Question

Year	Salary (A)	Salary (B)
1	65	55
2	65	57
3	65	59
4	67	62
5	69	64
6	72	67
7	74	69
8	77	72
9	79	75
10	82	78
11	84	81
12	87	84
13	89	88
14	89	91
15	89	95
16	92	95
17	92	95
18	94	95
19	94	95
20	96	99

1. Economics assumes people are interested in their rational self interest. Suppose a person works 20 years. Which job is the better choice (ceteris paribus)? An explanation of what ceteris paribus means should be given before deciding which job is better.

2. If the person invested their extra earnings each year how much additional money would they have in their account at the end of 20 years when they retire? The interest rate is constant at 10 percent per year.

3. Suppose the person works 40 years. Which job is the better choice? I will assume that the person has reached the top of the pay scale and pay will receive the same yearly salary they received in their 20th year of work for the remaining years they work.

Answer 1

(Sal A - Sal B)	(Sal B - Sal A)		Extra Ear A*1.1^N	Extra Ear B*1.1^N
Years	Salary A	Salary B	PVF	PV of A	PV of B	Extra Earnings A	Extra Earnings B	N=Remaining Years	Interest for A	Interest for B
Year 1	65	55	0.91	59	50	10	-	19	61	-
Year 2	65	57	0.83	54	47	8	-	18	44	-
Year 3	65	59	0.75	49	44	6	-	17	30	-
Year 4	67	62	0.68	46	42	5	-	16	23	-
Year 5	69	64	0.62	43	40	5	-	15	21	-
Year 6	72	67	0.56	41	38	5	-	14	19	-
Year 7	74	69	0.51	38	35	5	-	13	17	-
Year 8	77	72	0.47	36	34	5	-	12	16	-
Year 9	79	75	0.42	34	32	4	-	11	11	-
Year 10	82	78	0.39	32	30	4	-	10	10	-
Year 11	84	81	0.35	29	28	3	-	9	7	-
Year 12	87	84	0.32	28	27	3	-	8	6	-
Year 13	89	88	0.29	26	25	1	-	7	2	-
Year 14	89	91	0.26	23	24	-	2	6	-	4
Year 15	89	95	0.24	21	23	-	6	5	-	10
Year 16	92	95	0.22	20	21	-	3	4	-	4
Year 17	92	95	0.20	18	19	-	3	3	-	4
Year 18	94	95	0.18	17	17	-	1	2	-	1
Year 19	94	95	0.16	15	16	-	1	1	-	1
Year 20	96	99	0.15	14	15	-	3	-	-	3
PV of salary				642	606				269	27
Years	Salary A	Salary B	PVF	PV of A	PV of B
Year 1	65	55	0.91	59	50
Year 2	65	57	0.83	54	47
Year 3	65	59	0.75	49	44
Year 4	67	62	0.68	46	42
Year 5	69	64	0.62	43	40
Year 6	72	67	0.56	41	38
Year 7	74	69	0.51	38	35
Year 8	77	72	0.47	36	34
Year 9	79	75	0.42	34	32
Year 10	82	78	0.39	32	30
Year 11	84	81	0.35	29	28
Year 12	87	84	0.32	28	27
Year 13	89	88	0.29	26	25
Year 14	89	91	0.26	23	24
Year 15	89	95	0.24	21	23
Year 16	92	95	0.22	20	21
Year 17	92	95	0.20	18	19
Year 18	94	95	0.18	17	17
Year 19	94	95	0.16	15	16
Year 20	96	99	0.15	14	15
Year 21	96	99	0.14	13	13
Year 22	96	99	0.12	12	12
Year 23	96	99	0.11	11	11
Year 24	96	99	0.10	10	10
Year 25	96	99	0.09	9	9
Year 26	96	99	0.08	8	8
Year 27	96	99	0.08	7	8
Year 28	96	99	0.07	7	7
Year 29	96	99	0.06	6	6
Year 30	96	99	0.06	6	6
Year 31	96	99	0.05	5	5
Year 32	96	99	0.05	5	5
Year 33	96	99	0.04	4	4
Year 34	96	99	0.04	4	4
Year 35	96	99	0.04	3	4
Year 36	96	99	0.03	3	3
Year 37	96	99	0.03	3	3
Year 38	96	99	0.03	3	3
Year 39	96	99	0.02	2	2
Year 40	96	99	0.02	2	2
PV of salary				764	732

Answers have been highlighted in yellow.

1. Assuming PV factor of 10% entire analysis is done for present value and as PV for Job A is good, therefore recommended to go for Job A.

Cetris peribus means "keeping every other thing constant". In our analysis everything is constant except salary.

2. Assumed that each person invested extra dollars earned than from other job. Job A is having bright prospect. In the absence of information compound interest has been assumed.

3. For 40 years, still Job A is better because of higher PV.

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