Homework: Hedonic Theory
that there is a baseline risk of death on the job of q
percent annually. Firms can invest to
reduce this risk, so that actual risk at a job is q(
Here i is amount invested
a given employee faces
Of course mortality is bounded below by 0, so the
amount that can be invested i
ng mortality risk i
All firms produce the same good c
and this good has a price equal to 1.
All workers are equally productive and produce an output of
the consumption good.
erive an expression of wages
economy that has to be satisfied by wage
firms would be willing to
offer to workers in equilibrium.
Consider now individuals that have preferences over consumption and risk of death given by
is “job safety” relative to base
Write down the maximization problem
that workers face
and illustrate the choice problem in a graph
in a two
dimensional graph with c and s
on the axes
Assume that the parameter values are such that the solution is in the interior (ie
consumers preferences are such that a both c and s are normal goods. Assume furthermore that
individuals differ in
(but still everybody has
Consider two individuals of
whom one has a higher level of H than the other. W
ho will earn higher wages and who will face greater
Will the two individuals differ in their Value of a Statistical L
Use your answer to question 3 to explain why it might be difficult
to empirically measure the VSL using
the relation between wages and risk.
SHORT, PRECISE, CLEAR, AND CORRECT ANSWERS RECEIVE FULL POINTS.
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