Question

The demand for labor in Occupation A is LD = 20-W, where LD = number of workers demanded for that occupation, in thousands. The supply of labor for Occupation A is LA = -1.25 +.5W. For Occupation B, the demand for labor is similar, but the supply of labor is LB = -.5+.6W, which is indicative of a more pleasant environment associated with that occupation in comparison with Occupation A. What is the compensating wage differential between the two occupations? The zero-profit isoprofit curve for Company ABC is W = 4 + .5R, where W= the wage rate that the firm will offer at particular risk levels, R, keeping profits at zero. The zero-profit isoprofit curve for Company XY is W = 3 + .75R. a. Draw the zero-profit isoprofit curves for each firm. What assumption about marginal returns to safety expenditures underlies a linear isoprofit curve? b. At what risk level will the firms offer the same wage? c. At low-risk levels, which firm will be preferred by workers? At high-risk levels, which firm will be preferred by workers? Explain.

Answer 1

1.

For Occupation A, At equilibrium,

L_D = L_A

20 – W = –1.25 + 0.5 W

21.25 = 1.5W

$14.17 = W

For occupation B, equilibrium

L_D = L_B

20 – W = −0.5 + 0.6 W

20.5 = 1.6 W

$12.81 = W

The compensating wage differential = W in occupation A - W in occupation B

($14.17 − $12.81) = $1.36 per hour

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