3. The figure below depicts the effect of an increase in the unemployment benefi

Question

3. The figure below depicts the effect of an increase in the unemployment benefit on the workers' best response fure, when the unemployment rate is 12%. Which of the following statements is correct following a rise in the unemployment benefit? Select correct answer a. b. c. d. The firm's profit level falls. The workers' reservation wage falls. The efficiency wage at any given level of employment falls. The firm sets a lower efficiency wage. Best response function with U-12% and low unemployment benefit Best response function with U-12% and high unemployment benefit Hourly wage Reservation Wage set by wage firm

Explanation / Answer

Following an increase in the unemployment benefit, from the diagram we observe that the reservation wage increases with an increase in the unemployment benefit. Hence option b is correct.

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