Crusoe will produce P if and only if

cost of (Land + Labor Type 1) < marginal utility of 10 clams, discounted for time.

(1)

Crusoe will produce Q if and only if

cost of (Land + Labor Type 2) < marginal utility of 10 clams, discounted for time, discounted for risk.

(2)

Since risk creates a disutility, the utility on the right side of inequality (1) is greater for Crusoe than the utility on the right side of (2). Consequently, Crusoe will tolerate a greater disutility of labor for Labor Type 1 (left side of the first inequality) than for Labor Type 2. In other words, he will be willing to suffer a greater disutility in order to achieve a more desirable result. For the same reason, if third parties are bidding to perform both types of labor, Crusoe will be willing to offer a higher wage, if required by the market, to those who will perform Labor Type 1.

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