2. (30 points total) Lisa is about to graduate with an undergraduate degree in e

Question

2. (30 points total) Lisa is about to graduate with an undergraduate degree in economics. She estimates that if she gets a job after the university the present value of her lifetime earnings on the intended career path is $240,000. If she takes two years off work and gets a master's of science (MS) degree in economics, the present value of her lifetime earnings is $254,000. The annual cost of an MS degree in economics is $10,000 (payable at the beginning of each year) and the real interest rate is 10%. (12 points) What is the discounted (present value) cost of the MS degree in economics? What is its discounted (present value) benefit? A. B. (8 points) Should Lisa get an MS degree? Suppose labor market conditions for young just-out-of-college economists suddenly deteriorate. She now estimates that without an MS degree her lifetime earnings would be $200,000, and with a degree they would be $245,000. The annual cost of an MS degree remains the same as before, but the real interest rate falls to 5%. C. (10 points) What should Lisa's choice be in this situation? Explain your answer

Explanation / Answer

Total cost of MS degree (present value ) = 10000+10000/(1.1) = $19090.90

Benefit from doing MS degree = $(254000-240000) = $14000

Net Benefit = Benefit - Cost of getting an MS degree

Net Benefit = 14000 – 19090.90 = -$5090.90.

LiSa will not get an MS degree.

C) Now,

Total cost of MS degree (present value ) = 10000+10000/(1.05) = $19523.81

Benefit from doing MS degree = $(245000-200000) = $45000

Net Benefit = Benefit - Cost of getting an MS degree

Net Benefit = 45000 – 19523.81 = $25476.19.

LiSa will now go for a MS degree because net benefits from getting a MS degree are positive.

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