Labor Economics 5th Edition by George Borjas

Exercise 11

a. On a graph with the probability of injury on the x-axis and the wage level on the y-axis plot two indifference curves, labeled U A and U B , so that the person associated with U A is less willing to take on risk relative to the person associated with U B. Explain what it is about the indifference curves that reveals person A is less willing to take on risk relative to person B.
b. Consider a third person who doesn't care about the risk associated with the job. That is, he doesn't seek to limit risk or to expose himself to risk. On a new graph, draw several of this person's indifference curves. Include an arrow on the graph showing which direction is associated with higher levels of utility.
c. Consider a wage-risk equilibrium that is characterized by an upward-sloping hedonic wage function. Now suppose there is a government campaign that successfully alters people's perception of risk. In particular, each worker adjusts her preferences so that she now needs to be more highly compensated to take on risk. Discuss, and show on a single graph, how the government's campaign affects indifference curves, isoprofit lines, the equilibrium hedonic wage function, and the distribution of workers to firms.