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There are two types of labor in the economy: skilled labor LS and unskilled labor LU . Of course, skilled and unskilled labor earn different wages: WS /P and WU /P. The production function is given by
Y =Aln(LS)+ln(LU).
Parameter A reflects technology. Assume that skilled labor supply is increasing in the real wage of skilled labor and unskilled labor supply is perfectly inelastic.
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