Suppose a person is considering immigrating from their countryA(i.e., their home

country) to countryB. Suppose the person has a utility function that is increasing

linearly in income (i.e

U

m

>0 and

2

U

m2= 0).

In countryAthey expect to earn the average income $18,000 with a 90% chance. In

countryB, they expect to earn the average income $42,000; however, they only have a

25% chance of getting employment their fifirst year, a 50% chance of getting employment

their second year, and a 75% chance of getting employment their third year.

Suppose that it cost $10,000 to immigrate from countryAto countryB.

(a) If the discount rate is 0.05 (i.e.= 0.05), does it make sense to immigrate? Why

or why not?

(b) Suppose they decided to immigrate and after being in countryBfor one year, the

employment market market in countryAbooms and the probability of having a

job is 100%. What does our theory suggest will happen?

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