Answer Happy

a. Consider the one-sided search model of unemployment discussed in class. The model is assumed to be in its long-run equilibrium. Then, there is a simultaneous reduction in the separation rate, S, and an increase in total factor productivity. How will these changes affect the welfare of an employed worker, V.(w), as well as the welfare of an unemployed worker, V? Explain your results. (2 marks) b. What will be the impact of the changes in part (a) on the reservation wage relative to the initial equilibrium? Use a figure to show the effect on the reservation wage. Explain your result. (2 marks) c. As a result of the changes in parts (a) and (b) will the chance of a worker receiving a job offer that is greater or equal to the reservation wage increase, decrease or remain constant? Explain why. (2 marks) d. Determine the impact of the changes in parts (a)-(e) on: () the flow of workers from employment to unemployment, and (in the flow of workers from unemployment to employment. Show diagrammatically the effect of these changes on the long-run unemployment rate relative to the initial equilibrium. Provide an intuitive interpretation of your result. (4 marks)