Question

Thomas is considering pursuing 2 different jobs. In the first period, he must pay for education and then in the second period he earns money (he only lives for 2 periods). Job A requires $10,000 in education in the first period and then he earns $80,000 in the second period. Job B requires $45,000 in education in the first period and then he earns $120,000 in the second period.

a. Suppose Thomas can lend and borrow money at a 5 percent rate of interest between the two periods. Which career will he pursue? What if he can lend and borrow money at a 15 percent rate of interest? Will he choose a different option?

b. Suppose that Job A has an another educational track (perhaps a higher-level credential). Pursuing that track for Job A costs $15,000 in the first period and his earnings in Job A in the second period will be $90,000. If the interest rate is 5 percent, which choice will he make (lowcredential Job A, high-credential Job A, or Job B)?

Answer 1

a) The lending or borrowing rate = 5%

Let period 1 = 1 year and period 2 = 1 year

The condition is Job A requires $10,000 education in the period1 and then Thomas earns $80,000.

The total interest on education loan $10,000 in 2 years period = 10,000*5/100*2 = $1,000

Therefore, net earning of Thomas from Job A = $80,000-$10,000-$1000 = $69,000

Job B requires $45,000 in education in period 1 and then Thomas earns $120,000 in the Period 2

The total interest on education loan $45,000 in 2 years period= 45,000*5/100*2 = $4500

Therefore net earning of Thomas from Job B = $120,000-$45,000-$4500= $70,500

It is clear that net earnings from Job B is higher than Job A. Therefore, Thomas should pursue Job B.

Again, if lending or borrowing rate = 15%

then interest on $10,000 education loan for 2 years period= 10,000*15/100*2= $3000

Net earning of thomas from Job A = $80,000-$10,000-$3000=$67,000

Interest on $45,000 education loan for 2 years period = $45,000*15/100*2=$13,500

Therefore, net earning of Thomas from Job B = $120,000-45,000-$13,500= $61,500

From the results it can be said that Thomas should choose Job A option that offer higher earnings.

b) The total interest on education loan $15,000 for high credential job A= $15,000*5/100*2= $1500

Therefore, net earnings of Thomas from High credential job A = $90,000-$15,000-$1500= $73,500

From a) net earnings of Thomas from low credential job A = $69,000 and from Job B = $70,500

Therefore, Thomas should choose High credential Job A as it offers highest net earnings to Thomas.