Consider a wage-risk equilibrium that is characterized by an upward-sloping hedonic wage function. Now suppose there is a government campaign that successfully alters people’s perception of risk. In particular, each worker adjusts her preferences so that she now needs to be more highly compensated to take on risk. Discuss, and show on a single graph, how the government’s campaign affects indifference curves, isoprofit lines, the equilibrium hedonic wage function, and the distribution of workers to firms.

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The proposed campaign will not alter isoprofit lines but it will make indifference curves more steep... View the full answer