Question

Suppose that wages in Miami among the immigrant population are $20,000 a year and everywhere else outside the United States they are $10,000. Suppose the cost of migrating to Miami is proportional to how far someone must travel.   The cost of migrating is M=$36,000+ 20m, where m is the number of miles an immigrant’s origin country is from Miami. Please use this information to answer the following questions.

1. If Colombia is 1,500 miles from Miami, what is the maximum subjective discount factor that a Colombian migrant would have and still choose to immigrate to Miami?

2. If Cuba is 200 miles from Miami, what is the maximum subjective discount factor that a Cuban migrant could have and still choose to immigrate to Miami?

3. Based on the prior two questions should we see more migrants from Cuba or Colombia come to Miami?

Select one:

a. Cuba

b. Columbia

Answer 1

Note  the concept of Discounting Factor comes in finance and is used to determine the present value of future cash flows and the formula for the same in  finance is

Discounting factor = 1 / (1+P)n

Where P is the periodic interest rates on the investment, n number of years in question.

So here since interest rate or annual rate of return and number of years is not mentioned I have made assumptions and used simple discount formula. So please find our precisely what is expected regarding the calculation of discount factor and then you can post the same with appropriate figures, pardon if the discount factor considered is not consistent with the expected answer.

Solution -

Wages per Year of an immigrant worker = 20,000 dollars

Cost of migrating= 36000 dollars + 20 (m)

Cost of migrating for a worker from Colombia, where M =1500 miles

= 36,000 + 20*1,500

=36,000 + 30,000

=66,000

Discounting in % = ( cost of migrating - income earned / income earned ) * 100

(66000-20000 / 20000) *100 = 230 %

Cost of Migrating for a worker from Cuba , where M = 200 miles

=36,000 + 20*200

=36,000 + 4,000

=40,000

Discounting in % = (40000-20000 / 20000 )*100 = 100 %

Since the cost of migrating to Miami  from Cuba is less then that of Colombia as the distance between the origin and destination of the migrant workers is a determinant of cost of migrating and that between Cuba and Miami is less then that between Colombia and Miami hence the cost of migrating is also relatively less hence there will be more migration from Cuba then Colombia to Miami.