TBChap 005

Chapter 05
Compensating Wage Differentials
Multiple Choice Questions
1. In the standard theory of compensating differentials, a worker's reservation price is
A. the amount of money it takes to entice the worker into accepting a risky job.
B. the amount of money it costs a worker to take a risky job.
C. the amount of money a worker loses for not taking any job.
D. the amount of money it costs a worker to take a safe job.
E. the difference between the wage paid in firms offering risky jobs and the wage paid by firms
offering safe jobs.
2.
The market-clearing wage differential between a safe and a risky job is $5,000. Which of the
following is not true?
A.
The marginal worker is indifferent between working the safe or the risky job.
B.
All but the marginal worker in safe jobs require a wage differential above $5,000 to accept a
risky job.
C.
All but the marginal worker in the risky job require a wage differential below $5,000 to be
indifferent between safe and risky jobs.
D.
The per-worker cost for any firm to change technologies to offer safe jobs in place of risky jobs
is $5,000.
E.
The average per-worker cost of offering safe jobs exceeds $5,000 at the risky firms.
5-1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. The supply curve of labor to risky jobs reveals.
A. how many workers are willing to offer their labor to the risky job as a function of the wage
differential between the risky job and the safe job.
B. how many workers are willing to offer their labor to the risky job as a function of the wage paid
to workers of the risky job.
C. how many workers are willing to offer their labor to the safe job as a function of the wage paid
to workers of the risky job.
D. the number of workers who dislike risky jobs.
E. the fraction of workers who dislike risky jobs.
4. Estimates of the compensating wage differentials associated with particular job characteristics
are valid only if
A. all other factors that influence worker's wages are held constant.
B. non-wage characteristics of the job are allowed to vary by sector.
C. firms are willing to pay higher wages to more skilled workers.
D.
the compensation wage equals the worker's marginal cost.
E. the firm provides non-pecuniary compensation for risks that workers encounter on the job.
5. Under normal circumstances, the equilibrium compensation wage differential is the wage
differential that exactly attracts
A. the average worker into a regular job.

B. the marginal worker into a risky job.
C. the average worker into a less risky job.
D. the marginal worker into the labor market.
E. the average high-skilled worker into a low-skill job.
6. In order for the compensating differential associated with a risky job to be negative (so that a risky
job pays less than a non-risky job), it must be that
A. many workers are willing to work the risky job for free.
B. most workers prefer the risky job to the safe job when both wages are equal.
C. the number of risky jobs is less than the number of workers who prefer the risky job.
D. there is great demand for labor in both sectors.
E. the government mandates that the wages in the two sectors be equal.
5-2
7. Assume that the market clearing wages are $10 per hour in a safe job and $18 per hour in a risky
job. Then, at the completion of a war, many ex-soldiers who enjoy risky ventures enter the labor
market. Which of the following is not a likely outcome of this change?
A. Many firms that currently offer risky jobs will begin offering safe jobs.
B. The fraction of people working safe jobs will decrease.
C. The wage associated with risky jobs will decrease.
D. The number of people working risky jobs will increase.
E. The wage differential will decrease.
8. When graphing a worker's indifference curves in Probability of Injury (x-axis) versus Wage (y-
axis) space, Al's indifference curves are steeper than Pete's indifference curve. In this case:
A. Al is more risk-loving than Pete.

B. Al requires a greater wage increase than Pete in order to willingly take on more risk.
C. Al will end up receiving a higher wage than Pete.
D. Both are risk neutral.
E. Al will only accept a job if it offers no risk of injury.
9. Risk-averse workers
A. have shallow wage-risk indifference curves when risk is graphed on the x-axis.
B. are willing to work in riskier environments for a relatively low increase in the wage.
C. are willing to accept large wage decreases in exchange for a safer work environment.
D. never work in risky environments.
E. are more productive than risk-loving workers.
10. Suppose there are two types of jobs-safe and risky. Safe jobs currently pay $10 per hour. Risky
jobs currently pay $20 per hour. The government intervenes in the market, mandating that all
firms offer safe jobs and pay a wage of $10 per hour. Which of the following is true?
A. Workers who originally worked safe jobs are helped by the policy.
B. Firms that originally offered safe jobs are hurt by the policy.
C. Workers who originally worked risky jobs are helped by the policy.
D. Firms that originally offered risky jobs are hurt by the policy.
E. No one is hurt by the new policy.
11. Abby's reservation price for working in a risky job is $5 per hour while Rudy's reservation price for
working in a risky job is $8 per hour. Characterize Abby and Rudy's job selections if safe jobs pay
$12 per hour and risky jobs pay $18 per hour.
A. Abby and Rudy both work a safe job.

