In the two-sided search model, the expected payoff to searching for work
A) depends on the reservation wage.
B) increases with the employment insurance benefit and decreases with the market wage.
C) decreases with the employment insurance benefit and increases with the market wage.
D) increases with the employment insurance benefit and increases with the market wage.
E) decreases with labour market tightness.

Question

Quizplus · 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.

In the Two-Sided Search Model, the Expected Payoff to Searching