Modify the Ben-Porath model studied in Section 10.3 as follows. Assume that the horizon is finite, and suppose that φ' (0)
where recall that δh is the rate of depreciation of human capital.
(a) Provide the necessary conditions for an interior solution. Highlight how these necessary conditions should be modified to allow for corner solutions where s(t) might take the value of 0 or 1.
(c) How do the earnings of the individual evolve over the life cycle?
(d) How would you test the implications of this model?