Question

Nearly a decade-and-a-half ago The Economist magazine noted (“Pop, Crackle, Snap,” April 3, 2004), “Even desperate job-seekers think twice about accepting hazardous work such as coal-mining, cow slaughtering or cleaning up asbestos sites.” Oh, really?!? Suppose different types of people have different tastes for wages and safety. Specifically, Type 1 people are very safety-oriented while Type 2 will do “anything” for money. Suppose employers are able to provide different combinations of wages and safety. Specifically, for Type A employers safety is relatively easy/inexpensive to provide. For Type B employers safety is relatively difficult/expensive to provide.

A. Draw and identify the different workers’ indifference curves for wages and safety. Explain which curve(s) represents which type of worker.

B. Draw and identify the different firms’ isoprofit curves for wages and safety. Explain which curve(s) represents which firm.

C. Given your answers in Parts A and B above, use suitable economic analysis to demonstrate whether or not people can be persuaded to do dangerous work.

Answer 1

A.

In the above Indifference Curve, there are three important things:

i) the level of utility/satisfaction is the same all along the curve

ii) utility increases up and to the right

iii) convexity of an Indifference Curve means diminishing marginal rate of substitution between wages and safety

* Type1 (T1) workers are willing to lose a lot of wages just for a small increase in safety

* Type 2 (T2) workers are not ready to give up wages for safety

B. Iso profit curves for safety and wages :

Iso profit curve shows various combinations of wages and safety that a firm can provide while maintaining the same level of profit.

A negatively/downward sloping Indifference Curve indicates (i) both wages and safety are costly for firms and (ii) A firm can maintain profit and increase safety only if it convinces workers to accept low wages

The concanve shape of indifference curve indicates diminishing marginal rate of tranformation between safety and wages

C.

An Indifference Curve displays various combinations of safety and wages in a cross section of workers. One can measure how much workers value safety if one can measure safety.

The homogenous quality workers are unable to decide ( in indifference) where to work ( either with Firm1 or Firm2)

The set of tangencies between Indifference Curves and Iso profit curves prevail in the market. The wage-safety locus can be found out. With proper safety regulations workers can be persuaded to do dangerous work.