Enrique lives in rural Ecuador and is finishing his high school.As an outstanding student, he was accepted by the leading privateuniversity, University de Quito to study in a two year program oncomparative literature and linguistics to become a college teacher.If he goes to university, he will pay a tuition fee of $1000 ($1 =1 peso) per year (for 2 years). Suppose also that there is a“psychological†cost of $400 associated with moving to the city ofQuito, which represents the money equivalent (paid only once in thefirst period) of leaving his family / girlfriend.
In the first year, Enrique can work in the library of theuniversity and earn $1000 per year, while during the summer of thesecond year he can do an internship and earn $2000. At the thirdyear, he may start working as a college teacher, where he will earn$4000 per year for the first 2 years of his career. For the sake ofthis exercise, suppose that we only have 4 periods.
If Enrique refuses to go to University, he will work on thefamily farm and will earn $1000 per year for the first two years.His father promises him a salary equal of $3000 from the thirdyear. Consider a discount factor of 10%.
a) Calculate the expected present value benefits ofstudying.[7points]
b) Calculate the expected present value costs of studying(direct and indirect costs) [7
points]
c) Should Enrique go to the University? [1 points]
