Question: (a) Consider the production function Y = [(ALL)+(AHH)]/P, where Y is output, L is low-skilled labour, H is high-skilled labour, and AL and AH

(a) Consider the production function Y = [(ALL)+(AHH)]/P, where Y is output,

(a) Consider the production function Y = [(ALL)+(AHH)]/P, where Y is output, L is low-skilled labour, H is high-skilled labour, and AL and AH measure the productivity of the two types of labour. Assuming that labour markets are perfectly competitive, derive the wage for high-skilled labour, and discuss how it varies with L and H. How is this related to Q-complementarity between L and H? (b) Derive the ratio of high-skilled wages to low-skilled wages w=wH/WL. How does an increase in AH affect w? Does it matter if L and H are gross complements or substitutes? What do Katz and Murphy (1992) conclude about this issue empirically, and how? (c) Explain what Tinbergen's "Race Between Education and Technol- ogy" is, and how it is related to your previous answers.

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