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Noah has heard about a big flood that is coming his way and is deciding whether to move or not. There are four periods.
(a) If he stays, he can remain at his job as a boat builder. He will earn $30 a period for all four periods. If he leaves, he will not be in a big city and has to start over with his business. Thus he will earn $10 in the first period, $20 in the second period, $30 in the third period, and $40 in the last period. It will cost him $5 to move. With a discount rate of 15%, calculate the present value of staying and the present value of moving. Should Noah move?
(b) Noah realizes that he should also care about the money he spends every period and not just the money earned. If he stays in the city, he has to pay $10 to live every period. If he moves, he only has to pay $5 to live. Recalculate both present values with this new information. Should Noah move?
(c) Noah has decided that he doesn’t care about money that much. He cares about how his family feels and about his living conditions. If he stays he would get a utility of 5 in each period. If Noah goes, he will have a utility of 20 in each period, but an initial moving disutility of 30. Recalculate the present values using these utility numbers. Should Noah move?
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