17.10 Public choice of unemployment benefits Suppose individuals face a probability of u that they will be

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17.10 Public choice of unemployment benefits Suppose individuals face a probability of u 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 w (l – t), where t is the tax used to finance unemployment benefits. Unemployment benefits are constrained by the government budget constraint ub = tw (l – u).

a. Suppose the individual’s utility function is given by U = (yi )δ/δ, where 1 – δ is the degree of constant relative risk aversion. What would be the utility-maximising choices for b and t?

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

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

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Microeconomic Theory Basic Principles And Extensions

ISBN: 9781473729483

1st Edition

Authors: Christopher M Snyder, Walter Nicholson, Robert B Stewart

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