How much higher or lower is the price level

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Reference no: EM132208488

Question: Assume real wage in the USA is 40$, in Mexico, it is 25$ in 2000. Also, assume the nominal wage in the two countries is the same. Assume initially there is neither labor nor capital mobility between two states. However, the politicians of two states are considering to adopt two policy packages that might encourage either capital or labor mobility. Politicians let the economists construct two scenarios to see what will happen if they will adopt package 1 or package 2.

a) How much higher or lower is the price level in Utah compared with Nevada?

b) Draw the labor demand and supply curves of Utah and Nevada on separate graphs. Show the equilibrium real wage.

c) Now consider scenario 1, which will happen according to economists if politicians will adopt the package 1. The package 1 will create capital mobility between Nevada and Utah, however, workers still won't move from one state to another. According to this scenario, the wage difference between Utah and Nevada will be closed down in 2007. Assuming the new equilibrium wage in both countries will be 30$, show on two different graphs how capital mobility will affect the labor markets of Nevada and Utah. (Draw old and new demand curves and the supply curve for each graph. Show old and new equilibrium points)

d) Now consider scenario 2, which will happen according to economists if politicians will adopt the package 2. Package 2 will create labor mobility between two states, but capital will remain immobile.According to this scenario, the wage difference between Utah and Nevada close down, in 2010, and the new equilibrium wage in both countries will be 35$, show on two different graphs how labor mobility will affect labor markets of Utah and Nevada. (Draw old and new supply curves and the demand curve for each graph. Show old and new equilibrium points.)

Reference no: EM132208488

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