Question

Dahlia can earn​ $60,000 a year working at a relatively safe​ job, or​ $65,000 a year working at a riskier job. The probability of death from working at the relatively safe job is​ 1/5,000, and the probability of death from working at the riskier job is​ 1/1,000. Using the compensating differential approach and the above​ information, what is the value of​ Dahlia's life?A. ​$2 millionB. ​$2.5 millionC. ​$6.25 millionD. ​$25 million

Answer 1

C) ​$6.25 million

Step-by-step explanation:

Compensating wage differentials are paid to workers so that they accept tasks that are considered dangerous or hazardous.

A worker’s utility function is:

Utility = f (w, risk of injury)

Dahlia's safe job utility function = f(60000, 0.0002)

Dahlia's riskier job utility function = f(65000, 0.001)

A 400% increase in risk will increase Dahlia's salary by $5,000,

When you are using the compensation differential approach, you can determine the value of a life by dividing the compensating differential by the increased chance of death.

($65,000 - $60,000) / (1/1000 - 1/5,000) = $5,000 / 0.0008 = $6,250,000