Question

Section 4

Homework Assignment

1. If the price of attending Big Benefits University is $42,000 a year, including tuition,

fees, books, and foregone earnings, what is the marginal cost of attending, if it takes you

5 years to graduate, and you assume a 3% annual inflation rate?

2. If the average college graduate makes $38,000 more every year than the average high

school graduate, what is the cumulative marginal benefit of a college education if the

average college graduate works for 40 years, assuming a 3% inflation rate?

3. Congratulations! Your first baby was born yesterday and is healthy and strong. To

guard against your premature death, you want to purchase a life insurance policy that will

replace $58,000 of your annual income until your child is 20 years old. How much life

insurance should you purchase, if you assume a 3% inflation rate? (Do NOT worry about

Social Security for this example)

4. You want to save for your child’s education, you can either choose an account that is

federally tax free that earns 6% or a regular taxed invested that earns 7%. If your

marginal tax rate is 25%, which should you choose?

5. If you save $50 a month for 18 years in an account that earns 5% annually, how much

money will you have for your child’s education?

6. If you want to have $50,000 for your child’s education in 18 years, how much do you

have to put away each year in account that earns 7% to reach that goal?

Answer 1

Question 1