Reference no: EM131605605

Martha lives for three periods. She is currently considering three alternative education-work options. She can start working immediately, earning $90,000 in period 1, $100,000 in period 2 (as her work experience leads to higher productivity), and $80,000 in period 3 (as her skills become obsolete and physical abilities deteriorate).

Alternatively, she can spend $40,000 to attend college in period 1 and then earn $200,000 in periods 2 and 3.

Finally, she can receive a doctorate degree in period 2 after completing her 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 (but she cannot work, hence her income is zero). After receiving his doctorate, she will become a professor in an Economics Department and earn $350,000 in period 3.

Martha's discount rate is 10 percent per period. 

1) Write Martha's present-value lifetime income in the three paths she can follow. Do not worry with rounding issues. I am going to be reasonable. Write like this:

Path 1 (start to work immediately)=

Path 2 (goes to College)=

Path 3 (goes to College and PhD)=

2) And answer: what education path maximizes Martha's net present value of her lifetime earnings?