Practice Cost-Benefit Question Zhengxi, aged 21, is considering whether or not to go to university for four years. For simplicity assume that he is paid, and pays tuition, at the beginning of each year, and that his alternative income streams are both in real terms. If he attends university he will earn $40000 per year after graduation. If he does not attend he will earn $35000 per year. Zhengxi expects that the probability of unemployment will be constant each year of his working life at 10% if he attends university, and 20% if he does not. He expects to retire at age 65 (e.g. he expects to work for 40 years if he attends university). The direct costs of attending university are $5000 per year. The real rate of interest is 4%.
1)Identify the direct and opportunity costs of attending university.
2)Based on Zhengxi's expectations, show whether he should go to university