Farm workers in Oaks Farmville face a 1/257 probability of death at work and each of...

Farm workers in Oaks Farmville face a 1/257 probability of death at work and each of them receives a yearly wage of $93,000. Farm workers in Valley Farm face a 1/73 of death at work. Assume that both kinds of job require the same level of skills, effort and that all workers have the same preferences and tastes. The values of an statistical life is computed to be $6,000,000. How much should the workers in the risker job should get paid?

Expert Solution

Solution:

Value of statistical life = cost incurred to reduce risk/percentage of risk to death reduced

Then, cost incurred = yearly wage to high risk workers - yearly wage to low risk workers

= X - 93000 ; where we require to find the value of X

Risk reduced = probability of death to high risk workers - probability of death to low risk workers

= 1/73 - 1/257 = 184/18761

Then, we have 6000000 = (X - 93000)/(184/18761)

X = 6000000*184/18761 + 93000

X = 58845.4773 + 93000 = 151845.4773

So, the workers in riskier job should be paid approximately $151,845.

Rahul Sunny answered 2 years ago

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