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102B-PS_2--W2008

102B-PS_2--W2008 - year Calculate the present discounted...

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Prof. D. Malueg Problem Set #2 Econ 102B Due in Discussion Section the week of January 21 st . INSTRUCTIONS: Answer all of the questions. Show your work. 1. Matt is trying to decide whether to go to college. If he starts work right out of high school, he expects to earn \$50,000 for each of the next 40 years. Alternatively, he could spend four years in college, during which time he spends \$20,000 annually; after graduation he expects to earn \$70,000 for each of the next 36 years (note, he retires at the same age under both scenarios). At what interest rate are the present values of the cost/income streams the same? 2. Henry needs a car for going to law school. He needs the car for three years. He can buy or lease a new Honda Civic. A lease requires \$3000 at the signing and \$160 per month each of the following 36 months. At the end of the lease the car goes back to the dealer. Alternatively, Henry can buy the car for \$14,000 in cash; at the end of 36 months he is sure to sell it for \$6000. (a) Suppose Henry discounts future costs and benefits at 9% per
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Unformatted text preview: year . Calculate the present discounted value (cost) of each of Henry’s options. (b) Find the monthly discount rate (i.e., personal interest rate) at which Henry would be indi±erent between the two options. 3. Wilma bought a 10-year \$1000 bond when the interest rate was 5% per year. So her bond would provide her with \$50 at the end of each of ten successive years; and the \$1000 is also returned at the end of ten years. She has just collected her seventh annual payment on the bond. Suppose now she wants to sell the bond because she is in need of money sooner than expected. (a) Suppose the interest rate is still 5% and this is expected to continue for the indeﬁnite future. How much can she expect to sell her bond for? (b) Suppose the interest rate has increased to 10% and this is 10% rate is expected to continue for the indeﬁnite future. How much can she expect to sell her bond for?...
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