4.2 Andy and Kim live together. Andy may invest

$10,000 (possibly by taking on an extra job to earn the additional money) in Kim’s education this year. This investment will raise Kim’s future earnings by $24,000 (in present value terms—see Chapter 16). If they stay together, they will share the benefit from the additional earnings. However, the probability is 12 that they will split up in the future. If they were married and then split, Andy would get half of Kim’s additional earnings.

If they were living together without any legal ties and they split, then Andy would get nothing.

Suppose that Andy is risk neutral. Will Andy invest in Kim’s education? Does your answer depend on the couple’s legal status? A