B. Abby works a safe job while Rudy works a risky job.
C. Abby works a risky job while Rudy works a safe job.
D. Abby and Rudy both work risky jobs.
E. Rudy works a risky job while Abby doesn't care which type of job she works.
5-3
12. Which of the following is not a property of isoprofit curves graphed in Probability of Injury (x-axis)
versus Wage (y-axis) space?
A. All points on each isoprofit curve yield the same level of profit.
B. Profit-maximizing firms are indifferent as to where they operate on any given curve.
C. Isoprofit curves going out along the x-axis yield higher profits.
D. Isoprofit curves going up along the y-axis yield higher profits.
E. Isoprofit lines are upward sloping.
13. A hedonic wage function could be applied to which of the following job characteristics?
A. The probability of being injured on the job.

B. The degree to which a job involves monotonous work.
C. The degree to which the area surrounding the job location is safe.
D. The degree to which a job involves strenuous work.
E. All of the above can be represented with a hedonic wage function.
14. A standard hedonic wage function might show what relationship?
A. The relationship between the wage and a worker's age.

B. The relationship between the wage and a worker's race.
C. The relationship between the wage and a worker's gender.
D. The relationship between the wage and the probability of injury faced by the worker.
E. The relationship between the wage and a worker's skill level.
15. The equilibrium hedonic wage function is most likely
A. horizontal as no firm will over-pay for workers.

B. horizontal as firms will choose their optimal level of safety.
C. a single point, as all firms will choose the same level of risk, and consequently all workers will
be paid the same wage.
D. upward sloping as firms that offer riskier jobs usually pay higher wages.
E. downward sloping as firms that offer riskier jobs are usually able to pay lower wages.
16. The cost of offering safe versus risky jobs in the highway construction industry vary across firms.
In the end, we would expect the market equilibrium to
A. randomly match workers to jobs.

B. match workers who dislike risk to the highest paying jobs.
C. match workers who dislike risk to firms that find it cheapest to offer safe jobs.
D. have firms that face a high cost of offering safe jobs to pay the lowest wages.
E. have firms randomly choose their level of safety.
5-4
17. When a worker and firm are matched on the hedonic wage function, it is implied that
A. the worker cannot receive a higher wage at any other firm.

B. the worker-firm match is efficient in the sense that neither the worker nor the firm could
become better off with a different match.
C. the firm could increase its profits by offering a safer job as doing so would allow the firm to
lower the wage it pays.
D. the hedonic wage function must be very steeply sloped to ensure that the worker doesn't
accept a better paying job.
E. the worker receives no surplus from the match.
18. In Probability of Injury (x-axis) versus Wage (y-axis) space, isoprofit curves slope upward
because
A. profits increase with the number of workers the firm employs.

B. workers are willing to accept a lower wage in exchange for a riskier work environment.
C. the firm does not like to pay higher wages.
D. in order to keep profits constant, a higher wage must be offset by the firm saving money by not
investing as much in preventing on-the-job injuries.
E. profits are constant with respect to risk.
19. The correlation between wages and the probability of encountering a fatal injury while on the jobs
can be used to calculate:
A. the value of risk.

B. the value of safety.
C. the value of life.
D. the value of injury.
E. the value of work.
20. The value of life is calculated by comparing
A. wages to risk levels.

