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    Consider a competitive economy that had 4 different jobs that vary by wage and risk

    risk (r) wage (w)
    job 1 1/5 $3
    job 2 1/4 $12
    job 3 1/3 $23
    job 4 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 functions

    U(w, r) = w + 1/r^2

    Where does the worker chose to work? Suppose that the gov't regulated the workplace and required all jobs to have a risk factor of 1/5 (that is all jobs become Job 1) What wage would the worker now need to earn in the Job 1 to be equally happy following the regulation?

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    Solution Summary

    A competitive economy is contextualized.