(20 pts) Patrick and Rachel live in Seattle. Patrick’s net present value of life
ID: 1205691 • Letter: #
Question
(20 pts) Patrick and Rachel live in Seattle. Patrick’s net present value of lifetime earnings in Seattle is $125,000, while Rachel’s is $500,000. The cost of moving to Atlanta is $25,000 per person. In Atlanta, Patrick’s net present value of lifetime earnings would be $155,000, while Rachel’s would be $510,000.
(a) (10 pts) If Patrick and Rachel choose where to live based on their joint well-being, will they move to Atlanta?
(b) (5 pts) Is Patrick a tied-mover or a tied-stayer or neither?
(c) (5 pts) Is Rachel a tied-mover or a tied-stayer or neither?
Explanation / Answer
(a) If they both choose where to live based on their joint well-being then, they will stay in Seattle because while staying in Seattle, they together earn $ 625,000 while in Atlanta they willl earn $ 665,000 but due to cost of moving there actual return will be $ 615,000.
Therefore, they choose to say in Seattle.
(b) If both Patrick and Rachel decided to move then, Patrick is neither a tied-mover nor tied-stayer.
(c) If both Patrick and Rachel decided to move then, Rachel is a tied-mover because he get better in his current job location but he went with Patrick because he gains positive return.
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