Dahlia can earn $60,000 a year working at a relatively safe job, or $65,000 a year working at a riskier job. The probability of death from working at the relatively safe job is 1/5,000, and the probability of death from working at the riskier job is 1/1,000. Using the compensating differential approach and the above information, what is the value of Dahlia's life?
A) $2 million
B) $2.5 million
C) $6.25 million
D) $25 million

Question

Quizplus · Accepted Answer

The compensating differential approach calculates the value of life by dividing the wage differential by the difference in risk. Here, the wage differential is $5,000 ($65,000 - $60,000), and the difference in risk is 1/1,000 - 1/5,000 = 4/5,000 = 1/1,250. Thus, the value of life is $5,000 / (1/1,250) = $6.25 million.

Dahlia Can Earn $60,000 a Year Working at a Relatively