Suppose people with 15 years of schooling average earnings of $60,000 while people with 16 years of education average $66,000. a. What is the annual rate of return associated with the 16th year of education?
b. It is typically thought that this type of calculation of the returns to schooling is biased, because it doesn't take into account innate ability or innate motivation. If this criticism is true, is the actual return to the 16th year of schooling more than or less than your answer in part (a)?

a. The annual rate of return associated with the 16th year of education is:

9.1%

b. The actual return of return to the 16th year of schooling is more than 9.1%.

Explanation:

a) Data and Calculations:

Average income for people with 15 years of schooling = $60,000

Average income for people with 16 years of schooling = $66,000

Income associated with the 16th year of education = $6,000 (66,000 - 60,000)

Annual rate of return with the 16th year of education = $6,000/$66,000 * 100 = 9.1%

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