4. Joanne has just completed high school and is trying to determine whether to go to university for two years or go directly to work. Her objective is to maximise the savings she will have in the bank five years from now. If she goes directly to work she will earn $19 500 per year for each of the next five years. If she goes to university, for each of the next two years she will earn nothing—indeed, she will

have to borrow $6000 each year to cover her fees and books. This loan must be repaid in full three years after graduation. If she graduates from university, in each of the subsequent three years her wages will be $37 500 per year. Joanne’s total living expenses and taxes, excluding fees and books, equal $15 000 per year. LO 13.5 MEDIUM a)Suppose for simplicity that Joanne can borrow and lend at 0 per cent interest. On purely economic grounds, should she go to university or work? b)Does your answer to part (a) change if she can earn $25 000 per year with only a high school certificate? c)Does your answer to part (a) change if Joanne’s fees and books cost $8000 per year? d)Suppose that the interest rate at which Joanne can borrow and lend is 10 per cent per year, but other data are as in part (a). Savings are deposited at the end of the year they are earned and receive (compound) interest at the end of each subsequent year. Similarly, the loans are taken out at the end of the year in which they are needed, and interest does not accrue until the end of the subsequent year. Now that the interest rate has risen, should Joanne go to university or go to work?