To think about this start at the top of one of the isoprofit curves and then imagine reducing the prob of injury by increments of. 3) The isoprofit curves are said to be concave. 2) The isoprofit curves farther northwest (or left) have lower profit because if you consider a given probability of injury (and thus a given expenditure on safety) then higher wages would reduce the profit. The only way the firm can pay higher wages then, and keep the same profit, is give up safety devices and thus live with greater prob of injury. Notes: 1) The isoprofit curves slope upward because reducing the probability of injury costs money. Each curve has different combinations of prob of injury and wage the firm can offer and the firm would have the same level of profit. Each curve on the next slide is called an isoprofit curve. Before we bring firms and workers together, let’s look at how firms deal with prob of injury and wages. As you can imagine, workers have to get together with firms. Indifference curves are related to how workers deal with probability of injury and wages. Note here that when we look to just a little more on the prob of injury, the wage difference is the compensating differential for the individual. Both types of workers do not like risk, but the steep curve folks really do not like the chance of getting injured and thus need larger wage increases to take the riskier jobs compared to folks with flat indifference curves. The person with the steep indifference curve needs to get a higher wage to accept the riskier job, relative to the other worker. Now, move to a job with a higher prob of injury. (Also note I am not saying the two people have the same utility, but on their own curve the utility stays the same.) Where the curves cross we know the prob of injury and the wage are the same. In fact lets focus first on the point where the curves cross. Indifference curves can cross for two different people. On the next slide I have an indifference curve for two different people.
HEDONIC WAGE PLUS
Plus we will have people with different types of utility functions.
In the new model we will have jobs running with prob of injury from 0 to 1 and all in between. (the indifference curves in the excel file, by the way, show more probs, but there we just look above 0 and 1). Up to this point we have seen a model with only two types of jobs: Prob of injury = 0 jobs and prob of injury = 1 jobs.
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