13.11 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).