Question
Consider an individual who lives for three periods. In the first period, the individual may either work or go to school, but not both. In
Consider an individual who lives for three periods. In the first period, the individual may either work or go to school, but not both. In the second and third period, the individual will work regardless of what their decision for the first period was. If the individual decides to work in the first period, then he/she will earn $40 in period 1, $50 in period 2, and $60 in period 3. If the individual decides to go to school in period 1, then she has to pay $100 in period 1; however, his/her earnings in period 2 will be $125 and in period 3 will be $275. Suppose that th discount or interest rate is constant at 7%. (Hint: period 1 refers to today and therefore does not require discounting)
a) Calculate the present value, if the individual chooses to work in the first period.b) Calculate the present value, if the individual chooses to go to school in the first period.c) Should the individual acquire education or not?d) Explain how the cost of education will influence the individual's decision.e) Explain how the discount rate will influence the individual's decision.
mycc Macmillan: 40 Short.. Consider an individual who lives for three periods. In the first period, the individual may either work or go to school, but not both. In the second and third period, the individual will work regardless of what their decision for the first period was. If the individual decides to work in the first period, then he/she will earn $40 in period 1, $50 in period 2, and $60 in period 3. If the individual decides to go to school in period 1, then she has to pay $100 in period 1; however, his/her earnings in period 2 will be $125 and in period 3 will be $275. Suppose that th discount or interest rate is constant at 7%. (Hint: period 1 refers to today and therefore does not require discounting) a) Calculate the present value, if the individual chooses to work in the first period. b) Calculate the present value, if the individual chooses to go to school in the first period. c) Should the individual acquire education or not? d) Explain how the cost of education will influence the individual's decision. e) Explain how the discount rate will influence the individual's decisionStep by Step Solution
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