Question

You accept a job that pays out $15,000 your first year. You are given the option of either earning an additional $500 each year you work or 2% of your current salary. Your plan is to stay with this job for 4 years. Which option do you choose and how much will you make? 2% or $500? $​

Answer 1

To compare the two options, we need to calculate the total earnings for each option over the 4-year period.

Option 1: Earning an additional $500 each year

The total earnings for this option will be:

Year 1: $15,000

Year 2: $15,500 ($15,000 + $500)

Year 3: $16,000 ($15,500 + $500)

Year 4: $16,500 ($16,000 + $500)

Total earnings over 4 years = $15,000 + $15,500 + $16,000 + $16,500 = $63,000

Option 2: Earning 2% of current salary

To calculate the earnings for this option, we need to find the salary for each year using the formula:

salary = $15,000 + 2% × (previous year's salary)

Year 1: salary = $15,000

Year 2: salary = $15,300 ($15,000 + 2% × $15,000)

Year 3: salary = $15,606 ($15,300 + 2% × $15,300)

Year 4: salary = $15,924.12 ($15,606 + 2% × $15,606)

Total earnings over 4 years = $15,000 + $15,300 + $15,606 + $15,924.12 = $61,830.12

Therefore, the first option of earning an additional $500 each year results in higher total earnings of $63,000 over 4 years, compared to earning 2% of the current salary, which results in total earnings of $61,830.12. Hence, the first option of earning an additional $500 each year is the better choice.