Question

Consider a household consisting of four college friends. The friends have made a commitment to live together for the next five years. Presently they live in Milwaukee where Abby will earn $200,000, Bonnie will earn $120,000, Cathy will earn $315,000, and Donna will earn $150,000 over the next five years. They have the option of moving to Miami. Moving to Miami would impose a one-time moving cost of $5,000 on each person. If they move to Miami, however, Abby will earn $180,000, Bonnie will earn $150,000, Cathy will earn $300,000, and Donna will earn $100,000 over the next five years. Moreover, each friend prefers to live in Miami over Milwaukee. In particular, Abby and Bonnie both value the quality of life in Miami versus Milwaukee over the next five years at $40,000 while Cathy and Donna place the value at $25,000 each. Should the household move to Miami or stay in Milwaukee? Is anyone a tiedmover or a tied stayer?

Answer 1

Answer:

Explanation:

The total amount that Abby, Bonnie, Cathy and Donna would earn in Milwaukee in the next 5 years is

200000 + 120000 + 315000 + 150000 = $785000

Abbie and Bonnie only is

200000 + 120000 = $320000

Cathie and Donna only is

315000 + 150000 = $465000

The cost of moving to Miami is

5000 × 4 = $20000

The total amount that they would earn in Miami in the next 5 years is

180000 + 150000 + 300000 + 100000 = $730000

If we subtract the moving cost, the earnings in Miami would be

730000 - 20000 = $710000

Total value in Miami would be

710000 + 2(40000) + 2(25000) = $840000

Abbie and Bonnie only is

180000 + 150000 - 2(5000) + 2(40000) = $400000

Cathie and Donna only is

300000 + 100000 - 2(5000) + 2(25000) = $440000

From the calculations, there would be an overall increase in value if they move to Miami. Therefore, they should move.

The movement would favour Abbie and Bonnie and not Cathy and Donna.

Cathy and Donna are tied migrants because they would have preferred to stay at Milwaukee.

If they stay at Milwaukee, then Abbie and Bonnie are tied stayers.