Two bus-tour firms, Freedom and Eagle, hire drivers. Freedom pays $40k per year and Eagle pays $38k per year. The two jobs are exactly the same except that Freedom does regular safety inspection every 50k miles while Eagle does it every 36k miles. These two safety schedules create two different safety environments: at Freedom, a driver dies in an accident every 12 million miles while at Eagle, a driver dies every 15 million miles.
a. What is the value of a driver’s life implied by the compensating differential between the two firms?
(For the computation purpose, it is assumed that both firms travel an average 300,000 miles an year)
Risk of death faced by Freedom Firm drivers (D1) = 300,000 annual miles / 12 million miles
= .025
Risk of death faced by Eagle Firm drivers (D2) = 300,000 annual miles / 15 million miles
= .020
Salary of Freedom driver ( S1) = $ 40,000 per year
Salary of Eagle driver (S2) = $ 38,000 per year
The value of life = (S1-S2) / (D1-D2)
= ($ 40,000 - $ 38,000) / (.025 - .020)
= $ 400,000
The value of a driver’s life implied by the compensating differential between the two firms = $ 400,000
Two bus-tour firms, Freedom and Eagle, hire drivers. Freedom pays $40k per year and Eagle pays...