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2. Individuals have utility function given by U (C) : J5 Individuals earn a wage as when em- ployed and have no earnings when unemployed. The probability of being unemployed is p. The government intervenes and provides employment insurance (EI) benets I) to the unemployed. This is nanced by a lump sum tax t paid by the employed. (a) Write dovm the government's constraint for a balanced budget and individuals expected utility as a function of b, p, and to (assume that individuals cannot save). [2 marks] (b) When the likelihood of being unemployed depends positively on the generosity of El ben- ets I), should the government provide full or partial insurance? Explain (at most 3 sen- tences). [2 marks} Canada, the United States, and Mexico are considering reforms of their employment insurance programs and have invited you to give your expert opinion on the optimal policy. They have estimated two parameters that they think will be useful in guiding your advice: The change in consumption while unemployed for a $1 increase in the E1 benet rate (%) and the elasticity of being unemployed with respect to the benefit rate (53,), _ E1D). The estimates are as follows Canada United States Mexico 0.2 0.3 0.3 b 0.8 0.8 0.5 Eel? E 3-\" (c) Explain why % is relevant for the optimal EI benet rate. Based on this parameter only which country should have the higher EI benets? (At most 3 sentences.) [2 marks] (d) Explain why 511,!) is relevant in determining the optimal EI benefit rate. Based on this parameter only, which country should have higher EI benets? (At most 3 sentences.) [2 marks] (e) Assuming the countries are identical in all other dimensions, which country would you recommend should have the highest EI benet rate? Which should have the lowest? [1 mark]