Assume the hedonic wage function can be described as follow: H(r) = 2*(r-0.1), w

Question

Assume the hedonic wage function can be described as follow: H(r) = 2*(r-0.1), where r is the risk of getting injured such that r belong to the closed interval [0, 1]. That is, the probability of getting injured in larger or equal to zero and smaller or equal to 1 (i.e. 100%). Also, H(r) (which is larger or equal to zero) gives you the equilibrium wage (w) that will be given by the labor market according to the level of risk offered by the firm.

a)First, estate the hedonic wage function definition (you can find it in your course book) (5 points)

b)What is the interpretation of the slope?

c)Consider worker A values his wage and the safety (which is equal to 1 minus risk) level according to the following utility function: U (w, r) = w*(safety)3. What is the optimal amount of wage and risk this work is going to get?

d)Assume there’s a worker B willing to work in a riskier job than worker A. Show graphically (don’t need to use specific numbers) the hedonic function, the indifferences curves of worker A and B and the intersection between these indifference curves and the Isoprofit of the firms C and D where worker A and B will choose to work, respectively.

e)Suppose one of the firms represents a chemistry company and the other one a software company (as discussed in class). Which worker (A or B) will work in the chemistry company? Why? Discuss this allocation using the concept of matching in the work place.

Explanation / Answer

Assume the hedonic wage function can be described as follow: H(r) = 2*(r-0.1), w

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