7. U.S. Trucking pays its drivers $40,000 per year, while American Trucking pays

Question

7. U.S. Trucking pays its drivers $40,000 per year, while American Trucking pays its drivers $38,000 per year. For both firms, truck drivers average 240,000 miles per year. For simplicity, assume both firms require driving 60 million miles each year. Truck driving jobs are the same regardless of which firm one works for, except that U.S. Trucking gives each of its trucks a safety inspection ever 50,000 miles while American Trucking gives each of its trucks a safety inspection every 36,000 miles. This difference in safety inspection rates results in a different rate of fatal accidents between the two companies. In particular, one driver for U.S Trucking dies in an accident every 12 million miles while one driver for American Trucking dies in an accident every 15 million miles. What is the value of a trucker

Explanation / Answer

The (annual) probability of death for each driver working for US Trucking is 240,000 miles / 12 million miles/death = .02 deaths. Similarly for American Trucking, 240,000 / 15 million miles/death = .016 deaths. The difference in probability of death ?Pr(Death) = .004. The increased salary is ?Salary = $2,000. The implied value of life is ?Salary / ?Pr(Death) = $2,000/.004 = $500,000

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