Question

Your friend currently works as an accountant at a public accounting firm in the small town of Beaver Falls, Pennsylvania. He is offered a job in New York City for $60,000. Your friend calls you and tells you that he is excited about the new job offer, which gives him a raise from his current salary of $50,000. Based on your knowledge of economics, you think that Choose one: A. your friend most likely should not be quite so excited because the extremely high cost of living in New York City means his real salary increase will be less than he imagined. B. your friend has no reason to be excited because higher pay implies more job responsibilities and more working hours. C. your friend has every reason to be excited because he will be getting paid 120% of what he used to be paid. D. your friend has reason to be excited because in a bigger city he will have more things to do and his higher salary will allow him to spend on those activities.

Answer 1

Answer: Option (A) is correct.

Step-by-step explanation:

Current salary = $50,000 at Beaver Falls, Pennsylvania

Offered salary = $60,000 at New York City

So, there is a difference of $10,000 between the current and offered salary and he also knows that cost of living is higher in New York city as compared to the previous job location. Hence, he is not so excited about the new job offer.

The growth rate is calculated on the basis of real terms not in nominal terms. The nominal income of an individual increases from $50,000 to $60,000 but the real income doesn't increases because of high cost of living in New York city.