Reference no: EM133129169
There are two countries, the US and Mexico. The United States, which has more capital per worker and a higher level of technology, has higher labor productivity and hence higher wages. Assume purely competitive labor and goods markets, only one product, full employment, and that labor is therefore paid its marginal product. Further assume that the United States allows no labor immigration. Migrations are typically driven by wage differentials, with labor moving from the location of low wages toward the location of high wages. In essence, labor votes with its feet. The labor supplies for the two countries are as follows:
Mexican Labor Supply: LMEX = 50
US Labor Supply: LUS= 100
Mexican Marginal Product of Labor: wMEX=MPLMEX=40-.60LMEX
US Marginal Product of Labor: wUS= MPLUS=90-.50LUS
Use these equations to construct a basic Todaro Migration Model as shown in the textbook in Figure 4-13 on page 69. Add the two labor supplies to get a world labor supply. This forms the horizontal axis. On the two vertical axes, let the left axis be the US marginal product of labor and wages, and let the right axis be the Mexican marginal product of labor and wages. Now plot out the two marginal product of labor curves. These also serve as the demand curves for labor.
-Assuming pure competition, what is the return to capital for Mexico and the return to capital for the US?
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