
(a)
Determine whether Person J goes to junior college or work.
(a)

Explanation of Solution
According to the given information, there are two options.
Option 1:
If Person J plans to go to work, the earning will be $20,000 per year. This means, after 5 years, the total earning will be $1 00,000
Option 2:
If Person J plans to go to junior college, the earnings after 2 years will be $38,000 per year. This means, after 5 years, the total earning will be $114,000
Since Person J’s objective is to maximize the savings, he will opt the second option. That is, goes to junior college.
(b)
Determine whether Person J goes to junior college or work, if the earnings increase.
(b)

Explanation of Solution
If Person J‘s earning is $23,000 per year, after 5 years, the total earnings will be $115,000
(c)
Determine whether person J goes to junior college or work, if the tuition and book costs increase.
(c)

Explanation of Solution
As explained in part ‘a’, Person J’s savings from the 1st option is $25,000 and the savings from the second option is $27,000. If the tuition fee and book costs increase from $6,000 to $8,000, the total cost after 5 years become $91,000
Since Person J’s objective is to maximize the savings, he will opt the 1st option. That is, goes to work.
(d)
Determine whether Person J goes to junior college or work with the 10% interest rate.
(d)

Explanation of Solution
As mentioned in part ‘a’, the savings of the 1st option is $25,000 after 5 years. That is, $5,000
In 1st year, the savings is $5,000.
In 2nd year, the savings is $5,500 (10% 5,000 plus 5,000).
In 3rd year, the savings is $6,050 (10% 5,500 plus 5,500).
In 4th year, the savings is $6,655 (10% 6,050 plus 6,050).
In 5th year, the savings is $7,320.50 (10% 6,655 plus 6,655).
If Person J plans to opt option 2, that is, ‘goes to junior college’, then at the end of the 1st year, the total cost is $21,000
Thus, if Person J opts the second option, the total cost after 5 years with 10% interest will be $30,746. After 2 years, Person J will complete the course and enter into the world of work. Thus, the total cost for the reaming 3 years can be calculated as follows:
Thus, after entering into the job, the total cost will be $27,951.
In years 3 to 5, the earnings of Person J will be $38,000 per year and he spends $15,000 as expense. Thus, the savings will be $23,000 per year. At the end of 5 years, the value of these savings can be calculated as follows:
Thus, at the end of 5 years, the value of these savings will be $76,130.
Now, subtract the value of debts of Person J from the savings as follows:
Therefore, the saving yields $17,433 in assets at the end of five years. This amount is less if Person J skips junior college. Since Person J’s objective is to maximize the savings, he will opt the 1st option. That is, goes to work.
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Chapter 7 Solutions
Principles of Macroeconomics
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