Public Finance (The McGraw-Hill Series in Economics)
10th Edition
ISBN: 9780078021688
Author: Harvey S Rosen, Ted Gayer
Publisher: McGraw-Hill Education
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The Jeffersons have asked you what would be needed to fund the children’s future college costs. Assume each child will begin college at age 18 and graduate in four years. Assume current costs are $24,000 per year and are expected to increase by 5% per year and investments earn 7%.
A. Assuming no existing assets are dedicated to college, what is the annual savings amount required to fund the children’s education? The Jeffersons’ goal is to have an amount at the beginning of the freshman year for each child that is sufficient to fund a serial payment covering the $24,000 of current costs of college adjusted for inflation for each of the four years of college. Please include your calculator keystroke inputs [PV, I/YR, N, FV, and PMT (if needed)] for each step of this calculation. Also include whether any PMTs are in the end mode or the begin mode.
B. What would you say to the Jeffersons about their education funding situation? Write a script of a single paragraph as if you…
3. Suppose a high schools graduate earns $40,000 per year while a college graduate makes $80,000.
Assume these wages will not change over time, and there are no other benefits to going to college.
Explicit costs of going to college (tuition, books, supplies, etc.) are $30,000 per year. Ignore the psychic
costs. The college education lasts four years. The retirement age is 65.
a. Say an 18 year-old decides to obtain college education. What can her annual discount rate be?
b. Say a 40 year-old has a discount rate of 5%. Will this person go to college?
16. You are thinking about going to graduate school to earn a master's degree, which you hope
will allow you to earn more money. Which of the following is NOT an incremental cash flow
associated with your decision to extend your schooling versus going into the workforce when
you finish your undergraduate degree?
A) the cost-of-living expenses, such as rent and food, while you are in graduate school
B) the cost of tuition
C) the lost income you could have earned by working rather than staying in school
D) the cost of books and other supplies required for your graduate studies
Chapter 7 Solutions
Public Finance (The McGraw-Hill Series in Economics)
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