Question

Assume that you are negotiating a new three year contract. Are you better off with yearly raises of 3%,1% and then 2% or with yearly raises of 2%,1%, then 3%? Explain

Answer 1

one choice yearly increases : 3% first year, 1% second year, 2% third year

alternately : 2% first year, 1% second year, 3% third year

Since the numbers are simple and the second year the increase is same, we can tell which one is better directly.

The 1st offer is better. They give a 3% hike which is more than the other offer by 1% at the ned of 1 year. If the salary at the beginning is $10,000, Then you get $ 1,000 extra at the end of 1st year.  Then the interest earned on $1,000  in two years is additional and is with you as compared to the second contract offer. You receive 1 % more after third year in the second contract terms. That is equal to $1,000.  But in the first offer you have an additional amount that is equal to the interest on this amount of 1% for two years.