1. (30) Monitoring Technology in the Moral Hazard Theory of Unemployment. Using the moral hazard model of unemployment of Shapiro and Stiglitz (1984), we want to understand the effect on unemployment and welfare of technologicacal improvements in monitoring. a. (5) The equilibrium of the labor market is given by the solution to the following system of equations: F"(N*)=w* ((LD)) e (1-(1-5)N w = (+b) + By 1-N - B(1 - 0)] 8 ((NS)) a Plot the Labor Demand equation in a graph with N on the horizontal axis and won the vertical axis. Is the slope of the curve negative or positive? Explain. b. (5) Plot the No Shirking equation in a graph with N on the horizontal axis and won the vertical axis. Is the slope of the curve negative or positive? Explain. What happens to the curve as N 1? Explain.. c. (5) Combining the answer to the questions above, plot both the LD and NS equations. Identify in the graph the equilibrium, and the measure of workers who are unemployed. Since there are workers with- out a job who are willing to work at the equilibrium wage, why doesn't an individual firm lower its wage? d. (5) Using the same type of graph as in part (c), illustrate the effect of an improvement in the monitoring techology q on the equilibrium employment, wages and unemployment. Interpret your findings. e. (10) Consider the measure of welfare W given by the average utility of an agent in the economy, i.e. W = F(N) - eN. What is the effect of an increase in qon welfare? Explain your findings