Consider an individual who has two choices, obtain lower education or higher education. They face the following constraints: i) ii) The interest rate is 10% per period iii There are two periods iv) All costs and earnings, ineluding college costs are accrued at the end of the period They have an initial endowment of $10,000, which is available at the beginning of period 1 College tuition is $12,000 Lower Education Earnings are $15,000 each year Higher Education Earnings are SO for the first period and $44,000 in each subsequent period For each of the following, compute the PDV of each of the following Endowment Educ Costs Earnings (Lesser Educ) Earnings (Higher Educ) a) c) b) Compute the total PDV over both periods for both Lesser Education and Higher Education and determine which is greater Using the equation discussed in class, calculate the net present value for costs and benefits for each period. The basic version of the equation is on p. 283. Net present value for period i can be written as c) Where B and C are the benefits and costs for the period Should this person get the higher education, or not? Briefly describe why or why not Suppose there are now three periods, where a person with lower education has earnings of $15,000 in each of the three periods, and the person with higher education had no earnings in the first period, and $44,000 in each of the last two periods. e Should this person get the additional education? f)Why did your answer change? Consider an individual who has two choices, obtain lower education or higher education. They face the following constraints: i) ii) The interest rate is 10% per period iii There are two periods iv) All costs and earnings, ineluding college costs are accrued at the end of the period They have an initial endowment of $10,000, which is available at the beginning of period 1 College tuition is $12,000 Lower Education Earnings are $15,000 each year Higher Education Earnings are SO for the first period and $44,000 in each subsequent period For each of the following, compute the PDV of each of the following Endowment Educ Costs Earnings (Lesser Educ) Earnings (Higher Educ) a) c) b) Compute the total PDV over both periods for both Lesser Education and Higher Education and determine which is greater Using the equation discussed in class, calculate the net present value for costs and benefits for each period. The basic version of the equation is on p. 283. Net present value for period i can be written as c) Where B and C are the benefits and costs for the period Should this person get the higher education, or not? Briefly describe why or why not Suppose there are now three periods, where a person with lower education has earnings of $15,000 in each of the three periods, and the person with higher education had no earnings in the first period, and $44,000 in each of the last two periods. e Should this person get the additional education? f)Why did your answer change
