Question 1

According to the two-sided search model, in equilibrium labour market tightness tends to be high when

Accepted Answer

According to the two-sided search model, in equilibrium labour market tightness tends to be high when the firm's share of the surplus is high relative to the cost of a vacancy. This means that firms are willing to invest more in finding and matching with the right job candidates because the return on their investment is high. As a result, the labour market becomes tighter, with fewer vacancies and more competition among job seekers for available positions.

Question 2

In the two-sided search model, the number of firms is

Accepted Answer

In the two-sided search model, the number of firms is determined by the interaction of supply and demand in the market. Therefore, the number of firms is endogenous.

Question 3

In the two-sided search model, an increase in matching efficiency, e, could help high unemployment when there is

Accepted Answer

In the two-sided search model, matching efficiency refers to the ease with which firms and workers can find each other. An increase in matching efficiency would facilitate the matching process, which could help alleviate high unemployment when there is a large degree of mismatch between the skills of job seekers and the requirements of available jobs. Mismatch occurs when there is a disparity between the characteristics of job seekers (such as education, experience, or location) and those of job openings. When there is a significant degree of mismatch, even if there are many job openings and many job seekers, it may be difficult to find suitable matches. By increasing matching efficiency, the model can help reduce the time and resources required for matching, and thus lower unemployment.

Question 4

In the two-sided search model, Nash Bargaining implies

Accepted Answer

Nash Bargaining implies that the firm and the worker will receive a constant share of the surplus from a match, also known as the "bargaining solution" or the "negotiated outcome". This is because Nash Bargaining assumes that both parties have equal bargaining power and therefore will reach an agreement where each party receives the same share of the surplus.

Question 5

In the two-sided search model, an increase in productivity causes

Accepted Answer

In the two-sided search model, an increase in productivity leads to an increase in the number of firms looking to hire workers (i.e., an increase in vacancies) and also an increase in the number of workers searching for jobs. As a result, the vacancy rate and the unemployment rate both initially increase. However, as workers find jobs and vacancies are filled, the unemployment rate eventually falls while the vacancy rate rises. Therefore, the correct choice is E, which states that an increase in productivity causes the vacancy rate to rise and the unemployment rate to fall.

Question 6

According to the two-sided search model, in equilibrium the number of firms is

Accepted Answer

In the two-sided search model, the number of firms is negatively related to the cost of posting a vacancy because higher costs discourage firms from entering the market and posting vacancies.

Question 7

The probability of finding a job in the two-sided search model is

Accepted Answer

In the two-sided search model, the probability of finding a job is increasing in market tightness. Market tightness is defined as the ratio of vacant positions to job seekers, and as this ratio decreases (tighter market), the probability of finding a job increases. This is because there are more opportunities available for job seekers and fewer competitors for each job opening. Therefore, B is the best choice.

Question 8

In the two-sided search model, the expected payoff to searching for work

Accepted Answer

In the two-sided search model, the expected payoff to searching for work increases with both the employment insurance benefit and the market wage. This is because a higher benefit reduces the cost of searching and a higher market wage increases the expected payoff from finding a job. Therefore, choice D is correct. The reservation wage only affects the decision of whether to accept a job offer, not the expected payoff to searching, so choice A is incorrect. Choice B is also incorrect, as the expected payoff decreases with a lower market wage, not a higher one. Choice E is also incorrect, as labour market tightness affects the probability of finding a job, not the expected payoff.

Question 9

Which of the following is an assumption in the two-sided search model about the matching function?

Accepted Answer

In the two-sided search model, the matching function typically assumes diminishing returns to scale, meaning that the increase in matches from an increase in one side of the market (e.g., Q) is decreasing as that side continues to increase.

Question 10

In the two-sided search model, an unemployed worker's chances of finding a job depend on

Accepted Answer

In the two-sided search model, the labour market tightness plays the most significant role in determining the chances of an unemployed worker finding a job. This concept refers to the ratio of job vacancies to job seekers in a particular labor market. In a tight labor market, there are more job vacancies than job seekers, leading to a higher chance of matching and vice versa. Therefore, option D is the correct choice. A worker's search effort (A) and reservation wage (E) also affect their job search outcomes, but not as substantially as labor market tightness. Employment insurance benefits (B) and opportunities in other countries (C) do not influence the job search chances in the model.

Question 11

In the one-sided search model, if the employment insurance benefit goes down,

Accepted Answer

When employment insurance benefits decrease, individuals have less financial support while unemployed, leading them to lower their reservation wage to accept job offers more readily, thus reducing long-run unemployment.

Question 12

Constant returns to scale in the matching function means that, given any constant x > 0,

Accepted Answer

Constant returns to scale means that increasing the quantity of both the job seekers and job vacancies by the same factor (x) results in the same proportional increase in the number of matches. This is exactly what choice A says, so it is the best choice.

Question 13

Labour market tightness in the two-sided search model is defined by

Accepted Answer

Labour market tightness is typically defined as the ratio of the number of firms (or vacancies) to the number of consumers (or workers) searching for work.

Question 14

In the two-sided search model, the choice that responds to economic conditions is

Accepted Answer

A firm's choice of how many vacancies to post is the choice that responds to economic conditions in the two-sided search model.

Question 15

In the two-sided search model, there

Accepted Answer

The answer of In the two-sided search model, there
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Question 16

In the two-sided search model, the size of the labour force is positively related to

Accepted Answer

In the two-sided search model, the size of the labour force is positively related to the expected payoff to searching for work. This means that as the expected payoff increases, more individuals will enter the labour force as they perceive the benefits of finding a job to be greater.

Question 17

The matching function captures the difficulties in

Accepted Answer

The matching function refers to the process of matching heterogeneous firms with heterogeneous workers, which can often pose difficulties due to variations in skills and job requirements.

Question 18

In the two-sided search model, firms continue posting vacancies until the probability of matching with a worker is equal to

Accepted Answer

The firms in the two-sided search model continue posting vacancies until the marginal cost of posting a vacancy is equal to the marginal benefit from filling the vacancy. The marginal benefit is the profits from a match, which can be written as the product of the probability of matching with a worker and the surplus generated by the match. Therefore, the firms continue posting vacancies until the probability of matching with a worker is equal to the ratio of the cost of posting a vacancy to the profits from a match.

Question 19

In the two-sided search model, labour market tightness

Accepted Answer

In the two-sided search model, labour market tightness affects the chances of finding a job. This means that the probability of a job seeker finding a job is higher when the labour market is tight, and lower when the labour market is loose. Labour market tightness depends on the ratio of vacancies to unemployed workers, and it is influenced by factors such as labour market regulations, technology, and the overall state of the economy. Therefore, in this model, labour market tightness is an important determinant of job search outcomes.

Question 20

In the one-sided search model, if the job offer rate goes down,

Accepted Answer

When the job offer rate decreases, workers lower their reservation wage to increase their chances of accepting a job, but the effect on long-run unemployment is ambiguous as it depends on other factors like the overall job market conditions.

Quiz 6: Search and Unemployment