LABOR ECONOMICS
8th Edition
ISBN: 9781260004724
Author: BORJAS
Publisher: RENT MCG
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Question
Chapter 5, Problem 3P
(a)
To determine
Determine the equilibrium wage differential between safe and risky job.
(b)
To determine
Determine the new equilibrium wage differential.
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Suppose there is a negative compensating differential for risk (i.e., the riskier the job is, the less it pays).
a) Under what economic behavior or condition would this make sense?
b) Draw the indifference curves for the above scenario in a carefully labeled risk-wage diagram.
There are 50 workers in the economy in which all workers must choose to work a safe or a risky job. When it comes to accepting a risky job, Worker 1’s reservation price is $5; worker 2’s reservation price is $6, worker 3's reservation wage is $7, and so on. Assume there are exactly 12 risky jobs.
(a) What is the equilibrium wage differential between safe and risky jobs? Which workers will be employed at the risky firm?
(b) Suppose now that an advertising campaign, paid for by the employers who offer risky jobs, stresses the excitement associated with “the thrill of injury,” and this campaign changes the attitudes of the work force toward being employed in a risky job. Worker 1 now has a reservation price of $1, worker 2’s reservation price is $2, and so on. There are still only 12 risky jobs. What is the new equilibrium wage differential?
c) What is the maximum the firm should be willing to pay for its ad campaign?
Suppose there are 100 workers in the economy in which all workers must choose to work a risky or a safe job. Worker 1’s reservation price for accepting the risky job is $1; worker 2’s reservation price is $2; and so on. Because of technological reasons, there are only 10 risky jobs.a. What is the equilibrium wage differential between safe and risky jobs? Which workers will be employed at the risky firm?b. Suppose now that an advertising campaign paid for by the employers who offer risky jobs stresses the excitement associated with “the thrill of injury,” and this campaign changes the attitudes of the workforce toward being employed in a risky job.Worker 1 now has a reservation price of $10 (that is, she is willing to pay $10 for the right to work in the risky job); worker 2’s reservation price is $9; and so on. There are still only 10 risky jobs. What is the new equilibrium wage differential?
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