Answer to Question #257500 in Economics for Akhona Klanisi

Question

2.(‘Furloughs’. Question with Mathematical derivations) Consider the one sector. Pissarides model with a given productivity p (i.e. it does not depend on how many workers are hired in the sector).

a. Write down the life-time expected profit of the firm who has a worker, while incorporating match breakup risk δ in this equation. We call this the baseline case. Briefly discuss how you can also determine the job finding rate and steady state unemployment rate.

b. Suppose now that whenever a breakup happens, the firm can reverse that particular breakup by paying a cost. In equilibrium, how much is the firm willing to pay at most for reverting a breakup?

Answer 1

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