Question

In September 2019 a university paid $30,000 per year to workers who cleaned dormitories and also to workers who cleaned hospital rooms. In September 2020 it will be able to hire all the dorm cleaners it needs for $30,000 but it will need to pay $40,000 to hire hospital cleaners. Assume that there is no chance of getting sick from the pandemic for dorm cleaners but a 20% chance for hospital cleaners. Also assume that 2% of hospital workers who get sick will die. Also assume that the cost of getting sick is $10,000, including the cost of pain and suffering and out of pocket medical expenses not covered by the medical insurance that the university provides. What is the value of life implied by these assumptions? Explain your answer.

Answer 1

Value of life is an economic value used to quantify the benefit of avoiding a fatality

According to economics,

high wage implies , high risk of death and low wage implies , low risk of death

According to the question,Hospital cleaners earn more and they have the high risk of death

Dorm cleaners earn less and they have low risk of death

At equilibrium

Marginal Benefit=Marginal cost

MC of less risk job is =reduction in the wage

MB of less risk job is=(reduction in probability of death*value of life)

MC of less risk job=40000-30000 =10000

Reduction in probability of death =20/100 * 2/100 - 0(20% have sick out of which 2% die and low risk have no sick hence chance of death is 0

Reduction in probability of death=0.004 - 0=0.004

At equlibrium

10000= 0.004 * value of life

value of life =10000/0.004

=2500000

So the value of life in this scenario is 2500000

Hope it helps friend