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Unformatted text preview: Problem Set 12 Econ 702, Spring 2004 April 24, 2004 Problem 1 Suppose we have a world described by the following matrix, in which probability of finding a job and loosing a job is .1. Find the stationary distrubution of this economy and calculate the average duration of unemploy ment. = . 9 . 1 . 1 . 9 Problem 2 Consider the optimal unemployment insurance problem we covered in class, c ( V ) = min c,a,V u { c + [1 p ( a )] c ( V u ) } (1) s.t V = u ( c ) a + p ( a ) V E + (1 p ( a )) V u (2) Derive the envelope condition explicitly and show that c ( V ) is convex. Problem 3 Suppose we add unobservability of effort to the problem above. Show that c t is decreasing and a t is increasing over time in the efficienct unem ployment insurance scheme when people are unemployed. Problem 4 Consider the model with onesided lack of commitment, the value of the contract to the risk neutral agent with commitment is P ( V ) if she promised V to the risk averse agent....
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 Spring '08
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