Reference no: EM133125341

In a country called Uncle Sam Land (USL), the labor demand curve is given by: W = K - 4L Where W is the wage rate, K is a variable determined by capital stock in the country, and L is the labor force in the country.

We are in period 1, where K is 50 and the labor supply is 10.

Beginning from period 1, let's assume that capitalists always convert (i.e., save and invest) 25 percent of their income to add to the stock of K (assume there is no depreciation). Similarly for other periods. Capitalists always save 25%

Multiply capitalists' income by 25% and add the amount to 50 to find the new value of K for Period 2.

a) Show how wages and capitalists' income change in the next three periods (Period 2, Period 3 and Period 4) in this country if labor supply remains the same at 10.

b) Show how wages and capitalists' income change in the next three periods (Period 2, Period 3 and Period 4) in this country if immigration takes place and labor supply becomes 11, beginning Period 2.

c) In the context of this example, discuss the political feasibility of immigration in the long run (Period 2, Period 3 and Period 4) keeping in mind that the original workers in USL do not want a drop in their wages. Can you think of any policy that would reduce the opposition to immigration in USL?

d) Many poor countries are caught in poverty traps. A more generous immigration policy in the rich countries is one way of addressing the issue of world poverty.. Are you optimistic about "immigration as foreign aid" idea based on this example?