Question

Explain the hedonic pricing model associated with educational attainment. As part of your discussion, explain the shape of workers' indifference curves, isoprofit curves, and the hedonic wage function. no graphs or diagrams.

Answer 1

SOLUTION

HEDONIC PRICING MODEL OF EDUCATIONAL ATTAINMENT

Hedonic pricing treats a marketed good, usually a house, as a sum of individual goods ( characterstics or attributes ) that cannot be sold separately in the market. The main objective of a hedonic pricing model is to estimate the contribution of such characterstics or attributes to the price of house. This is why they have become a core strategy to estimate the implicit prices of nonmarketable goods.It is a model that identifies price factors according to the premise that price is determined both by internel characterstics of the good being sold and external factors affecting it.

The most common example of the hedonic pricing method is in the housing market, wherein the price of a building or a peice of land is determined by the characterstics of the property itself ( that is, its size, appearence and features like solar panels or state- of- the- art faucet fixtures and condition) as well as characterstics of the surronding environment. (that is, if the neiborhood has a high crime rate / is accessible to schools and or downtown area, the level of water and air pollution, or the value of other homes close by ).

THE SHAPE OF WORKERS INDIFFERENCE CURVE

The shape of the workers indifference curve is not a straight line. The indifference curve is convex to the origin. This is due to the concept of the diminishing marginal rate of substitution between two goods.Indifference curve have a roughly similar shape in two ways

They are downward sloping from left to right;

They are convex with respect to the origin. In other words, they are steeper on the left and flatter on the right.

People cannot really put a numerical value on their level of satisfaction. However, they can, and do, identify what choices would give them more, or less, or the same amount of satisfaction. An indifference curve shows all combinations of goods that provide an equal level of satisfaction.

ISOPROFIT CURVE

A curve showing the combinations of two or more variables that geerate the same level of profit to the firm. In a duopoly model, an isoprofit curve can depict combinations of output levels of the two firms that leads to the constant level of profit for one of the firms. An isoprofit curve consist of isoprofit lines which is composed of amounts of labor, and its total output that yield the same amount of profit to the firm.

HEDONIC WAGE FUNCTION

A hedonic wage function reflect the relationship between the wage and the job characterstics. It matches workers with different risk preferences with firms that can provide jobs that match these different risk preferences. The hedonic wage function measure the wage increase offered by a slightly risky job. Wages vary because workers are different.