Question

Two companies, West Timber and Musk Logging, are both activity in the lumber industry. The lumber industry involves some amount of danger for workers, and the two companies face different isoprofit curves with respect to the trade-off between wages and risk. Since the logging industry is competitive, both companies operate at 0 profit. West Timber has a zero-profit isoprofit curve of w = 4+.5R, wherew is the wage offered by West Timber at level of risk R. Likewise, the zero-profit isoprofit curve at Musk Logging is w = 3+.75R. (a) Draw the zero-profit lines for West Timber and Musk Logging. (b) At what level of risk can the firms offer the same wage, and what wage is offered there? (c) Which firm will be preferred by workers who prefer low risk levels, and which firm will be preferred by workers who are not bothered as much by risk levels. Add the indifference curves for two such workers to your diagram from part (a).

Answer 1

(a) WT w=4+05R ML: W: 3 +0.75R wage Iso profit for ML Low risk worker IC 10 High risk worker IC Iso profit for WT 5 5 10 4 Risk (6) occues at! same wage 4 + 0.5R I! 3+0.75R 11 ori O'Q5R 11 4 I', R !) 6 will be تمام (c) for nisk R> 4 wage highere for ML WT Then high risk and person will prefer ML will prefer wTML. This is because nish averse worker has & steeper les between R o On the other hand nisk pereson and a to risk loring neutral person has flatter ic. Then the iso profit for high risk should be steepere.