Problem Set 5Econ 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).
1. [30 pts] Labor
a. [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.
b. [10 pts] List and describe three reasons why wages may be higher than the
equilibrium wages.
c. [10 pts] Using graphical analysis, show and explain how wages in the formal sector
that are higher than the full employment wages affect wages and employment in
the informal sector. Please draw your figures.
2. [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$.
a. [10 pts] What is the equilibrium rate of unemployment in Caracas will stop migration?
b. [10 pts] Suppose that the probability of finding a job is 25%, will the worker
migrate to Caracas?
3. [40 pts] Gains from International Migration
a. [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.
b. [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.
c. [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?
4. [10 pts] Effects of International Migration
a. What does the evidence show regarding the brain drain hypothesis? Can migration
change the returns to education in the origin/sending country?
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