20. Consider the following graph of indifference curves between risk (P = probability of injury) and wage (w). Use our Hedonic Wage Function approach (from Ch. 5). In either case (the steeper or flatter indifference curve, ), suppose the individual starts with wage wo and probability of injury P = 0.4. W steeper U flatter 0.4 0.5 Which of the following statements is accurate? From the stated starting point, O none of the other options. O the compensating differential required to get a willingness to take on an increase in risk from 0.4 to 0.5 is larger for the case of the flatter indifference curve. ○ we would expect to see a person with the flatter indifference curve in jobs with a lower probability of injury than the person with the steeper one. O the flatter indifference curve indicates a lower willingness to put up with an increase in risk from 0.4 to 0.5. O the steeper indifference curve indicates a lower willingness to put up with an increase in risk from 0.4 to 0.5.

20. Consider the following graph of indifference curves between risk (P = probability of injury) and wage (w). Use our Hedonic Wage Function approach (from Ch. 5). In either case (the steeper or flatter indifference curve, ), suppose the individual starts with wage wo and probability of injury P = 0.4. W steeper U flatter 0.4 0.5 Which of the following statements is accurate? From the stated starting point, O none of the other options. O the compensating differential required to get a willingness to take on an increase in risk from 0.4 to 0.5 is larger for the case of the flatter indifference curve. ○ we would expect to see a person with the flatter indifference curve in jobs with a lower probability of injury than the person with the steeper one. O the flatter indifference curve indicates a lower willingness to put up with an increase in risk from 0.4 to 0.5. O the steeper indifference curve indicates a lower willingness to put up with an increase in risk from 0.4 to 0.5.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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Use graph to illustrate the matching of employers and employees under hedonic wage theory with risk of injury. Assume there are two employees of different types (A and B), and two employers of two different types (X and Y). Worker A maximizes utility along A2 by working for Employer X for WAX and risk level RAX. Worker B maximizes utility along B2 by working for Employer Y for high wage WBY and with high risk level RBY Please draw the indifference curves and the iso-profit curves with zero profit, point out the two tangent points that measure the matching points for both employers and employees. (Hint: use Risk of Injury as the horizontal axis.)
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