19.11 Public choice of unemployment benefits Suppose individuals face a probability of that they will be unemployed next year. If they are unemployed they will receive unemployment benefits of

b, whereas if they are employed they receive (1), where is the tax used to finance unemployment benefits. Unemployment benefits are constrained by the government budget constraint ubtw(1u).

a. Suppose the individual's utility function is given by U = (y;)/8, where 1-8 is the degree of constant relative risk aversion. What would be the utility- maximizing choices for b and r?

b. How would the utility-maximizing choices for b and I respond to changes in the probability of unemployment, u?

c. How would b and r change in response to changes in the risk aversion parameter 8?