Home » Stephanie has just finished high school, and expects to live two more periods, period 1 and period 2. She has two career paths open to her:

Stephanie has just finished high school, and expects to live two more periods, period 1 and period 2. She has two career paths open to her:

I need help with this question!

1. Stephanie has just finished high school, and expects to live two more periods, period

1 and period 2. She has two career paths open to her: under path A she can enter the

work force and start earning money immediately; under path B she can go to college

in period 1 at a cost and work in period 2. If she chooses option A, she will earn

\$50,000 in each period. Under option B, she pays a cost of \$150,000 in period 1 but

earns \$300,000 in period 2. Stephanie can borrow and save at an interest rate r.

a. For what value of r will Stephanie be indifferent between career paths A and

B?

b. Let v(c) be an increasing and concave function, and suppose Stephanies

preferences over consumption in period 1 and 2 are described by the utility

function u(c1,c2)= v(c1)+ v(c2). If the interest rate is zero, how much will

Stephanie borrow in period 1, and what will her consumption in the two

periods be?

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