B. risk levels to the number of children in a worker's household.
C. wages to the number of children in a worker's household.
D. average life expectancy by occupation to average risk levels by industry.
E. average wages to the average retirement age.
5-5
21.
Suppose 1 in 200 pilots flying Space-X aircraft dies each year while only 1 in 500 pilots flying
Subspace Gliders dies each year. Moreover, the average salary of Space-X pilots is $115,000,
while the average salary of Subspace Glider pilots is $109,000. Given this information, what is the
implied statistical value of a life of a pilot?
A.
$6,000
B.
$120,000
C.
$480,000
D.
$1,200,000
E.
$2,000,000
22. A firm has the choice of offering "dirty" jobs that are likely to cause severe health problems for its
workers or of offering "clean" jobs by installing safety equipment at a cost of $5 per hour per
employee that will substantially reduce the chances of health problems. The firm will
A. install the safety equipment if workers can ascertain whether they are working a dirty or a
clean job.
B.
never willingly choose to install the costly safety equipment.
C.
never install the safety equipment without a government subsidy to do so.
D.
install the safety equipment if workers are willing to be paid $3 per hour less in a clean job than
in a dirty job.
E.
willingly install the safety equipment if workers are willing to be paid $7 per hour less in a clean
job than in a dirty job.
5-6
23. A potential implication of OSHA regulation is that
A. the most risk averse workers begin working the riskiest jobs.
B.
the hedonic wage function may no longer exist at the safest levels.
C.
the hedonic wage function may no longer exist at the riskiest levels.
D. average wages increase.

E. for the same amount of output produced, total production costs will be less.
24. Having the government regulate work-place safety would most likely improve economic efficiency
if
A. the cost of introducing safety equipment is high.

B. workers value safe work environments.
C. workers are unable to correctly judge the risk associated with a particular job.
D. firms are unable to attract workers to safe jobs.
E. firms and workers differ on the value they place on safe versus risky jobs.
25. Assuming that workers are fully aware of their working conditions, which of the following will not
happen when the government mandates pollution control to protect workers' health?
A. Worker utility will increase.

B.
Employment will decrease.
C. The air in workplaces will become cleaner.

D. Firms with low-profits before the mandate may shut down or exit the industry.
E. Wages will fall at all but the cleanest firms.
26. When the government imposes safety regulations on a particular job or labor market, what is
most likely to happen?
A. Wages will increase.

B. Utility will increase if workers are able to correctly evaluate working conditions.
C. Wages will fall but utility will increase if workers misperceive on-the-job risk.
D. Employment will increase.
E. Firms that used to offer bad working conditions will be required to shut down.
5-7
27.
One implication of the theory of compensating differentials is that jobs in states with high income
tax rates are likey to
A.
be associated with more fringe benefits.
B.
be associated with fewer fringe benefits.
C.
pay the same wage and offer the same fringe benefits package as the same jobs in lower-tax
states.
D.
have worse working conditions.
E.
be seasonal in nature.
28. Ability bias can arise when estimating compensating wage differentials associated with various
job characteristics. What is ability bias in this context?
A. Low-skilled workers are likely to have low wages but good job amenities.
B. High-skilled workers are likely to have high wages but poor job amenities.
C. High-skilled workers are likely to have lower wages than unskilled workers but to have better
job amenities.
D. High-skilled workers are likely to have higher wages than unskilled workers but to have worse
job amenities.
E. High-skilled workers are likely to have higher wages than unskilled workers, but they are also
likely to trade some of their higher wages for better job amenities.
29. If the U.S. system of unemployment insurance didn't exist, one would predict that
A. workers would never become unemployed.

