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

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Business

Porter Cummings

20 May, 12:08

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

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Shania Branch · Answer 1

C) $6.25 million

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