Question

For this homework assignment, we present two ideal scenarios. Scenario #1 : After graduation from high school students begin jobs as construction workers and elementary school teachers. They expect their wages to remain relatively level throughout their careers. They marry five years after graduation from high school and raise large families with home schooling by the parents. Before marriage, both men and women work; once couples begin home schooling their children, one parent stays home, either the father or the mother Scenario #2: After high school, students start pre-medical programs at college. They expect four years of college and four years of medical school, with costs of $40,000 a year. The students' parents have no extra money, so the students borrow the tuition costs. After medical schools, they work forten years as surgeons and medical specialists, then have one child that is sent to day care one year after birth and eventually to public school. Both parents work full time. A. In each scenario, what is the expected progression of income? For each career, what is the expected ratio offuture income to current income (older construction worker vsyoung construction worker, surgeon vs college student). What is the likelihood of working with home schooled families vs one child in public school or day care? In each scenario, what is the expected progression of expenses? Consider current education costs and future costs of raising a family. In Scenario #1, why are expenses low before marriage and high after marriage? In Scenario #2, why are expenses high during college and medical school and low afterwards? B. C. In each scenario, do recent high school graduates save for future expenses or borrow from future income? Assume that all the students are good risks and we need not worry about defaults on loans In which scenario is the real interest rate higher? D.

Answer 1

Answer (A): By Progression of income, we mean the rate of the increasing or decreasing difference in the income level due to the increasing income. In the case of Scenario 1, the students would be able to earn more during their younger days, i.e. when they are young and full of energy as they have chosen to work as construction workers and elementary school teachers. Whereas, in the case of Scenario 2, the students would be able to earn more during their older ages, as they have chosen to be surgeons or medical specialists, and with the passage of time, their experience in the medical sphere would increase, and hence their income level would also increase. Therefore, the expected progression of income in the case of scenario 1 would be negative, as income decreases with the passage of time. In the case of Scenario 2, the expected progression of income would be positive as income increases with the passage of time. The home-schooled child would have all the care and affection of his/ her parents and will probably study in an environment which is more conducive to his habits, however, home study has been seen to be less productive than the study at a school or university. Each child needs the total overall changing scenarios for the all-round growth. When a child studies under all situations, like home and outside, he gets to all the scenarios, and thus there is more chance of this child being more intellectual and developed. Therefore, working with the child who has studied in the day care of public school would be more fruitful.

Answer (2) : By Progression of expense, we mean the rate the decreasing or increasing difference in the expense level due to the increase or decrease of income or with the passage of time. In the case of Scenario 1, the expense level of the students as they grow old would be higher since they work under conditions which would challenge their physical condition and they might face more and more medical issues with the passage of time, also when they grow old, they might not be able to perform the same level of physical hard labor as compared to when they were young, So their expense level would considerably rise. Whereas, in the case of Scenario 2, the students would be able to earn more during their older ages, and therefore, even if their expenses rise when they become old, they would be able to pay for t easily and thus keep the expense under control. Therefore, the expected progression of expense in the case of scenario 1 would be positive, as expense increases with the passage of time. In the case of Scenario 2, the expected progression of expense would be negative as expense is always met with adequate income level. There is one more reason why the progression of expense is positive because after marriage, and when they have children, one of the parents have to leave their job and look after the children, which reduces their monthly income, thereby increasing their expense ratio when they grow old.

Answer (3) : In each Scenario, the students save for future expense, as their income would gradually decrease with the passage of time, therefore, when they grow old, they need to have the purchasing power to satisfy the expense requirements. In the case of scenario 1, the expense power at the hands of the students would be lesser as they are already under the pressure of satisfying the daily expense for their spouse and children. They are not in a condition to send the children to the schools because they cannot financially support it. One of the spouses has to stay back home to look after the schooling if the children at home. This creates a loom of financial dependence. Whereas in the case of Scenario 2, the students are financially at a much-improved stage and are able to support the proper education of their children and also save adequately ought for their own expenses when they grow old.

Answer (4) : The real interest rate is higher n the case of Scenario 1 , since their financial condition is weaker as compared to the children in Scenario 2. The Children, in scenario 2 , can pay for even the higher interest rates as they have high rate of incomes even when they grow old. But in the case of scenario 1 , the children are financially poor and for them even a small rate of interest would seem like a huge burden, Therefore, the real interest rate is higher in the case of the children in Scenario 1.