Yasmin Jamieson is 18 years old and is about to graduate from an Ottawa high school....

Yasmin Jamieson is 18 years old and is about to graduate from an Ottawa high school. She must decide: which university will she attend in September? She wants to follow a 4-year undergraduate degree in Economics. Yasmin has been accepted to attend McMaster University in Ontario, Canada, and Stanford University, California, United States. She faces only one annual cost for the each of the four years she is in university: tuition. Annual tuition at McMaster is $15,000. At Stanford, annual tuition is $45,000. Assume that she is not considering the option of working after high school. Therefore, do not consider the foregone labour earnings when going to university. After graduation, Yasmin has a strong interest in Labour Economics and hopes to receive job offers from Capital Economics (near Hamilton, Canada) and from Insight Economics (near Stanford, USA).

She knows that these two companies offer different annual salaries depending on where one has graduated. Capital Economics will offer a McMaster graduate an annual salary of $128,000 and a Stanford graduate an annual salary of $160,000. Insight Economics will offer a McMaster graduate an annual salary of $175,000 and a Stanford graduate an annual salary of $250,000.

Let’s assume the following:

• Yasmin’s objective in her decision-making is to maximize the present value of net future income over her career (that is, income net of costs).

• She is certain to get job offers from both companies.

• Please ignore differences between these two cities in terms of income taxes, the exchange rate, the cost of living and moving costs.

• These annual salaries do not change for the duration of her expected career, from age 22 to 65. Hint: this time horizon is sufficiently long to use the present value (PV) approximation formula.

• However, the present value of annual tuition costs should be calculated using the expanded present value formula.

• The market interest rate is 5%. Which university would you recommend to Yasmin? Please show all your calculations and explain your recommendation. (20 points)

Solutions

Expert Solution

Rahul Sunny answered 1 month ago

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