Question1) a) A labor market is in steady state equilibrium with unemployment rate u = 0.04 and probability of re-employment per month λ = 0.12. What is the probability of becoming unemployed in a month? b) What is the size of the labor force when the number of unemployed is U = 20,000? How long does an unemployment spell last on average? c) An increase in unemployment benefits makes the duration of unemployment spells 10 months. What is the new level of unemployment? d) In a simple job search model, the probability of an unemployed worker finding a job (λ) is equal to the probability of receiving a job offer (µ) times the probability of accepting it (p). Assume that the reduction in λ from part a) to part c) is not due to changes in unemployment benefits, but rather due to changes in µ. If p remains constant at 0.2, what is the reduction in µ? e) It is not realistic to assume that p remains constant. Explain why. Assuming that the wage distribution is fixed, in which direction will p change if µ is reduced?
Question1) a) A labor market is in steady state equilibrium with unemployment rate u = 0.04 and probability of re-employment per month λ = 0.12. What is the probability of becoming unemployed in a month? b) What is the size of the labor force when the number of unemployed is U = 20,000? How long does an unemployment spell last on average? c) An increase in unemployment benefits makes the duration of unemployment spells 10 months. What is the new level of unemployment? d) In a simple job search model, the probability of an unemployed worker finding a job (λ) is equal to the probability of receiving a job offer (µ) times the probability of accepting it (p). Assume that the reduction in λ from part a) to part c) is not due to changes in unemployment benefits, but rather due to changes in µ. If p remains constant at 0.2, what is the reduction in µ? e) It is not realistic to assume that p remains constant. Explain why. Assuming that the wage distribution is fixed, in which direction will p change if µ is reduced?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question1)
a) A labor market is in steady state equilibrium with unemployment rate u = 0.04 and probability of
re-employment per month λ = 0.12. What is the probability of becoming unemployed in a
month?
b) What is the size of the labor force when the number of unemployed is U = 20,000? How long
does an unemployment spell last on average?
c) An increase in unemployment benefits makes the duration of unemployment spells 10 months.
What is the new level of unemployment?
d) In a simple job search model, the probability of an unemployed worker finding a job (λ) is equal
to the probability of receiving a job offer (µ) times the probability of accepting it (p). Assume
that the reduction in λ from part a) to part c) is not due to changes in unemployment benefits,
but rather due to changes in µ. If p remains constant at 0.2, what is the reduction in µ?
e) It is not realistic to assume that p remains constant. Explain why. Assuming that the wage
distribution is fixed, in which direction will p change if µ is reduced?
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