FINANCIAL ECONOMICS (LABOR ECONOMICS) 440.640 MIDTERM STUDY GUIDE 2026 (Complete And Verified Study material) (20pages) LEARNEXAMS

 Why issupply curve upward sloping?  Supply curve shows 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  Because we assume all workers dislike risk, no worker would be willing to work at is zero.  As the wage differential rises, there will come a point where the worker who dislikes risk the least is “bought off” and decides to work in the risky job. This threshold is shown by the reservation price Δ̂MIN  As the wage differential between the risky job and the safe job keeps increasing, more and more workers are bribed into the risky occupation, and the number of workers who choose to work in risky jobs keeps rising. The market supply curve to the risky job therefore is upward sloping.  Nutshell: supply curve slopes up because as wage gap between risky job and safe job increases, more and more workers are willing to work in the risky job.  Why is demand curve downward sloping?  A firm’s choice to offer safe or risky working conditions will depend on what is more profitable.  Market labor demand curve for risky workers is derived by adding up the labor demand curve of risky firms.  If the compensating wage differential is very high, NO firm would choose to become a risky firm and the demand for risky workers is zero.  As the wage differential falls, there will come a point where the firm that has the most to gain from becoming a risky firm decides what it is worth incurring the additional labor cost.  As the wage differential between risky job and safe job keeps falling, more and more firms will find it profitable to offer a risky environment and the quantity of labor demanded by risky firms rises.  Thus, demand curve for risky jobs is downward sloping.  Nutshell: Demand curve slopes down because fewer firms will offer risky working conditions if risky firms have to offer high wages to attract workers.  The market compensation differential equates supply and demand and gives the bribe required to attract the last worker hired by risky firms.  Intersection of market supply and demand curves  Compensating wage differential received by workers in risky firms is (w1 – w0)* and E* workers are employed in these jobs  If the wage differential exceeds this equilibrium level, more persons are willing to work in risky firms than are being demanded so that the compensating wage differential would fall.