B. workers who became unemployed would remain unemployed for longer durations.
C. no worker would accept a job that is associated with seasonal unemployment.
D. seasonal unemployment would cease to exist.
E.
workers in jobs that have high risks of unemployment or in jobs that face seasonal cycles of
unemployment would be paid higher wages.
5-8
30.
Empirically, women who are married to a spouse who has access to health insurance earn higher
wages and are less likely to be offered employer-sponsored health insurance than are married
women whose spouse does not have access to health insurance. This pattern
A.
is unexpected as wages should be unrelated to fringe benefits.
B.
supports the theory of compensating differentials as it indicates there is a trade-off between
wages and benefits.
C.
supports the theory of compensating differentials as it indicates there is no trade-off between
wages and benefits.
D.
fails to provide support for the theory of compensating differentials.
E.
contradicts the result that the hedonic wage function is upward-sloping.
5-9
Chapter 05 Compensating Wage Differentials Answer Key
Multiple Choice Questions
1. In the standard theory of compensating differentials, a worker's reservation price is
A. the amount of money it takes to entice the worker into accepting a risky job.
B. the amount of money it costs a worker to take a risky job.
C. the amount of money a worker loses for not taking any job.
D. the amount of money it costs a worker to take a safe job.
E. the difference between the wage paid in firms offering risky jobs and the wage paid by
firms offering safe jobs.
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Topic: The Market for Risky Jobs
2.
The market-clearing wage differential between a safe and a risky job is $5,000. Which of the
following is not true?
A.
The marginal worker is indifferent between working the safe or the risky job.
B.
All but the marginal worker in safe jobs require a wage differential above $5,000 to accept
a risky job.
C.
All but the marginal worker in the risky job require a wage differential below $5,000 to be
indifferent between safe and risky jobs.
D.
The per-worker cost for any firm to change technologies to offer safe jobs in place of risky
jobs is $5,000.
E.
The average per-worker cost of offering safe jobs exceeds $5,000 at the risky firms.

Blooms: Remember
Difficulty: 01 Easy
5-10
3. The supply curve of labor to risky jobs reveals.
A. how many workers are willing to offer their labor to the risky job as a function of the wage
differential between the risky job and the safe job.
B. how many workers are willing to offer their labor to the risky job as a function of the wage
paid to workers of the risky job.
C. how many workers are willing to offer their labor to the safe job as a function of the wage
paid to workers of the risky job.
D. the number of workers who dislike risky jobs.
E. the fraction of workers who dislike risky jobs.

Blooms: Understand
Difficulty: 02 Medium
4. Estimates of the compensating wage differentials associated with particular job characteristics
are valid only if
A. all other factors that influence worker's wages are held constant.
B. non-wage characteristics of the job are allowed to vary by sector.
C. firms are willing to pay higher wages to more skilled workers.
D.
the compensation wage equals the worker's marginal cost.
E. the firm provides non-pecuniary compensation for risks that workers encounter on the job.

Blooms: Understand
5. Under normal circumstances, the equilibrium compensation wage differential is the wage
differential that exactly attracts
A. the average worker into a regular job.

B. the marginal worker into a risky job.
C. the average worker into a less risky job.
D. the marginal worker into the labor market.
E. the average high-skilled worker into a low-skill job.

Blooms: Understand
5-11
6. In order for the compensating differential associated with a risky job to be negative (so that a
risky job pays less than a non-risky job), it must be that
A. many workers are willing to work the risky job for free.
B. most workers prefer the risky job to the safe job when both wages are equal.
C. the number of risky jobs is less than the number of workers who prefer the risky job.
D. there is great demand for labor in both sectors.
E. the government mandates that the wages in the two sectors be equal.
Blooms: Understand
7. Assume that the market clearing wages are $10 per hour in a safe job and $18 per hour in a
risky job. Then, at the completion of a war, many ex-soldiers who enjoy risky ventures enter
the labor market. Which of the following is not a likely outcome of this change?
A. Many firms that currently offer risky jobs will begin offering safe jobs.
B. The fraction of people working safe jobs will decrease.
C. The wage associated with risky jobs will decrease.
D. The number of people working risky jobs will increase.
E. The wage differential will decrease.

Blooms: Understand
8. When graphing a worker's indifference curves in Probability of Injury (x-axis) versus Wage (y-
axis) space, Al's indifference curves are steeper than Pete's indifference curve. In this case:
A. Al is more risk-loving than Pete.

