Econ 150B MT1 Answers

Econ 150B MT1 Answers - University of California, Santa...

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University of California, Santa Barbara Olivier Deschênes Department of Economics Winter 2009 Economics 150B Answer Key Midterm Examination #1 Name:______________________________________ Perm:______________________________________ Question 1: [4 points] True/False/Uncertain (To receive full credit you must explain/prove your answers) Certain occupations, such as coal mining, are inherently dangerous to worker’s health and safety. Therefore, the most appropriate government policy is the establishment and enforcement of rigid safety standards (assume that workers are fully informed about the risk involved with coal mining jobs). False: If workers have perfect information about the injury risks attached to their jobs, and choose riskier jobs (presumably for a higher wage), then it must be that these jobs gives them the highest level of utility. Therefore, government policies establishing safety standards (imposing maximal risk levels for example) are going to make some workers worst off. See the graph at the end. 1
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Question 2: [4 points] Suppose all workers have the same preferences represented by R w U = where w is the wage and R is the proportion of the firm’s air that is composed of toxic pollutants. There are only two types of jobs in the economy, a clean job (R = 0) and a dirty job (R = 1). Let w 0 be the wage paid by the clean job and w 1 be the wage paid for doing the dirty job. If the clean job pays $25 per hour, what is the wage in dirty jobs? What is the compensating wage differential? Answer: In equilibrium all workers will get the same utility since all workers have the same preferences. Workers on the clean job get utility U 0 = 5 From this information we can calculate the wage required on the dirty job to equalize utilities: 36 6 5 1 1 1 = = = w w U Thus the compensating wage differential is w 1 – w 0 = $11 2
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Question 3: [2 points] Suppose that a worker’s utility depends only on the wage rate (w) and the injury rate (r) on his
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This note was uploaded on 03/01/2009 for the course ECON Econ 150B taught by Professor Olivierdeschênes during the Spring '09 term at UCSB.

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Econ 150B MT1 Answers - University of California, Santa...

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