Consider a competitive economy that has four different jobs that vary by their wage and risk level. The table below describes each of the four jobs.
|
Job
|
Risk (r)
|
Wage (w)
|
|
A
|
1/5
|
$3
|
|
B
|
1/4
|
$12
|
|
C
|
1/3
|
$23
|
|
D
|
1/2
|
$25
|
All workers are equally productive, but workers vary in their preferences. Consider a worker who values his wage and the risk level according to the following utility function:
Where does the worker choose to work? Suppose the government regulated the workplace and required all jobs to have a risk factor of 1/5 (that is, all jobs become A jobs). What wage would the worker now need to earn in the A job to be equally happy following the regulation?