Refer to the equations and graph below for assistance in answering these questions. 1. Peter lives

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Refer to the equations and graph below for assistance in answering these questions.

1. Peter lives for three periods. He is currently considering three alternative education-work options.

He can start working immediately, earning $100,000 in Year 0, $110,000 in Year 1 (as his work experience leads to higher productivity), and $90,000 in Year 2 (as his skills become obsolete and physical abilities deteriorate).

Alternatively, he can spend $50,000 to attend college in Year 0 and then earn $180,000 in Years 1 and 2.

Finally, he can receive a doctorate degree in Year 1 after completing his college education in Year 0. This last option will cost him $50,000 in Year 0, but it will cost him nothing ($0) when he is attending graduate school in the Year 1 as his expenses on tuition and books will be covered by a research assistantship. After receiving his doctorate, he will become a professor in a business school and earn $400,000 in Year 2. Peter's discount rate is 20 percent per period.

What education path maximizes Peter's net present value of his lifetime earnings?

2. A high school graduate has to decide between working and going to college. If she works, she will work for the next 50 years of her life. If she goes to college, she will be in college for 5 years, and then work for 45 years. In this model, the rate of discount that equates the lifetime present value of not going to college and going to college is 8.24% when the cost of each year of college is $15,000, each year of non-college work pays $35,000, and each year of post-college work pays $60,000. For each of the parts below, discuss how the rate of discount that equalizes the two options would change and whether she would make a different schooling decision based on the change. Note that the way to answer these questions is to follow the logic of discount rates, you do not need to make explicit calculations.

(a) Each year of college still costs $15,000 and each year of post-college work still pays $60,000, but each year of non-college work now pays $40,000.

(b) Each year of college still costs $15,000 and each year of non-college work still pays $35,000, but each year of post-college work now pays $80,000.

(c) Each year of non-college work and post-college work still pays $35,000 and $60,000 respectively, but now each year of college costs $35,000.

(d) Each year of college still costs $15,000. The first year of non-college work pays $35,000 but then increases by 3 percent each year thereafter. The first year of post-college work pays $60,000 but then increases by 5 percent each year thereafter.