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1 Computing VSL Consider an individual who has a utility function over earnings w and mortality probability a of the form: U(w, ) = w
1 Computing VSL Consider an individual who has a utility function over earnings w and mortality probability a of the form: U(w, ") = w - an', where a is a given positive constant. This individual faces a constraint given by w = bum, where b is a given positive constant. 1.1 Define an indifference curve for this individual, and find the slope of this indif- ference curve and relate the slope to the ratio of marginal utilities. 1.2 Find the utility-maximizing bundle (w, a) for this individual. Note that this bundle will be a function of a and b. 1.3 Suppose a = 101 ", and b = 10". Find the VSL for this individual: i) by calculating the slope of the constraint, or ii) by computing the slope of the individual's indifference curve, at the optimal bundle you have calculated earlier
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