Question

An employee asks her boss whether she can transfer offices so that she can work in a different part of the country. The boss responds positively and says that the employee can choose to work in Cleveland, Miami, or New York City. The boss then hands the employee a list, as shown in the table below, of the salaries that she would earn in the different cities and the average price levels in those same cities. Office location Salary () Cleveland Miami New York Cit 80,000 120,000 150,000 CPI 100 155 210 a. From the standpoint of maximizing the employee's consumption possibilities, she should choose (Cick toselect) Instructions: Round your answer to the nearest whole number b. The minimum salary in New York City the boss could offer the employee to make her indifferent between moving țo Cleveland r New York City is $

Answer 1

Real salary in Cleveland = (80,000/100) X 100 = $80,000 Real salary in Miami-120,000/155) X 100-$77,419.35 Real salary in New York City (150,000/210) X 100 S71,728.57 Since real income in Cleveland is the highest, the employee should chose Cleveland In order to make the employee indifferent between moving to Cleveland or NYC, the real income in both the locations should be equal Give, CPI is NYC is 210, the nominal salary that should be offered in NYC should be Y: Thus (Y/210) X 100 Y = $168,000 $80,000 Thus, minimum salary that should be offered in New York City should be $168,000