(a) Draw a graph with an indifference curve for each of these two types of workers:
• Worker A places relatively high value on avoiding stress. Label this curve $U_A$.
• Worker B places relatively high value on income. Label this curve $U_B$.
Include an arrow indicating the direction in which worker utility is increasing.
(b) Draw a graph with an isoprofit curve these two types of employers:
• Firm I has a relatively high cost of reducing stress. Label this curve $F_I$.
• Firm II has a relatively low cost of reducing stress. Label this curve $F_{II}$.
Include an arrow indicating the direction in which firm profits are increasing.
(c) Assuming perfect competition, based on our theory of compensating differentials,
would we expect worker A to accept a job with firm $F_I$ or firm $F_{II}$? Why?
(d) Combining your indifference curves from (a) and isoprofit curves from (b), draw
a graph where workers A and B are employed but not with the same firm.
(e) On your graph from part (d), label the compensating wage differential for having
a more stressful job.
(f) Suppose that a new workforce management system is developed that allows Firm
I to more easily keep track of deadlines and manage group projects, making it
less costly to reduce stress in the workplace, but still more costly than firm II
can. What would we predict to happen to the compensating wage differential for
stressful jobs? Show on the same graph from part (d).
