Suppose the above New York Times article, which stresses the hazards associated to exposure to this...

Suppose the above New York Times article, which stresses the hazards associated to exposure to this dangerous chemical, changes the attitudes of the work force toward being employed in firms with impure air. Worker 1 now has a reservation price of 41 cents; worker 2’s reservation price is 42 cents; worker 3’s reservation price is 43 cents, and so on. As before, there are 150 jobs in firms without air purification systems, and this number is fixed. Thus, the demand for workers in jobs with impure air is perfectly inelastic.

a. Find the new equilibrium wage differential between safe and risky jobs. Draw this equilibrium labeling as many points as you can.

Expert Solution

COMPENSATING DIFFERENTIAL

In order to graph the supply curve you need to keep in mind the reservation price of the workers. The reservation price in simple words is the minimum wage that a worker would accept to work in a risky place. The reservation price for worker 1 is 0.41, for worker 2 is 0.42, and so on. This information tell us that the supply curve intercepts the y axis at 0.41, is upward sloping and has a slope of +0.01. On the other hand, the paragraph tell us that there are 150 fixed jobs, therefore, demand curve (D) is perfectly inelastic at point 150.

In order to get the equilibrium point, we have to write the demand and supply curve and then equalize then and clear x.

Y = b + mx

S= 0.41 +0.01x

D = 150

Clear x

0.41+0.01x = 150 à (150 -0.41)/0.01 = x

X = 14,959

To fill the 150 job vacancies, the equilibrium wage must be $14,959

Remember that the firm employs those workers who least mind being exposed to the risk.

Therefore, your graph should look like the next one:

Rahul Sunny answered 2 years ago

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