Question

1. Consider the situation of a mass layof (i.e., a factory shuts down) where 1,200 people become unemployed and now begin a job search. In this case there are two states: employed (E) and unemployed (U) with an initial vector E U [0 1,200] Suppose that in any given period an unemployed person wil find a job with probabil- ity .7 and will therefore remain unemployed with a probability of .3. Additionally, persons who find themselves employed in any given period may lose their job with a probability of .1 (and will have a .9 probability of remaining employed). (a) Set up the Markov transition matrix for this problem. (b) What will be the number of unemployed people after () 2 periods; (i) 3 periods; (ifi) 5 periods, (iv) 10 periods? (c) What is the steady-state levei of unemployment?

Answer 1

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