Name: Hafsah Fajar Jati

Matric number: 201604030055

1. Suppose a worker with an annual discount rate of 10 percent currently resides in Pennsylvania
and is deciding whether to remain there or to move to Illinois. There are three work periods left
in the life cycle. If the worker remains in Pennsylvania, he will earn $20,000 per year in each of
the three periods. If the worker moves to Illinois, he will earn $22,000 in each of the three
periods. What is the highest cost of migration that a worker is willing to incur and still make the
move?

Compare the present value of staying in Pennsylvania to the present value of moving to Illinois:

20,000 20,000
𝑃𝑉𝑃𝐴 = 20,000 + + = 54,710.74
1.1 1.12

22,000 22,000
𝑃𝑉𝐼𝐿 = 22,000 + + = 60,181.82
1.1 1.12

A worker will move if the present value of earnings in Illinois minus the costs of moving there
exceed the present value of earnings in Pennsylvania :
𝑃𝑉𝐼𝐿 − 𝐶𝑜𝑠𝑡𝑠 > 𝑃𝑉𝑃𝐴
Costs < 60,181.82 – 54,710.74 = 5,471.08

Thus, the highest cost of migration that a worker is willing to incur and still make the move is
$5,471.08.

2. Suppose high-wage workers are more likely than low-wage workers to move to a new state for
a better job.
(a) Explain how this migration pattern can be due solely to differences in the distribution of
wages.
For example, the migration costs are the same for all workers at 1,000,000 IDR. Then, if all
low-wage workers are paid either 3 Million or 4 Million IDR depending on productivity and
location, and that all high-wage workers are paid either 20 Million or 30 Million IDR
depending on productivity and location. The immediate result is that no low-wage worker
will ever migrate, while all high-wage workers who are not already earning 30 Million IDR
will migrate to a location where they are valued at 30 Million IDR.
(b) Explain how this migration pattern can take place even if the cost to moving is greater for
high- wage workers.
From the previous example, even if the cost to migration was 2 Million IDR for high wage
workers while it remained at 1 Million IDR for low-wage workers, the same pattern of no
low-wage workers migrating and all high-wage workers migrating until they earn 30 Million
IDR emerges.
3. Mickey and Minnie live in Orlando. Mickey’s net present value of lifetime earnings in Orlando is
$125,000. Minnie’s net present value of lifetime earnings in Orlando is $500,000. The cost of
moving to Atlanta is $25,000 per person . In Atlanta, Mickey’s net present value of lifetime
earnings would be $155,000, and Minnie’s net present value of lifetime earnings would be
$510,000. 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?
 As a couple:
The net present value of lifetime earnings of staying in Orlando 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 Orlando. Thus, there can only be a tied-stayer.
 For Mickey:
Staying in Orlando 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 Mickey would
choose to move to Atlanta. Therefore, Mickey is a tied-stayer.
 For Minnie:
Staying in Orlando is associated with a Net PV= $500,000, while moving to Atlanta would
yield a Net PV=$510,000 – $25,000 = $485,000. So Minnie would choose to remain in
Orlando. Thus, Minnie is not a tied- stayer.