Question

In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion, your __________ wage increased but your ___________ wage has decreased.

Answer 1

Your nominal wage increased but your real wage has decreased.

Step-by-step explanation:

Given that,

Cost of living index in Las Vegas = 110

Cost of living index in San Francisco = 170

Salary in Las Vegas = $57,000

Salary offered to work in San Francisco = $70,000

The cost of living index of the two cities indicates that the cost of living in San Francisco is higher than the cost of living in Lag Vegas.

The salary in Las Vegas is $57,000, when we are taking into consideration the effect of the cost of living, then the value of this salary in San Francisco must be:

= (Cost of living index in San Francisco ÷ Cost of living index in Las Vegas) × Salary in Las Vegas

= (170 ÷ 110) × $57,000

= 1.5454 × $57,000

= $88,090.9

Hence, if the salary offered to work in San Francisco = $70,000,

Then, this will increase the nominal salary but the real salary will not increase (i.e, decreased) because of the higher cost of living in San Francisco.