Case Study: Sam works in a car manufacturing company. Currently, his firm pays him $50 per hour and he works 35 hours per week. Each hour he works he experiences disutility of effort from working valued at $8 per hour. In addition, should Sam lose his job the government will pay him an unemployment benefit of $25 per hour, for each hour he would otherwise work each week, for a maximum of 20 weeks. Prior to the energy crisis if Sam lost his job the expected duration of unemployment before he would find another job is 15 weeks.
Question a. Calculate Sam`s (i) employment rent per hour and his (ii) total employment rent.
Question b. With the advent of the energy crisis and the increase in the interest rate by the Central Bank, the economy has gone into recession causing Sam`s expected duration of unemployment to increase to 35 weeks. Furthermore, the dramatic increase in the expected duration of unemployment has resulted in psychological stress from unemployment valued at $5 per hour. In the light of these developments re-calculate Sam`s (i) employment rent per hour (2 marks) and (ii) total employment rent
Question c. Describe the relationship between the size of the employment rent and (i) the expected duration of unemployment (ii) the size of the unemployment benefit per hour and (iii) the size of the psychological cost of unemployment per hour.