3240 Week 10 Exercises

Textbook Ch 9: #1, 3, 4, 5, 6, 8.
Textbook Chapter 9: #1
 Situation (Modified) For university education: 4- year period
 Cost: Tuition $600 per year, book $100 per year
 Could earn $6000 per year without university education
 With university education: could earn $10000
 r= 5%
 T=15 years
 Question: Would you go for university education?
 PV of Cost of education = 2 3 4 1.05
6700
1.05
6700
1.05
6700
1.05
6700
  
 PV of Benefit of education = 5 15 1.05
4000
…..
1.05
4000
   
 PV of cost= )} 23757.87
1.05
1
1 (
0.05
1.05
{
1.05
6700
)
1.05
1
1.05
1
1.05
1
1 (
1.05
6700
2 3 4      
 PV of benefits= )} 27334.83
1.05
1
1 (
0.05
1.05
{
1.05
4000
}
1.05
1
…..
1.05
1
{1
1.05
4000
5 10 5 11        
 Will choose the university education.
 Now let’s apply infinite time or T 
 PV of Benefit of education =           5 15 1.05
4000
…..
1.05
4000
= } 65816.198
0.05
1.05
{
1.05
4000
}
1.05
1
…..
1.05
1
{1
1.05
4000
5 10 5           
Textbook Ch 9: #3:
 Situation: Two-period after high school
 If work without university education = YH for the first and second period
 If choosing university education :
First year: Spending $5000 for university education and earning $5000 from
summer job
Second year: earn YU (after university) .
Page 2 of 2
 Define the condition for choosing university education:
 PV of High school only =
r
Y
Y H
H 

1
 PV of university education =
r
YU
 1
 U H H
H
H
U Y Y r Y
r
Y
Y
r
Y
   

 

(1 )
1 1
 U H Y r Y ) 2 (  
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