Question
Ellen is trying to decide whether to stay in her small-town home or move to the big city after college graduation (the last education she
Ellen is trying to decide whether to stay in her small-town home or move to the "big city" after college graduation (the last education she will ever get). The only job available to her in her hometown is in the family business at a yearly salary of $50,000 per year, and she will never get a raise. If she moves to the big city, her real wage starts at $25,000 per year and increases at x% per year. She plans to work for only 20 more years, her discount rate is r=.05, and the cost of living is assumed the same in both her hometown and the big city. What x makes her indifferent between staying in her hometown and moving to the big city if all she cares about is maximizing her present discounted value of earnings? (Excel or some equivalent will be useful here.)
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