Question

7.4Suppose Norma will live and work forever, and the interest rate i is 10 percent. What does it take to get Norma to migrate?

(a)Set NPV to zero in Equation 7.6 to solve for the wage gain Δw that leaves Norma indifferent between moving and not moving.

(b)Assume that the moving cost c (in dollars) increases linearly with distance d (in miles). In particular, let c = 1000 + d, and use this equation to express Norma’s reservation wage gain as a function of distance d.

(c)For a move of 400 miles, Norma requires a wage gain of $_____ per year.

(d)Norma has a job offer from an employer 1,000 miles away. The wage offer is $250 per year more than she makes on her current job. Does she move to the new job?

Equation 7.6= " NPV= -C + Δw/ i "

Answer 1

ANSWERS:

a) The equation 7.6 is NPV=-C+W/i. By setting NPV zero, we have -C+W/i = 0, i=10% i.e; i=0.1

By substituting i=0.1 in the equation and solving for wage gain , we have  W=0.1C OR C=10W.

To be indifferent from moving or non moving, the wage gain should be equal to cost of moving.

The solution to the problem states that the wage gain should be at least one-tenth of cost moving to be indifferent.

b) Wage gain as function of distance.

From our solution we have W=0.1 C. substitute the value of C in this equation. C=1000+d (given), where d is distance in miles. Thus W=0.1(1000+d)= 100+0.1d.

wage gain as the function of distance is W= 100+0.1d.The answer.

c) Wage gain for a move of 400 miles.

Substituting the value of 'd' in the equation , we get:

W= 100+0.1(400)= $140.

d) Decision to move 1000 miles away

Wage gain from new offer= $250

Indifferent wage gain for moving 1000 miles away is:

W= 100+0.1(1000)= 100+100=$200.

Since wage gain from the new offer($250) is more than the indifferent gain at 1000 miles($200), She should move to the new job.