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In: Economics

Peter lives for three periods. He is currently considering three alternative education-work options. He can start...

Peter lives for three periods. He is currently considering three alternative education-work options. He can start working immediately and earn $100,000 in period 1, $110,000 in period 2, and $90,000 in period 3. Alternatively, he can spend $50,000 to attend college in period 1 and then earn $180,000 in period 2 and 3. Finally, he can receive a doctorate degree in period 2 after completing his college education in period 1. This last option will cost him nothing in period 2 as his graduate school expenses on tuition and books will be covered by a research assistantship. After receiving his doctorate degree, he will become a professor in a business school and earn $400,000 in period 3.

Peter must make all college related expenses at the beginning of each period and he is paid at the end of every period.

a) Suppose that the market interest rate is given by 20 percent. What education path maximizes Peterís net present value of life time earnings?

b) What will be the optimal decision if the market interest rate is given by 0 percent?

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Expert Solution

Rahul Sunny answered 2 years ago
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