020 16:37 cookiee1387

Suppose labor income starts at $50,000 and then grows at a constant rate of 2 per cent per year after that. Let wt be labor income in year t, so that wt = w0(1 + g) t , where w0 = 50, 000 and g = 0.02. (a) If the interest rate is R, what is the formula for the present discounted value (PDV from now on) today (in year 0) of labor income in a particular future year t? (b) Now add up these terms from t = 0 to t = 45 to get a formula for the PDV of labor income. Your answer should look something like that in equation (7.12) of the textbook. (c) Write your answer to part (b) so that it takes the form of the geometric series P DV = w0(1 + a + a 2 + a 3 + ... + a 45). What is the value of a that you find? (d) Apply the geometric series formula to compute the PDV for the case of R = 0.04, R = 0.03, and R = 0.02. What happens when R = 0.02 and why?

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Suppose labor income starts at $50,000 and then grows at a constant rate of 2 per cent per year afte...

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