An economic model suggests that for every additional year of education

An economic model suggests that for every additional year of education, the future wages increase by 5 percent.

If Richard, with 12 years of education, earns $20 per hour, how much will he earn per hour if he decides to undertake four additional years of education?

ANSWER

The model suggests that if Richard earns $20 per hour, an additional year of education will increase his hourly wages to 1.05 × $20. Therefore, four additional years of education will increase his hourly wage to 1.05 × 1.05 × 1.05 × 1.05 × $20 or $24.31 per hour.