Individuals have utility function given by U(C) = VC. Individuals earn a wage w when em-...

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Individuals have utility function given by U(C) = VC. Individuals earn a wage w when em- ployed and have no earnings when unemployed. The probability of being unemployed is p. The government intervenes and provides employment insurance (EI) benefits b to the unemployed. This is financed by a lump sum tax t paid by the employed. (a) Write down the government's constraint for a balanced budget and individuals expected utility as a function of b, p, and w (assume that individuals cannot save). [2 marks] (b) When the likelihood of being unemployed depends positively on the generosity of EI ben- efits b, should the government provide full or partial insurance? Explain (at most 3 sen- tences). [2 marks] Individuals have utility function given by U(C) = VC. Individuals earn a wage w when em- ployed and have no earnings when unemployed. The probability of being unemployed is p. The government intervenes and provides employment insurance (EI) benefits b to the unemployed. This is financed by a lump sum tax t paid by the employed. (a) Write down the government's constraint for a balanced budget and individuals expected utility as a function of b, p, and w (assume that individuals cannot save). [2 marks] (b) When the likelihood of being unemployed depends positively on the generosity of EI ben- efits b, should the government provide full or partial insurance? Explain (at most 3 sen- tences). [2 marks]

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