Compensating wage differentials for risk An individual receives utility from daily income (y), given by U 1 y2 5 100y 2 1 2

y 2

.

The only source of income is earnings. Hence y 5 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 1x22 5 Var x 1 E 1x22.