Let us consider the dynamic job search model with continuous wage we discussed in the
lecture. For example, a model economy lasts for two periods and the time discount factor
is β > 0. The wage is drawn from the uniform distribution over the interval [wmin, wmax].
Individuals decide whether to accept a job offer or to remain unemployed depending on what
type of job she finds. If an individual accepts the job offer, she keeps it forever. When being
unemployed, flow utility will be b.
• Calculate the reservation wages, wR1
and wR2
if b < wmin.
• Determine whether wR1
and wR2 will increase or decrease in response to a decrease in b.
