Question

Suppose a person is searching for a job and (s)he thinks that there are 5 types of companies in the same industry that may hire (her)him, their average pay is as follows: $40,000 by small privately owned companies, midsize privately owned companies paying $42,500, midsize corporations paying $45,000, large corporations paying $47,500, and very large corporations paying $50,000

Given the number of jobs available in each kind of company and the candidate’s resume, the probability of being hired by each kind of company is 30%, 25%, 20%, 15%, and 10% respectively. This candidate considers that (s)he may search for the next six months.

A. Assuming there are no search costs, also assuming that this person does not have any non-labor income, and the candidate is risk neutral, what would be the reservation wage at the beginning of the search?

B. What would be the reservation wage in the third month of search?

C. Assuming that it costs the candidate $2000 per month in search costs, what would be the reservation wage?

D. Assume search costs are still $2000 per month but now also assume the candidate received $1500 per month in nonlabor income, what would be the reservation wage?

Answer 1