4. U.S. Trucking pays its drivers S40,000 per year, while American Trucking pays

Question

4. U.S. Trucking pays its drivers S40,000 per year, while American Trucking pays its drivers $38,000 per year For both firms, truck drivers average 240,000 miles per year. Truck driving jobs are the same regardless of which firm one works for, except that U.S. Trucking gives each of its trucks a safety inspection every 50,000 miles while American Trucking gives each of its trucks a safety inspection every 36,000 miles. This difference in safety inspection rates results in a different rate of fatal accidents between the two companies. In particular, one driver for U.S Trucking dies in an accident every 12 million miles while one driver for American Trucking dies in an accident every 15 million miles. What is the value of a truckers life implied by the compensating differential between the two firms?

Explanation / Answer

Miles driven by a driver per year = 240,000 miles

It has been stated that one driver of American Trucking dies for every 15 million miles.

Calculate the probability of death for a driver that works for the American Trucking -

PAT = 240,000/15 million miles = 0.016

It has been stated that one driver of US Trucking dies for every 12 million miles.

Calculate the probability of death for a driver that works for the US Trucking -

PUST = 240,000/12 million miles = 0.02

Difference in probability between two firms -

Difference in probability = 0.02 - 0.016 = 0.004

Difference in salary paid by two firms -

Difference in salary = $40,000 - $38,000 = $2,000

Calculate the implied value of truckers life -

Implied value = Difference in salary/Difference in probability = $2,000/0.04 = $500,000

The implied value of truckers life is $500,000.

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