Problem 4
(Labor movements) [week 7] Consider two countries, Home and Foreign. Both countries produce only one good, output,
with two factors of production, capital and labor. The supply of capital and the technology to
produce the good are the same in both countries and are fixed. The marginal product of labor in each country
depends on employment and it has the form:
where L is the
quantity of labor employed in production.
Initially Home has 11 units of labor employed in the industry, whereas
Foreign has only 3.
a)
Assume that labor is not allowed to move across
countries. Use the marginal product of
labor curve to determine the real wage and the distribution of income between
workers and capitalists in each country.
Show it in a graph. [HINT: for the distribution of income, use figure
4A-2, “distribution of income within the cloth sector”, in the text]
b)
Which country has higher real wages? Explain the intuition behind your answer.
c)
Assume now that countries sign an agreement that allows free
migration of workers across countries.
Find the effect of this free movement of labor on each country’s
employment and real wages. Show it in a graph. Explain.
d) Use graphs to compare the
income of workers and capitalists before and after trade in each of the two
countries. Explain.
e)
Who wins and who loses after opening to trade? Explain the
intuition behind your answer.
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