1. Fletcher lives for three periods. He is currently considering three alternative education-work options. He can start working immediately, earning $104,720 in period 1, $114,580 in period 2, and $110,880 in period 3. Alternatively, he can spend $61,600 to attend college in period 1 and then earns $209,440 in periods 2 and 3. Finally, he can receive a doctorate degree in period 2 after completing his college education in period 1. He will spend $61,600 to attend college in period 1 but graduate school will cost him nothing as his expenses on tuition and books will be covered by a research assistanceship. After receiving his doctorate, he will become a professor in a business school and earn $431,200 in period 3.

a. Give a plausible economic explanation as to why his earnings fluctuate as they do if he starts work immediately in the first option.

b. Suppose Fletchers discount rate is 5%. What education-work path would you expect Fletcher to select? Why? Show all necessary work.

c. Suppose Fletchers discount rate is 10%. What education-work path would you expect Fletcher to select? Why? Show all necessary work.

d. Explain what the discount rate represents in this type of model