Consider workers trade-offs between wages and job conditions in a Compensating Wage Differentials framework. Let wi represent the wage in job i, and ri represent the level of risk in job i. Each worker has preferences over wages and risk, represented by their utility function.

Diana has preferences represented the utility function: U = sqrt

Steve has preferences represented the utility function: U = sqrt 2

a. Consider the utility functions above. When choosing jobs, which worker is more likely to choose a risky job, all else equal? Why? .

b. Using the Theory of Compensating Wage Differentials (3 assumptions), list three reasons why some jobs pay more even when they are less risky.

c. Diana can choose between two jobs: Secret Agent: Offers a wage of $16/hour and a risk level 10 Ambassador: Offers a wage of $9/hour and a risk level of 1 Calculate Dianas utility at each of these jobs. Which job will Diana choose?