1. QUESTION1: Education decision makings (60%)
2. Following table shows (1) the potential costs of going to a school, (2) potential earnings when a student does not go to the school, and (3) potential earnings when a student goes to the school. All the unit of the currency is in $.

(1)

Agedirect cost of going to school

1515020350250300350400450500550600650

(2)

Earnings, not going to school 1200 1300 1500 1600 1800 2000 2200 2500 2700 3000 3100

(3)

Earnings, going to school 0 0 2200 2400 2700 3000 3100 3500 3700 4000 4100

1-1. (5%) Calculate the cost and benefit of going to the school for each age. (hint: you need to consider opportunity costs of going to school. Reminding the graph in the lecture may help identifying costs and benefits.)

From here, instead of using the annual discount rate, we are going to use "5-years discount rate" to make our analysis

1

simpler. If the "5-years discount rate" is, then you are going to evaluate 5 years later with1+, and 10 years later

12

with(1+), and similar for later years. Assume that when you make educational decisions, you are at the age of 10.

1-2.(15%) Suppose 5-years discount rate is 11%. Compute present value of (1) cost going to school, and (2) benefit of going to school. Comparing present values of cost and benefit, is it worth going to school?

1-3. (15%) Suppose now 5-years discount rate is 25%. Again, compute present value of (1) cost going to school, and (2) benefit of going to school. Comparing present values of cost and benefit, is it worth going to school? Comparing the result in 1-2, and discuss differences in a few sentences.