Question

David is a high school senior. He must decide whether to work or go to college. If he has a high school degree, he will make $20,000 per year. If he has a college degree, he will make $35,000 per year. To get a college degree, he must go to school for one period at a tuition cost of $10,000. Assume David lives for 3 periods and his discount is 0.1.

(a) What is David’s direct cost of attending college? What is his opportunity cost? What will he decide to do?

(b) Now, assume David can get a full-ride scholarship (thus H = 0). Now what will he do?

(c) Since David is receiving a scholarship for his undergrad degree, he is now debating about going to grad school. If he decides to get his PhD, he must go to school in the first period (undergrad) at a cost of $0, and he must go to school in the second period (grad school) at a cost of $0. With a PhD, David can make $77,000 per year. Will David go to grad school? You only need to compare undergrad and grad school.

Answer 1

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