Question

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) If Patrick and Rachel choose where to live based on their joint well-being, will they move to Atlanta?

(b) Is Patrick a tied-mover or a tied-stayer or neither?

(c) Is Rachel a tied-mover or a tied-stayer or neither?

Answer 1

Solution: -

As a couple, the net present value of lifetime earnings of staying in Seattle is $500,000+ $125,000 = $625,000 and of moving to Atlanta is $510,000+ $155,000 - $50,000 = $615,000. Thus, as a couple, they would choose to stay in Seattle, and there can be at most one tied-stayer. (There cannot be a tied-mover, because the couple is not moving.)

For Patrick, staying in Seattle is associated with a net present value of $125,000, while moving to Atlanta would yield a net present value of $155,000 - $25,000 = $130,000. So, Patrick would choose to move to Atlanta. Therefore, Patrick is a tied-stayer.

For Rachel, staying in Seattle is associated with a net present value of $500,000, while moving to Atlanta would yield a net present value of $510,000-$25,000 = $485,000. So, Rachel would choose to remain in Orlando. Thus, Rachel is not a tied-stayer.