B. Al requires a greater wage increase than Pete in order to willingly take on more risk.
C. Al will end up receiving a higher wage than Pete.
D. Both are risk neutral.
E. Al will only accept a job if it offers no risk of injury.

Blooms: Understand
5-12
9. Risk-averse workers
A. have shallow wage-risk indifference curves when risk is graphed on the x-axis.
B. are willing to work in riskier environments for a relatively low increase in the wage.
C. are willing to accept large wage decreases in exchange for a safer work environment.
D. never work in risky environments.
E. are more productive than risk-loving workers.

Blooms: Understand
10. Suppose there are two types of jobs-safe and risky. Safe jobs currently pay $10 per hour.
Risky jobs currently pay $20 per hour. The government intervenes in the market, mandating
that all firms offer safe jobs and pay a wage of $10 per hour. Which of the following is true?
A. Workers who originally worked safe jobs are helped by the policy.
B. Firms that originally offered safe jobs are hurt by the policy.
C. Workers who originally worked risky jobs are helped by the policy.
D. Firms that originally offered risky jobs are hurt by the policy.
E. No one is hurt by the new policy.

Blooms: Understand
11. Abby's reservation price for working in a risky job is $5 per hour while Rudy's reservation price
for working in a risky job is $8 per hour. Characterize Abby and Rudy's job selections if safe
jobs pay $12 per hour and risky jobs pay $18 per hour.
A. Abby and Rudy both work a safe job.

B. Abby works a safe job while Rudy works a risky job.
C. Abby works a risky job while Rudy works a safe job.
D. Abby and Rudy both work risky jobs.
E. Rudy works a risky job while Abby doesn't care which type of job she works.
AACSB: Analytical Thinking

Blooms: Apply
Difficulty: 03 Hard
5-13
12. Which of the following is not a property of isoprofit curves graphed in Probability of Injury (x-
axis) versus Wage (y-axis) space?
A. All points on each isoprofit curve yield the same level of profit.
B. Profit-maximizing firms are indifferent as to where they operate on any given curve.
C. Isoprofit curves going out along the x-axis yield higher profits.
D. Isoprofit curves going up along the y-axis yield higher profits.
E. Isoprofit lines are upward sloping.
Blooms: Remember
Difficulty: 01 Easy
Topic: The Hedonic Wage Function
13. A hedonic wage function could be applied to which of the following job characteristics?
A. The probability of being injured on the job.

B. The degree to which a job involves monotonous work.
C. The degree to which the area surrounding the job location is safe.
D. The degree to which a job involves strenuous work.
E. All of the above can be represented with a hedonic wage function.

Blooms: Remember
Difficulty: 01 Easy
14. A standard hedonic wage function might show what relationship?
A. The relationship between the wage and a worker's age.

B. The relationship between the wage and a worker's race.
C. The relationship between the wage and a worker's gender.
D. The relationship between the wage and the probability of injury faced by the worker.
E. The relationship between the wage and a worker's skill level.
Blooms: Remember
Difficulty: 01 Easy
15. The equilibrium hedonic wage function is most likely
A. horizontal as no firm will over-pay for workers.

B. horizontal as firms will choose their optimal level of safety.
C. a single point, as all firms will choose the same level of risk, and consequently all workers
will be paid the same wage.
D. upward sloping as firms that offer riskier jobs usually pay higher wages.
E. downward sloping as firms that offer riskier jobs are usually able to pay lower wages.
5-14
Blooms: Remember
Difficulty: 01 Easy
16. The cost of offering safe versus risky jobs in the highway construction industry vary across
firms. In the end, we would expect the market equilibrium to
A. randomly match workers to jobs.

B. match workers who dislike risk to the highest paying jobs.
C. match workers who dislike risk to firms that find it cheapest to offer safe jobs.
D. have firms that face a high cost of offering safe jobs to pay the lowest wages.
E. have firms randomly choose their level of safety.
Blooms: Understand
17. When a worker and firm are matched on the hedonic wage function, it is implied that
A. the worker cannot receive a higher wage at any other firm.

