Derivation of the Weighted-Average Reservation Wage Equation

An individual's reservation wage (w_r) is determined by the weighted average of the weekly utility of being unemployed (b+a^M) and the weekly utility of being employed in a new job (v), as shown in the formula: w_r = τ(b+a^M) + (1-τ)v. In this formula, τ represents the expected proportion of time the individual will be unemployed. Assuming the utility of being employed is greater than the utility of being unemployed (v > b+a^M), what is the most likely direct effect on the reservation wage if a new government program significantly reduces the expected duration of unemployment?

Calculating an Individual's Reservation Wage

Policy Impact on Reservation Wage

Interpreting the Reservation Wage Equation

Consider the equation for an individual's reservation wage: w_r = τ(U) + (1-τ)V, where w_r is the reservation wage, U is the weekly utility from being unemployed, V is the weekly utility from being employed, and τ is the expected proportion of time spent unemployed (where 0 < τ < 1). If the utility from being employed is greater than the utility from being unemployed (V > U), then the reservation wage (w_r) must be greater than the utility from being employed (V).

Match each component of the reservation wage equation, w_r = τ(b+a^M) + (1-τ)v, with its correct description.

Consider the formula for an individual's reservation wage: w_r = τ(U) + (1-τ)V, where U represents the weekly utility from being unemployed, V is the weekly utility from being employed, and τ is the expected proportion of time spent unemployed. As the expected proportion of time unemployed (τ) approaches 1, the reservation wage (w_r) approaches the value of ____.

An individual's reservation wage ($w_r$) is calculated as a weighted average: $w_r = \tau(U) + (1-\tau)V$, where $\tau$ is the expected proportion of time unemployed, U is the weekly utility while unemployed, and V is the weekly utility from a new job. Assume that for any job, V > U.

An individual is comparing two different job markets:

• Market A: Offers high job security, resulting in a low expected proportion of time unemployed ($\tau_A$).
• Market B: Offers lower job security, resulting in a high expected proportion of time unemployed ($\tau_B$), where $\tau_B > \tau_A$.

Under which condition could the reservation wage in the less secure market ($w_{r,B}$) be higher than the reservation wage in the more secure market ($w_{r,A}$)?

Evaluating Policy Effectiveness on Reservation Wages

An individual's reservation wage (w_r) is determined by the formula w_r = τ(U) + (1-τ)V, where U is the weekly utility from being unemployed, V is the weekly utility from a new job, and τ is the expected proportion of time spent unemployed. If economic conditions improve, leading to a significant decrease in the expected proportion of time spent unemployed (τ), what is the resulting effect on the sensitivity of the reservation wage to changes in the utility from being unemployed (U)?