Earnings Functions Attempt to Find the Determinants of Earnings, Using $\begin{aligned}\widehat{\ln \left(\text { Earn }_{i}\right)}= & 0.54+0.083 \times E d u c, R^{2}=0.20, S E R=0.445 \\& (0.14)(0.011)\end{aligned}$

question 50

Essay

Earnings functions attempt to find the determinants of earnings, using both continuous
and binary variables.One of the central questions analyzed in this relationship is the
returns to education.
(a)Collecting data from 253 individuals, you estimate the following relationship $\begin{aligned}\widehat{\ln \left(\text { Earn }_{i}\right)}= & 0.54+0.083 \times E d u c, R^{2}=0.20, S E R=0.445 \\& (0.14)(0.011)\end{aligned}$ where Earn is average hourly earnings and Educ is years of education.
What is the effect of an additional year of schooling? If you had a strong belief that years
of high school education were different from college education, how would you modify
the equation? What if your theory suggested that there was a "diploma effect"?

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Definitions:

Market Price

The amount for which something can be sold on a given market at a specific point in time.

Cost of Equity

The earnings a firm needs to determine whether an investment satisfies its capital return criteria, commonly utilized in the process of capital budgeting.

Cost of Equity

The return a company is required to generate for its shareholders, often estimated using the Capital Asset Pricing Model (CAPM).

Market Price

The modern-day pricing for buying or selling an asset or service.