Question

1. Consider the labor supply and labor demand functions below, where w is the hourly wage and h is the hours worked per day.

Labor supply: w=5+2.5´h

Labor demand: w=26-0.5´h

1. Compute the daily profit of the firm assuming that other factors of production are all costless. Show all the steps. Also, draw the labor supply and labor demand lines, and identify the economic profit area. (15 points)

2. What if labor demand is less elastic; e.g., labor demand: w=26-h? Would daily profit increase? Show all the steps. (15 points)

2. An economy consists of two regions, the North and the South. The short-run elasticity of labor demand in each region is –0.75. Labor supply is perfectly inelastic within both regions. The labor market is initially in an economy-wide equilibrium, with 400,000 people employed in the North and 200,000 in the South at a wage of $10 per hour. Suddenly, 5,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native residents and also supply their labor inelastically.

1. What will be the effect of this immigration on wages in each of the regions in the short run before any migration between the North and the South occurs? Illustrate the changes using labor demand and labor supply graphs. (15 points)

2. Suppose 1,000 native-born persons per year migrate from the South to the North in response to every dollar differential in the hourly wage between the two regions. What will be the ratio of wages in the two regions after the first year native labor responds to the entry of the immigrants? (10 points)

3. Consider the following production function: Y=0.075´E^0.75´K^0.25 for a developing country, where Y is the output, E is labor input and K is capital input. Instead of thinking of immigration from a developing to a developed country, suppose a developed country invests large amounts of capital (foreign direct investment, or FDI) in our developing country.

1. How does an increase in FDI affect labor productivity in the developing country? How will wages respond in the short-run? (15 points)

2. What are the long-run implications of FDI, especially in terms of potential future immigration from the developing country? (10 points)

Answer 1

Here we need to understand that equilibrium demand equals supply.

And for calculation of profit, we need to calculate total revenue as the total cost is assumed to be zero from the question itself

For part B