Suppose there is a consumer whose life is divisible into three periods which follow each other consecutively—youth, middle age and post-retirement age. The length of each period is 20 years and the consumer earns no labour income on post-retirement. In his youth the consumer earns labour income at the rate of Rs 2,500 per month. In his middle age the consumer's earnings are uncertain—there is a 25% probability that he will earn at the rate of Rs 5,000 per month, alternatively, he will earn at the rate of Rs 10,000 per month. The consumer gets to know what his rate of earnings in middle age will be at the end of his youth. Assume that the consumer expects to pay no taxes, the nominal rate of return on saving and the rate of interest is always zero and there is no inflation expected throughout his life.
What is the present discounted value of the consumer's expected lifetime labour income (Rs in lakhs)?
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