Reference no: EM133129714
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=40-0.60Lmex
US Marginal Product of Labor: Wus=MPLus=90-0.50Lus
1. Given a Mexican labor supply of 50 and a US labor supply of 100, what are the wage rates in Mexico and in the US.
2. Assuming pure competition, what is the total wage bill for Mexico? What is the total wage bill for the US?
3. Assuming pure competition, what is the total product of Mexico and the total product of the US?
4. Assuming pure competition, what is the return to capital for Mexico and the return to capital for the US?
5. Now allow free migration between Mexico and the United States. People migrate. Calculate the new wage rates in Mexico and the US. What has happened to Mexican wage rates? What has happened to US wage rates? Why?
6. Calculate the new labor supplies of Mexico and the US. What has happened to the Mexican and the US labor supplies? Why?
7. Calculate the new total wage bill, the return to capital, and the total product of both the US and Mexico. What has happened to total world output due to the free migration?
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