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Factor market problem (economics)

  1. Dec 11, 2009 #1
    Vasya can go to college for 4 years or start working immediately after high school. If he chooses to work, the best he can do is earn $20,000 a year for the rest of his life, which would last forever. The real interest rate is r=10%, thus, the present value of his lifetime income is the sum of present values of his annual incomes: which, using the formula for the sum of infinite geometric series,

    or $20,000 (1.1/0.1) =$220,000.

    If Vasya goes to college for four years, he would be earning zero income during his studies, but, after graduating, his annual income would be $40,000 for the rest of his infinite life.
    What is the maximum amount Vasya should be willing to pay for his college degree (assuming that he pays it in full and up-front)?
  2. jcsd
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