Max is currently not employed and values an hour of leisure at $9/hour. If he ob
ID: 1151991 • Letter: M
Question
Max is currently not employed and values an hour of leisure at $9/hour. If he obtains a job, he will earn $10/hour.
(a) Since the current unemployment rate is 8 percent, Max assumes the probability of receiving a job offer if he decides to seek employment is 92 percent. Is Max likely to be a discouraged worker? Why or why not?
(b) If the unemployment rate rises to 10 percent and the wage Max will earn if he finds employment falls to $9.50/hour during a recession, is Max now likely to be a discouraged worker? Why or why not?
Explanation / Answer
A.
Expected value of earning if get a job = .92*10 + .08*0 = $9.2
Since, the expected earning is $9.2 and it is more than the value of leisure that is $9/hour, then Max will continue searching the job and he will not be a discouraged workers.
B.
In a new scenario, when the unemployment rate is 10%:
Expected value of earning if get a job = .90*9.5 + .10*0 = $8.55
Now, the expected earing from the job is $8.55 that is less than the value of leisure that is $9 per hour, then Max will become a discouraged worker. It will happen, because he is getting a job that gives less value than the leisure hours.