However, firms that have installed expensive air purification systems are able to eliminate fumes from the glue inside the plants. Suppose that 50 of these pillow-manufacturing jobs exist in firms with air purification systems, while the other 150 of these jobs are in firms without air purification systems. Assume that the number of firms without air purification systems is fixed. Thus, the demand for workers in jobs with impure air is perfectly inelastic.

Assume that there are 200 workers who need to find jobs in this market (western foothills of North Carolina). The workers preferences are uniformly distributed between 11 cents and 2 dollars 10 cents such that Worker 1’s reservation wage (?w) for accepting a job with impure air is 11 cents; worker 2’s reservation price is 12 cents; worker 3’s reservation price is 13 cents and so on.

1. Draw the supply curve to jobs with impure air labeling as many points as you can.

2. Draw the demand curve for jobs with impure air labeling as many points as you can.

3. Find the equilibrium wage differential between jobs with impure and pure air. What is the interpretation of this equilibrium wage differential? Draw this equilibrium labeling as many points as you can.

4. Which workers will be employed at firms with impure air? What is their average reservation wage (w) for accepting a job with impure air?

5. Which workers will be employed at firms with pure air? What is their average reservation wage (w) for accepting a job with impure

6. Suppose the above New York Times article, which stresses the hazards associated to exposure to this dangerous chemical, changes the attitudes of the work force toward being employed in firms with impure air. Worker 1 now has a reservation price of 41 cents; worker 2’s reservation price is 42 cents; worker 3’s reservation price is 43 cents, and so on. As before, there are 150 jobs in firms without air purification systems, and this number is fixed. Thus, the demand for workers in jobs with impure air is perfectly inelastic. Find the new equilibrium wage differential between safe and risky jobs. Draw this equilibrium labeling as many points as you can.

7. Suppose now that the Occupational Safety and Health Administration (OSHA) forced additional firms to install air purification systems, bringing the number of jobs in firms without air purification systems down to 90. Find the new equilibrium wage differential between pure and impure air jobs. Draw this equilibrium, labeling as many points as you can.