Question

For this homework assignment, we present two ideal scenarios. Scenario #1: After graduation from high school, students begin jobs as construction workers and elementary school teachers. They expect their wages to remain relatively level throughout their careers. They marry five years after graduation from high school and raise large families with home schooling by the parents. Before marriage, both men and women work; once couples begin home schooling their children, one parent stays home, either the father or the mother. Scenario #2: After high school, students start pre-medical programs at college. They expect four years of college and four years of medical school, with costs of $40,000 a year. The students’ parents have no extra money, so the students borrow the tuition costs. After medical schools, they work for ten years as surgeons and medical specialists, then have one child that is sent to day care one year after birth and eventually to public school. Both parents work full time. In each scenario, what is the expected progression of income? For each career, what is the expected ratio of future income to current income (older construction worker vs young construction worker; surgeon vs college student). What is the likelihood of working with home schooled families vs one child in public school or day care? In each scenario, what is the expected progression of expenses? Consider current education costs and future costs of raising a family. In Scenario #1, why are expenses low before marriage and high after marriage? In Scenario #2, why are expenses high during college and medical school and low afterwards? In each scenario, do recent high school graduates save for future expenses or borrow from future income? Assume that all the students are good risks and we need not worry about defaults on loans. In which scenario is the real interest rate higher?

Answer 1