Choice and Cost Benefit Analysis > Two-Period Intertemporal Choice

Education and Training

Without any further training, Floyd expects to earn $30,000 in each of periods 0 and 1.  However, in period 0 he could enroll in either of two training programs.  Program A costs $5,000 in period 0 and would give him skills that would raise his period 1 income by $10,000.  Program B is more expensive but would raise his income more: it costs $20,000 but his raise would be $25,000. Floyd is able to borrow or lend at 10% and would like to have exactly twice as much consumption in period 0 as in period 1.

  1. Please determine which program, if any, would be best for Floyd. 
  2. Determine his optimal consumption bundle contingent on the program he should choose. 
  3. Does he save or borrow?  How much?
Solution
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 11/08/2009