B. the worker-firm match is efficient in the sense that neither the worker nor the firm could
become better off with a different match.
C. the firm could increase its profits by offering a safer job as doing so would allow the firm to
lower the wage it pays.
D. the hedonic wage function must be very steeply sloped to ensure that the worker doesn't
accept a better paying job.
E. the worker receives no surplus from the match.

Blooms: Understand
18. In Probability of Injury (x-axis) versus Wage (y-axis) space, isoprofit curves slope upward
because
A. profits increase with the number of workers the firm employs.

B. workers are willing to accept a lower wage in exchange for a riskier work environment.
C. the firm does not like to pay higher wages.
D. in order to keep profits constant, a higher wage must be offset by the firm saving money by
not investing as much in preventing on-the-job injuries.
E. profits are constant with respect to risk.

Blooms: Understand
5-15
19. The correlation between wages and the probability of encountering a fatal injury while on the
jobs can be used to calculate:
A. the value of risk.

B. the value of safety.
C. the value of life.
D. the value of injury.
E. the value of work.
Blooms: Remember
Difficulty: 01 Easy
Topic: How Much Is a Life Worth?
20. The value of life is calculated by comparing
A. wages to risk levels.

B. risk levels to the number of children in a worker's household.
C. wages to the number of children in a worker's household.
D. average life expectancy by occupation to average risk levels by industry.
E. average wages to the average retirement age.

Blooms: Remember
Difficulty: 01 Easy
5-16
21.
Suppose 1 in 200 pilots flying Space-X aircraft dies each year while only 1 in 500 pilots flying
Subspace Gliders dies each year. Moreover, the average salary of Space-X pilots is $115,000,
while the average salary of Subspace Glider pilots is $109,000. Given this information, what is
the implied statistical value of a life of a pilot?
A.
$6,000
B.
$120,000
C.
$480,000
D.
$1,200,000
E.
$2,000,000
AACSB: Analytical Thinking

Blooms: Apply
Difficulty: 03 Hard
5-17
22. A firm has the choice of offering "dirty" jobs that are likely to cause severe health problems for
its workers or of offering "clean" jobs by installing safety equipment at a cost of $5 per hour per
employee that will substantially reduce the chances of health problems. The firm will
A. install the safety equipment if workers can ascertain whether they are working a dirty or a
clean job.
B.
never willingly choose to install the costly safety equipment.
C.
never install the safety equipment without a government subsidy to do so.
D.
install the safety equipment if workers are willing to be paid $3 per hour less in a clean job
than in a dirty job.
E.
willingly install the safety equipment if workers are willing to be paid $7 per hour less in a
clean job than in a dirty job.

Blooms: Understand
Topic: Safety and Health Regulations
23. A potential implication of OSHA regulation is that
A. the most risk averse workers begin working the riskiest jobs.
B.
the hedonic wage function may no longer exist at the safest levels.
C.
the hedonic wage function may no longer exist at the riskiest levels.
D. average wages increase.

E. for the same amount of output produced, total production costs will be less.

Blooms: Understand
5-18
24. Having the government regulate work-place safety would most likely improve economic
efficiency if
A. the cost of introducing safety equipment is high.

B. workers value safe work environments.
C. workers are unable to correctly judge the risk associated with a particular job.
D. firms are unable to attract workers to safe jobs.
E. firms and workers differ on the value they place on safe versus risky jobs.
Blooms: Understand
25. Assuming that workers are fully aware of their working conditions, which of the following will
not happen when the government mandates pollution control to protect workers' health?
A. Worker utility will increase.

B.
Employment will decrease.
C. The air in workplaces will become cleaner.

D. Firms with low-profits before the mandate may shut down or exit the industry.
E. Wages will fall at all but the cleanest firms.
Blooms: Understand
26. When the government imposes safety regulations on a particular job or labor market, what is
most likely to happen?
A. Wages will increase.

B. Utility will increase if workers are able to correctly evaluate working conditions.
C. Wages will fall but utility will increase if workers misperceive on-the-job risk.
D. Employment will increase.
E. Firms that used to offer bad working conditions will be required to shut down.

