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Consider a country in which there are 2 sectors called sector 1 and sector 2. The production functions in the two sectors are: Y1=10*(L1)^0.5 and Y2=20(L2)^0.5 where L1 is number of workers employed in sector 1 and L2 in number of workers employed in sector 2. The prices of goods in both sectors are $1. The total number of workers in the economy is 1000. The only difference between the sectors are that in sector 1 workers are paid their average products, whereas in sector 2 they are paid their marginal products. Workers move freely between sectors so wages are equal.
A) Draw a diagram for this economy and calculate number of workers in each sector.
B) Assumer that now producers in both sectors behave optimally. Draw a diagram for this economy.
C) Calculate the optimal number of workers in each sector.
D) Use answers from (A) and (C) to answer: compared to the optimal allocation of workers, what sector has too many workers and what sector has too small employment?
E) assume that in both sectors producers still behave optimally and that the government introduces the minimum wage of $1. Draw a diagram. What will it do to the employment in each sector? is this policy efficient? (Hint: before drawing the figure, calculate optimal wage and compare to minimum wage)
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