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Consider the following model of unemployment. A household is either employed or looking for a job. When unemployed, utility is Vu. An unemployed receives unemployment benefits b and has a probability p of finding a job in any period. Each job offers to work at a particular wage w from some distribution H() where H(w) is fraction of unemployed receiving a wage offer greater than w. The utility of being employed is Ve(w). Each employed looses its job with probability s. The size of the labor force is normalized to one.Define the reservation wage w and determine it in a figure with wage offer on the x-axis.What is the flow from the pool of unemployed to the pool of employed every period?What is the flow from the pool of employed to the pool of unemployed every period?Determine the natural unemployment rate in this economy. Describe in a short paragraph and graphically the impact of an increase in unemployment benefits on the reservation wage and the natural rate of unemployment.
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