Question

5. Mickey and Minnie live in Anaheim. Mickey’s net present value of lifetime earnings in Anaheim is $500,000, while Minnie’s is $150,000. The cost of moving to Orlando is $15,000 per person. In Orlando, Mickey’s net present value of lifetime earnings would be $550,000, while Minnie’s would be $125,000.

a) If Mickey and Minnie choose where to live based on their joint well-being, will they stay in Anaheim or move to Orlando?

b) Which of the following is Mickey (circle):            Tied-mover     Tied-stayer      Neither

c) Which of the following is Minnie (circle):            Tied-mover     Tied-stayer      Neither

d) What is the maximum moving cost they would jointly be willing to pay to move to Orlando?

Answer 1

Anaheim NPV Orlando NPV

Mickey- $ 500000 Mickey- $ 5,50,000

Minnie- $ 150000 Minnie- $ 1,25,000

a)- On based of their Joint well being, they should stay in Anahein because their NPV will be more in Anaheim. We have to deduct $ 15000 cost of moving.

NPV in Anaheim= $500000+$150000= $ 6,50,000

NPV in Orlando= $ 550000+$ 125000-$15000-$15000=$ 645000

b) In this scenario- Mickey would be Neither

c) Minnie should be Tied stayer. Because there is benefit of Mickey moving alone as it will increse NPV for Mickey after $ 15000 cost of moving.

NPV of Mickey in Anaheim= $500000

NPV of Mickey in Anaheim= $550000-$15000= $ 5,35,000

d) Max $ 25000 jointly moving cost they would be willing to pay.