Consider the following wage search model: During a period an unemployed worker receives one wage offer with probability λ. With probability 1 − λ, the unemployed worker does not receive an offer. The wage offer is drawn from the wage offer distribution F(w) which is assumed to be uniform over the interval [0,100]. Specifically this implies that the probability of receiving an offer w ̃ less than or equal to some level w is Pr(w ̃ ≤ w) = w/100. During any period, an employed worker loses her job with probability δ. For any given reservation wage R such that unemployed workers reject offers below R and accept offers above R, determine the steady state unemployment rate using the logic of the bathtub model. Use your answer to calculate the unemployment rate for δ = 0.017, λ = 0.5, and R = 35.
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