Pauline is offered a Job in Minneapolis that pays $80,000.She is offered a similar job in Louisville that pays $71,200.Which pair of CPIs would ensure that the two salaries have the same purchasing power?
A)90 in Minneapolis and 83 in Louisville
B)90 in Minneapolis and 72 in Louisville
C)100 in Minneapolis and 89 in Louisville
D)105 in Minneapolis and 90 in Louisville

Question

Quizplus · Accepted Answer

To ensure that the salaries have the same purchasing power, we need to adjust for the cost of living in each city. This can be done using the Consumer Price Index (CPI). By dividing the salary in one city by the CPI of that city and then multiplying that result by the CPI of the other city, we can compare purchasing power.

For Minneapolis:

$80,000 / CPI of Minneapolis = adjusted salary in Minneapolis

For Louisville:

$71,200 / CPI of Louisville = adjusted salary in Louisville

To make the two adjusted salaries equal, we need to find a pair of CPIs that will give us the same result when we do these calculations.

Using choice C, we get:

For Minneapolis:

$80,000 / 100 = $80,000

For Louisville:

($71,200 / 89) x 100 = $80,000

Therefore, if the CPI in Minneapolis is 100 and the CPI in Louisville is 89, the two salaries will have the same purchasing power.

Pauline Is Offered a Job in Minneapolis That Pays $80,000