1. Compensating wage differentials for risk An individual receives utility from daily income ( y ), given By U ( y ) = 100 y − 1 2 y 2 . The only source of income is earnings. Hence y = wl , where w...

1. Compensating wage differentials for risk An individual receives utility from daily income (y), given By
U(y) = 100y
− 1 2
y
2 . The only source of income is earnings. Hence
y
=
wl, where
w
is the hourly wage and
l
is hours worked per day. The individual knows of a job that pays €5 per hour for a certain 8-hour day. What wage must be offered for a construction job where hours of work are random – with a mean of 8 hours and a standard deviation of 6 hours – to get the individual to accept this more ‘risky’ job?
Hint:
This problem makes use of the statistical identity
E(x
2) =
Var x
+
E(x
2).