3.Consider two states A and B. Data on differences in UI programs across states show that State A has a much wider range in the payroll tax rates paid by different experience-rated firms than does State B.

(a) Which states system subsidizes firms with high layoff rates to a greater degree? Explain. (b) Which state is more likely to have a higher unemployment rate? Explain.

c, where c is an individual's weekly consumption. Their current weekly income is $1000 while working. All individuals face the same 10% probability of being laid off, in which case they will have no income. Or

equivalently, everyone has 90% probability to be able to continue to work.

The town's government is considering providing some social unemployment insurance. In particular, each unemployed would be paid the same weekly benefit b, financed by lump-sum tax on the people who keep their job.

1.(a)What is current expected utility of an individual when there is no unemployment insurance?

2.(b)Write down the government's constraint for a balanced budget. Express the lump-sum tax as a function of b.

3.(c)One proposal is b1 = $180. What would be the corresponding budget balancing tax 1 according you result in (b)? What would the expected utility of an individual if (b1, 1) is implemented?