Question

Two rural individuals Matyás and Toka are contemplating leaving their village for a nearby town. Given that Matyás has a secondary school certificate, she has a higher probability of obtaining an urban sector job than Toka, who is a primary school drop out. If they remain in the village and work on their family farms, they earn $200 each per year if the yield is high and $100 per year if the yield is low. The yield will be high with probability 0.5 and low with probability 0.5. Alternatively both these individuals can choose to migrate to town, in which case they each expect to find a formal or informal sector job, paying the following earnings according to the given probabilities.

	Year 1		Year 2		Year 3
	Formal Sector	Informal Sector	Formal Sector	Informal Sector	Formal Sector	Informal Sector
Matyás	$400 (0.4)	$200 (0.6)	$400 (0.5)	$200 (0.5)	$500 (0.6)	$300 (0.4)
Toka	$200 (0.2)	$100 (0.8)	$200 (0.4)	$200 (0.6)	$300 (0.5)	$300 (0.5)

1. (a) According to the Harris-Todaro model, on a one-year time horizon, which individual will migrate? [2 points]

2. (b) On the three-year time horizon, which individual(s) will migrate? (Assume the rate of interest at which both can borrow or lend money is i = 5%) [5 points]

3. (c) Assume a one-year time horizon. Suppose now that there is a traditional family support payment of $40 that all urban migrants must pay yearly to their relatives back in the village. At the same time, each bears a ‘psychological cost’ associated with moving to the city. Such a cost is $25 for Matyás and $15 for Toka. Again, according to the Harris-Todaro model, which farmer will migrate to town? [5 points]

4. (d) Assume a one-year time horizon, Still maintaining the ‘psychological’ costs associated with moving to the city, suppose now that all formal jobs also come with medical benefits, which are worth $30 a year, in additional to the wage. Informal sector jobs do not carry any such benefits. According to the Harris- Todaro model once again, which individuals will migrate to town? [3 points]

Answer 1

answer b starts from second image. Forgot to mention on paper. Thanks