Consider an economy which has only two regions: urban and rural. There are a total of...

 

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Consider an economy which has only two regions: urban and rural. There are a total of 10 million workers in the economy and they are all identical and risk-neutral. Assume there are no moving costs and that workers only take into consideration their expected wages when making location decisions. The marginal product of labour in the formal urban sector is given by MPF = 60 - 4LF where LF denotes the number of workers (in millions) employed in that sector. Similarly, the marginal product of labour in the rural agricultural sector is given by MPA = 40-4LA where LA denotes the number of workers (in millions) employed in agriculture. Employers in both sectors act competitively taking this wage as given. In the urban area there is also an informal sector in which workers can earn a wage WI = 20. Questions 23 - 28 relate to this information. Question 23 (3 points) Suppose that workers are free to locate in either the rural or urban area and that there are no distortions. In a competitive, flexible wage equilibrium, the long run allocations of labour in each sector and the equilibrium wage are given by LF = 8; LA = 12; w = 20 LF = :12; LA = 8; w = 24 LF = 7.5; LA = 2.5; w = 30 LF = 10; LA = 10; w = 20 Question 24 (2 points) Starting from the flexible wage equilibrium, suppose the formal sector wage is exogenously raised to w = 32 but migration from rural to urban areas is not allowed. The number of workers (in millions) in the formal and informal urban sectors, respectively, would be LF = 3; L1= 2 LF = 6; L₁ = 4 LF = 7; L₁ = 3 LF = 6; L1 = 1.5 Question 25 (2 points) Again assuming that there is no migration, after the formal wage is increased the probability of any one worker obtaining a formal sector job and the expected wage in the urban sector are given by p = 0.6; we = 24 p= 0.8; w = 32.8 p = 0.6; we = 23.2 p = 0.7; w = 27.2 Question 26 (3 points) Suppose now that migration is allowed. The relationship between the probability of obtaining a formal sector job and the number of workers in the rural agricultural sector is given by p= 2 10 - LA 6 P = 10 - LA 7 P = 20 LA p = 3 10 - LA Question 27 (3 points) In a long run, Harris-Todaro equilibrium with free migration, the allocation of the workforce across the agricultural, urban-formal and urban-informal sectors is given by LA = 6; LF = 7; L₁ = 7 LA = 8; LF = 6; L₁ = 6 LA = 2; LF = 6; L₁ = 2 LA = 4; LF = 3; L₁ = 3 Hide hint for Question 27 If ax² + bx+c = 0, then x = -6± √b²-4ac 2a Question 28 (2 points) In the Harris-Todaro equilibrium, the wage in agriculture is given by WA = 22 WA = 32 - WA 24 WA = 24.9 Consider an economy which has only two regions: urban and rural. There are a total of 10 million workers in the economy and they are all identical and risk-neutral. Assume there are no moving costs and that workers only take into consideration their expected wages when making location decisions. The marginal product of labour in the formal urban sector is given by MPF = 60 - 4LF where LF denotes the number of workers (in millions) employed in that sector. Similarly, the marginal product of labour in the rural agricultural sector is given by MPA = 40-4LA where LA denotes the number of workers (in millions) employed in agriculture. Employers in both sectors act competitively taking this wage as given. In the urban area there is also an informal sector in which workers can earn a wage WI = 20. Questions 23 - 28 relate to this information. Question 23 (3 points) Suppose that workers are free to locate in either the rural or urban area and that there are no distortions. In a competitive, flexible wage equilibrium, the long run allocations of labour in each sector and the equilibrium wage are given by LF = 8; LA = 12; w = 20 LF = :12; LA = 8; w = 24 LF = 7.5; LA = 2.5; w = 30 LF = 10; LA = 10; w = 20 Question 24 (2 points) Starting from the flexible wage equilibrium, suppose the formal sector wage is exogenously raised to w = 32 but migration from rural to urban areas is not allowed. The number of workers (in millions) in the formal and informal urban sectors, respectively, would be LF = 3; L1= 2 LF = 6; L₁ = 4 LF = 7; L₁ = 3 LF = 6; L1 = 1.5 Question 25 (2 points) Again assuming that there is no migration, after the formal wage is increased the probability of any one worker obtaining a formal sector job and the expected wage in the urban sector are given by p = 0.6; we = 24 p= 0.8; w = 32.8 p = 0.6; we = 23.2 p = 0.7; w = 27.2 Question 26 (3 points) Suppose now that migration is allowed. The relationship between the probability of obtaining a formal sector job and the number of workers in the rural agricultural sector is given by p= 2 10 - LA 6 P = 10 - LA 7 P = 20 LA p = 3 10 - LA Question 27 (3 points) In a long run, Harris-Todaro equilibrium with free migration, the allocation of the workforce across the agricultural, urban-formal and urban-informal sectors is given by LA = 6; LF = 7; L₁ = 7 LA = 8; LF = 6; L₁ = 6 LA = 2; LF = 6; L₁ = 2 LA = 4; LF = 3; L₁ = 3 Hide hint for Question 27 If ax² + bx+c = 0, then x = -6± √b²-4ac 2a Question 28 (2 points) In the Harris-Todaro equilibrium, the wage in agriculture is given by WA = 22 WA = 32 - WA 24 WA = 24.9

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Okay lets work through these questions stepbystep Question 23 The correct answer is LF 8 LA 12 w 20 In the competitive flexible wage equilibrium the m... View the full answer