Mickey and Minnie live in Orlando. Mickey’s net present value of lifetime earnin
ID: 1125629 • Letter: M
Question
Mickey and Minnie live in Orlando. Mickey’s net present value of lifetime earnings in Orlando is $100,000, while Minnie’s is $200,000. In Atlanta, Mickey’s net present value of lifetime earnings would be $125,000, while Minnie’s would be $210,000.
a) The cost of moving to Atlanta is $5,000 per person. If Mickey and Minnie choose where to live based on their joint well-being, will they move to Atlanta? Is Mickey a tied-mover or a tied- stayer or neither? Is Minnie a tied-mover or a tied-stayer or neither?
b) Solve the same question when the cost of moving is $15,000. c) Solve the same question when the cost of moving is $20,000. d) Solve the same question when the cost of moving is $30,000.
Explanation / Answer
Answer:
a. For a couple, tied stayer is a person who sacrifices better income opportunities elsewhere because his partner is better off at the present location. Tied mover is a person who relocates with his partner to some other place despite having better income opportunities at the current location.
Net present value of lifetime earnings in Orlando:
Mickey- $100,000
Minnie- $200,000
Net present value of lifetime earnings in Atlanta:
Mickey- $125,000
Minnie- $210,000
Cost of moving to Atlanta- $5,000 per person
For Mickey and Minnie their joint Net present value of lifetime earnings in Orlando is:
= $100,000+ $200,000 = $300,000
And, Net present value of lifetime earnings in Atlanta is:
= $125,000+$210,000- $10,000 = $325,000
Since Net present value of lifetime earnings in Atlanta is higher hence, the couple would move to Atlanta.
For, Mickey Net present value of lifetime earnings in Orlando: $100,000 and Net present value of lifetime earnings in Atlanta is $125,000-$5,000= $120,000. Since his Net present value of lifetime earnings in Atlanta is higher hence he is neither a tied stayer nor a tied mover.
For, Minnie Net present value of lifetime earnings in Orlando: $200,000 and Net present value of lifetime earnings in Atlanta is $210,000-$5,000= $205,000. Since her Net present value of lifetime earnings in Atlanta is higher hence she is neither a tied stayer nor a tied mover.
b) Cost of moving to Atlanta- $15,000 per person
For Mickey and Minnie their joint Net present value of lifetime earnings in Orlando is:
= $100,000+ $200,000 = $300,000
And, Net present value of lifetime earnings in Atlanta is:
= $125,000+$210,000- $30,000 = $305,000
Since Net present value of lifetime earnings in Atlanta is higher hence, the couple would move to Atlanta.
For, Mickey Net present value of lifetime earnings in Orlando: $100,000 and Net present value of lifetime earnings in Atlanta is $125,000-$15,000= $110,000. Since his Net present value of lifetime earnings in Atlanta is higher hence he is neither a tied stayer nor a tied mover.
For, Minnie Net present value of lifetime earnings in Orlando: $200,000 and Net present value of lifetime earnings in Atlanta is $210,000-$15,000= $195,000. Since her Net present value of lifetime earnings in Orlando is higher hence she is a tied mover.
c) Cost of moving to Atlanta- $20,000 per person
For Mickey and Minnie their joint Net present value of lifetime earnings in Orlando is:
= $100,000+ $200,000 = $300,000
And, Net present value of lifetime earnings in Atlanta is:
= $125,000+$210,000- $40,000 = $295,000
Since Net present value of lifetime earnings in Orlando is higher hence, the couple would choose to stay in Orlando.
For, Mickey Net present value of lifetime earnings in Orlando: $100,000 and Net present value of lifetime earnings in Atlanta is $125,000-$20,000= $105,000. Since his Net present value of lifetime earnings in Atlanta is higher hence he is a tied stayer.
For, Minnie Net present value of lifetime earnings in Orlando: $200,000 and Net present value of lifetime earnings in Atlanta is $210,000-$20,000= $190,000. Since her Net present value of lifetime earnings in Orlando is higher hence she is neither a tied stayer nor a tied mover.
d) Cost of moving to Atlanta- $30,000 per person
For Mickey and Minnie their joint Net present value of lifetime earnings in Orlando is:
= $100,000+ $200,000 = $300,000
And, Net present value of lifetime earnings in Atlanta is:
= $125,000+$210,000- $60,000 = $275,000
Since Net present value of lifetime earnings in Orlando is higher hence, the couple would choose to stay in Orlando.
For, Mickey Net present value of lifetime earnings in Orlando: $100,000 and Net present value of lifetime earnings in Atlanta is $125,000-$30,000= $95,000. Since his Net present value of lifetime earnings in Orlando is higher hence he is neither a tied stayer nor a tied mover.
For, Minnie Net present value of lifetime earnings in Orlando: $200,000 and Net present value of lifetime earnings in Atlanta is $210,000-$30,000= $180,000. Since her Net present value of lifetime earnings in Orlando is higher hence she is neither a tied stayer nor a tied mover.