1. (8 points) A worker is deciding whether to migrate from San Juan to New York. Assume that she lives forever. If she stays in San Juan, then her annual earnings are 25 from year 1 onwards. If she moves to New York, then her annual earnings are 75 from year 1 onwards. In this case, the worker incurs the migration cost M in year 0. Let the yearly discount rate be r = 0.10.

(a) If the worker stays in San Juan, what is the present value of her future earnings? Discount the earnings stream to year 0.

(b) Suppose that the worker decides to move to New York. What is the highest possible value of the migration cost M?

2. (8 points) The human resources department of a company is examining its personnel records. An analyst plots the probability of a worker leaving the firm in a given year against the number of years that the worker has been employed at the firm. The graph shows that senior employees have lower turnover compared to recent hires.

(a) Explain why investments in specific training might generate a negative relationship between job seniority and the separation probability.

(b) Why might seniority be negatively correlated with turnover even in the absence of on-the-job training?