Peter lives for three periods. He is currently considering three alternative education-work options. He can start working
Question:
Peter lives for three periods. He is currently considering three alternative education-work options. He can start working immediately, earning \($100,000\) in period 1, \($110,000\) in period 2 (as his work experience leads to higher productivity), and \($90,000\) in period 3 (as his skills become obsolete and physical abilities deteriorate). Alternatively, he can spend \($50,000\) to attend college in period 1 and then earn \($180,000\) in periods 2 and 3. Finally, he can receive a doctorate in period 2 after completing his college education in period 1. This last option will cost him nothing when he is attending graduate school in the second period 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 period 3. Peter’s discount rate is 20 percent per period. What education path maximizes Peter’s net present value of his lifetime earnings?
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