The government of Arendelle is considering providing a social unemployment insurance program. In particular, they are considering two options: the first would pay any worker who loses her job $100/week for a year, and the second would pay $600/week for a year. Both would be financed by collecting a tax from workers that keep their (full-time) jobs—for the first option, the tax would be $25/week, and for the second option, the tax would be $150/week.
Calculate the expected utility of both types of workers under each program, as well as in the absence of an unemployment insurance program. How do the workers rank the possibilities? Explain your answer in terms of redistribution and risk aversion.
Now assume that if laid-off workers receive unemployment benefits of $600/week, they will choose not to work part-time. How does this affect the expected utility of the workers under this program?