Equilibrium wages and employment levels in the two regions

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Reference no: EM13769437

Consider an economy with two separate regions: A and B. There are 100 million workers in total who supply their labor in elastically. The demand for labor (in millions) in region A is EA = theta *100 15 wA and in region B it is .EB = theta *100 15 wB

a) Assume that initially theta = 1 and that the regional labor market has settled down to its long-run equilibrium. What are the equilibrium wages and employment levels in the two regions?

b) Now suppose that a positive demand shock strikes region A and that theta increases from theta = 1 to theta = 1.5.. i. Immediately after the shock, and before any migration takes place, what happens to the wages in the two regions? ii. What is the new long-run equilibrium? How many workers migrate from region B to A?

iii. Suppose that, like the Chinese government, the authorities attempt to restrict internal migration by issuing mobility permits. What is the outcome if the government provides only 10 million permits to region B's residents?

Reference no: EM13769437

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