1. Discuss how the wage and risk levels are simultaneously determined by the employee and the firm. Draw a detailed graph depicting the marriage between employees and firms. What are the major implications of your graph?

2. An argument advanced for a governmental ban on smoking in the workplace is that it would lower the insurance cost because of improved health resulting from the reduction in second-hand smoke. Assuming that this assertion is true, under what circumstances would a firm voluntary ban smoking in the workplace such that a government mandate was not necessary. Explain.

3. The public employees union in Oregon agreed to a settlement where they would forgo pay increases over several years in exchange for the state picking up the employee contribution to retirement in the early 1980's. However, a recent ballot measure was passed in Oregon requiring public employees to pay their own retirement benefits, which amounted to approximately a 6.5 percent pay cut. Proponents of the measure argued that public employees were being paid too much because private sector firms made their employees pay for their retirement contribution. However, public employee's contended that this was unfair because they had made wage concessions in exchange for the state paying their benefits. Suppose you were hired as an arbitrator in the case to propose a settlement for the dispute. Use your knowledge regarding compensating differentials to analyze this issue. Carefully, explain the factors that would enter into your considerations and how you would rule on the case given those considerations.