Blooms: Understand
5-19
27.
One implication of the theory of compensating differentials is that jobs in states with high
income tax rates are likey to
A.
be associated with more fringe benefits.
B.
be associated with fewer fringe benefits.
C.
pay the same wage and offer the same fringe benefits package as the same jobs in lower-
tax states.
D.
have worse working conditions.
E.
be seasonal in nature.

Blooms: Remember
Difficulty: 01 Easy
Topic: Compensating Differentials and Job Amenities
28. Ability bias can arise when estimating compensating wage differentials associated with various
job characteristics. What is ability bias in this context?
A. Low-skilled workers are likely to have low wages but good job amenities.
B. High-skilled workers are likely to have high wages but poor job amenities.
C. High-skilled workers are likely to have lower wages than unskilled workers but to have
better job amenities.
D. High-skilled workers are likely to have higher wages than unskilled workers but to have
worse job amenities.
E. High-skilled workers are likely to have higher wages than unskilled workers, but they are
also likely to trade some of their higher wages for better job amenities.

Blooms: Understand
5-20
29. If the U.S. system of unemployment insurance didn't exist, one would predict that
A. workers would never become unemployed.

B. workers who became unemployed would remain unemployed for longer durations.
C. no worker would accept a job that is associated with seasonal unemployment.
D. seasonal unemployment would cease to exist.
E.
workers in jobs that have high risks of unemployment or in jobs that face seasonal cycles
of unemployment would be paid higher wages.

Blooms: Understand
30.
Empirically, women who are married to a spouse who has access to health insurance earn
higher wages and are less likely to be offered employer-sponsored health insurance than are
married women whose spouse does not have access to health insurance. This pattern
A.
is unexpected as wages should be unrelated to fringe benefits.
B.
supports the theory of compensating differentials as it indicates there is a trade-off
between wages and benefits.
C.
supports the theory of compensating differentials as it indicates there is no trade-off
between wages and benefits.
D.
fails to provide support for the theory of compensating differentials.
E.
contradicts the result that the hedonic wage function is upward-sloping.

Blooms: Remember
Difficulty: 01 Easy
Topic: Health Insurance and the Labor Market
5-21

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Chapter 05

Compensating Wage Differentials

Multiple Choice Questions

1. In the standard theory of compensating differentials, a worker's reservation price is

A. the average worker into a regular job.

A. Al is more risk-loving than Pete.

A. Abby and Rudy both work a safe job.

A. The probability of being injured on the job.

14. A standard hedonic wage function might show what relationship?

A. The relationship between the wage and a worker's age.

15. The equilibrium hedonic wage function is most likely

A. horizontal as no firm will over-pay for workers.

A. randomly match workers to jobs.

A. the worker cannot receive a higher wage at any other firm.

A. profits increase with the number of workers the firm employs.

A. the value of risk.

20. The value of life is calculated by comparing

A. wages to risk levels.

D. average wages increase.

A. the cost of introducing safety equipment is high.

A. Worker utility will increase.

C. The air in workplaces will become cleaner.

A. Wages will increase.

A. workers would never become unemployed.

Multiple Choice Questions

1. In the standard theory of compensating differentials, a worker's reservation price is

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. the average worker into a regular job.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. Al is more risk-loving than Pete.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. Abby and Rudy both work a safe job.

AACSB: Analytical Thinking

A. The probability of being injured on the job.

AACSB: Reflective Thinking

14. A standard hedonic wage function might show what relationship?

A. The relationship between the wage and a worker's age.

15. The equilibrium hedonic wage function is most likely

A. horizontal as no firm will over-pay for workers.

A. randomly match workers to jobs.

A. the worker cannot receive a higher wage at any other firm.

AACSB: Reflective Thinking

A. profits increase with the number of workers the firm employs.

AACSB: Reflective Thinking

A. the value of risk.

20. The value of life is calculated by comparing

A. wages to risk levels.

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Reflective Thinking

23. A potential implication of OSHA regulation is that