Gaby’s rate of return to years of education

Gaby’s rate of return to years of education follows the following equation:

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R = 0.5 ? 0.07S + 0.01A

where is her the rate of return to education, is years of schooling, and ! is a measure ofability.

3.a) Based on this equation, explain whether Gaby is experiencing increasing or decreasingreturns to years of education.

3.b) Based on this equation, explain whether ability increases or decreases the return to yearsof education.

3.c) If the interest rate is = 0.1, and if Gaby’s ability is ! = 75 (meaning that 75% of thepopulation has a lower ability than her), use the equation to find Gaby’s optimal number of years of schooling .