Darnell can work on an oil rig, where the probability of being killed in a work-related accident is 4/6,000, or he can earn work as a lumberjack, where the probability of being killed in a work-related accident is 1/6,000. Using the compensating differential approach, the value of Darnell's life is $6 million. How much more per year will working on an oil rig pay than working as a lumberjack?
A) $2,000
B) $3,000
C) $4,000
D) $6,000

Question

Quizplus · Accepted Answer

The compensating differential approach suggests that the difference in risk between the two jobs should be compensated by the difference in pay, proportional to the value of life. The difference in risk is 4/6,000 - 1/6,000 = 3/6,000. Given the value of life is $6 million, the additional pay for the higher risk on the oil rig is (3/6,000) * $6,000,000 = $3,000.

Darnell Can Work on an Oil Rig, Where the Probability