Joanne has just completed high school and is trying to determine whether to go to junior college for two years or go directly to work. Her objective is to maximize the savings she will have in the bank five years from now. If she goes di¬rectly to work, she will earn $20,000 per year for each of the next five years. If she goes to junior college, for each of the next two years she will earn nothing— indeed, she will have to borrow $6,000 each year to cover tuition and books. This loan must be repaid in full three years after graduation. If she graduates from junior college, in each of the subsequent three years, her wages will be $38,000 per year. Joanne's total living expenses and taxes, excluding tuition and books, equal $15,000 per year.
a. Suppose, for simplicity, that Joanne can borrow and lend at 0 percent interest. On purely economic grounds, should she go to junior college or work?
b. Does your answer to part a change if she can earn $23,000 per year with only a high school degree?
c. Does your answer to part a change if Joanne's tuition and books cost $8,000 per year?
d* Suppose that the interest rate at which Joanne can borrow and lend is 10 percent per year, but other data are as in part a. Savings are deposited at the end of the year they are earned and receive (compound) interest at the end of each subsequent year. Similarly, the loans are taken out at the end of the year in which they are needed, and interest does not accrue until the end of the subsequent year. Now that the interest rate has risen, should Joanne go to college or go to work?