1
Emmanuel Clayton
EC931657
AECO370 Masters
Homework on Compensating Differentials
(HW6)
1.
Rosie the Riveter has the following utility function over weekly wages, w, and the
probability of death due to a fall, p.
± ² ±³± ´ ±µ¶¶¶± · ±¸
(i)
Draw her indifference curves for U = 100, 200, 300, 400 over the range of p from
0 to 0.2.
Utilily
Value
(U)
(c)
Wage
p = 0
Wage
p = 0.1
Wage
p = 0.2
100
2000
100
300
500
200
2000
200
400
600
300
2000
300
500
700
400
2000
400
600
800
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(ii)
Suppose the probability of death from a fall is zero when she works on a single
storey building but it increases by 0.01 for every additional floor of the building
she works on. If she can get $200 per week to work on a (single storey)
supermarket, how much would the builder of a 11 storey office block have to pay
her? What about a 21 storey skyscraper?
Probability
of Death
(p)
Wage
($)
Floor
0
200
Ground Fl
0.01
202
1
0.02
204
2
0.03
206
3
0.04
208
4
0.05
210
5
0.06
212
6
0.07
214
7
0.08
216
8
0.09
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 Spring '11
 masters
 Economics, Utility

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