8-3. Patrick and Rachel live in Seattle. Patrick\'s net present value of lifetim
ID: 1130254 • Letter: 8
Question
8-3. 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. If Patrick and Rachel choose where to live based on their joint well-being, will they move to Atlanta? Is Patrick a tied mover or a tied stayer or neither? Is Rachel a tied mover or a tied stayer or neither?Explanation / Answer
8-3
In Seattle,
Calculate combined net present value of lifetime earnings -
Combined value = NPV of life time earnings of Patrick + NPV of life time earnings of Rachel
Combined value = $125,000 + $500,000 = $625,000
In Atlanta,
Calculate combined net present value of lifetime earnings -
Combined value = NPV of life time earnings of Patrick + NPV of life time earnings of Rachel
Combined value = $155,000 + $510,000 = $665,000
Total cost of moving to Atlanta = $50,000
So,
Net combined value = $665,000 - $50,000 = $615,000
It can be seen that joint well being will be lower if they move to Atlanta.
So, on basis of joint well-being, Patrick and Rachel will choose to live in Seattle.
On individual basis, taking into account the cost of moving, Patrick would be able to increase his net present value of lifetime earnings by $5,000 if he moves to Atlanta while there will be decrease of $15,000 for Rachel if she moves to Atlanta.
So, it is profitable for Patrick to move to Atlanta but on basis of joint well being, he has to remain in Seattle.
Thus, Patrick is a tied-stayer.
Rachel is neither.
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