Problem Set 5
Econ 361
Format: Please typewrite your answers and show all your work when making calculations. You can make calculations by hand and add the images to the document but make sure to typewrite your answers (you can use this Word document).
- [30 pts] Labor
- [10 pts] Using graphical analysis, show and explain what happens to the labor supply and labor demand when wages are higher than the equilibrium wage (i.e., full employment equilibrium) under perfectly competitive labor markets. Please draw your figures.
- [10 pts] List and describe three reasons why wages may be higher than the equilibrium wages.
- [20 pts] Harris-Todaro model
Imagine a rural area in Venezuela where jobs are scarce. A worker is making the decision between staying or migrating to Caracas (the capital). The worker current real wage is 55$ and the wage in the formal sector in Caracas is 90$.
- [10 pts] What is the equilibrium rate of unemployment in Caracas will stop migration?
- [10 pts] Suppose that the probability of finding a job is 25%, will the worker migrate to Caracas?
- [40 pts] Gains from International Migration
- [15 pts] Using the model of global demand and supply with two countries home and foreign, show and explain what happens to the labor supply of the world when foreign has a higher wage than home. Why may the labor supply change? Please draw your figures.
- [10 pts] Using the same figure from a., show and explain what happens to the wages in both countries if there are no migration costs.
- [15 pts] Using graphical analysis, show and explain what happens with output in home, foreign, and in the world after migration. Which country is better off? Are there gains from international migration?
- [10 pts] Effects of International Migration
- What does the evidence show regarding the brain drain hypothesis? Can migration change the returns to education in the origin/sending country?
