CFA Practice Question

CFA Practice Question

Higher unemployment insurance benefits tend to increase unemployment because they
A. increase the opportunity cost of job search and hence increase the search time.
B. reduce the opportunity cost of job search and hence increase the search time.
C. increase the opportunity cost of job search and hence decrease the search time.
Explanation: A change that reduced the job seeker's cost of continued search would lead to more lengthy periods of search. If unemployment benefits increase, it is less costly to continue looking for a preferred job. This reduction in the cost of job search would induce job seekers to expand their search time. Unemployment would be pushed upward.

User Contributed Comments 11

User Comment
Dinosaur The opportunity cost of job search is unemployment benefits, if these are higher then the opp cost is increased.
charliedba No. The opportunity cost of job search is lost salaries. higher unemployment benefits reduce that cost and make the process longer.
StanleyMo yeap, assuming you make 1 hour $50, and after you jobless, gov subs you $25, reducing opportunity cost to $25.
dwadd agree with dinosaur 100%. what do you forgo by getting a job? -the benefits you were receiving.
Bobokoko you don't have a job so you are not foregoing anything right?? The oppotunity cost is what you forego at the next highest level, which in this case is your unemployment. yes??
pstebelp I agree with you Bobokoko!
Kathkun Agree with Dinosaur, my answer is A.
moritz I also agree with charliedba. When I don't have a job, I'm missing out on the money I could be making. Thus the opportunity cost of job searching = opportunity cost of being unemployed = my potential wage - the unemployment benefit.
MaresaJaden This question was vague. I put A, but I can also see how charliedba is correct.
DMCV Strikingly similar is this question and the current state of the U.S. economy.
dan1987 I put A as well but looking at the question again the opportunity cost is the difference between the benefits and a salary, if the benefits increase OP is reduced and because your getting more a month than before you have less incentive/ more time to find a job suitable for your skill set
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