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In: Economics

Lloyd is completing high school and wondering about his future. He needs to make a choice...

Lloyd is completing high school and wondering about his future. He needs to make a choice between pursuing a bachelor’s degree in business or pursuing an MBA. Lloyd lives in two periods, the first relating to his education and the second relating to employment commencing after graduation and extending through retirement. In the first period, he completes his education. In the second period, he works in the labor market. Lloyd determines to attend the University of Utah.

If Lloyd pursues a bachelor’s degree at the U of U, he will spend $52,000 on education in the first period and earn $2.4 million in the second period. If he pursues an MBA, he will spend $139,000 on education in the first period and earn $2.8 million in the second period. Lloyd seeks to maximize his lifetime earnings.

Suppose that Lloyd can lend and borrow money at a 7% rate of interest between the two periods. Which degree will Lloyd pursue? Explain using both mathematic calculation and verbal description.

Solutions

Expert Solution

The Lloyd will prefer pursuing an MBA over a bachelor's since in the second period he will get more return from the MBA programme. Thus considering the conditions given in the question the best choice for Lloyd is to Pursue an MBA.

Case 1 Option (1.) Pursue Bachelors in business Expenses 52,000 in first period and in second period he may earn 2.4 millions$. Option (2.) Învest 52000$ at 7% thus 52.000( 1.07)-55,640 Life time earning is $2, 400, 000- $55,640 $2, 344, 360 Case2 Option(1.) Pursue MBA : Expenses 0.139 Millions in first period and in second period ear ning $2.8 millions. Option(2) Investing $0.139 millions at 7% thus 139.000(1.07) = 148,730$ Life time earning is 2, 800, 000 148, 730 $2, 651,270. Lloyd would prefer to MBA as his life time earning marimizes pursue

Rahul Sunny answered 1 year ago
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