Description
Problem 1
- Modify the Lewis model and assume that there is a strictly positive marginal product of labor in the traditional sector. Use figures with production functions in the traditional and the modern sectors to show what the equilibrium is when no one wants to move away from agriculture. What assumptions do you have to make about production functions to arrive at the conclusion that fewer people will end up in agriculture?
- Use the same starting point as in the above question. Derive the demand for labor in the traditional and in the modern sectors. Show graphically what the characteristics of the equilibrium would look like when no one wants to change sectors.
Problem 2
- What is the main difference in prediction between the Lewis model and the Harris-Todaro model on rural to urban migration?
- Given the validity of the Harris-Todaro model, what would you tell a government by creating government-subsidized jobs in its cities?
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Homework 2
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Problem 1
a) Modify the Lewis model and assume that there is a strictly positive marginal product of labor
in the traditional sector. Use figures with production functions in the traditional and the
modern sectors to show what the equilibrium is when no one wants to move away from
agriculture. What assumptions do you have to make about production functions to arrive at
the conclusion that fewer people will end up in agriculture?
SOLUTION
Lewis mode of unlimited supply
Consider dual economy agriculture emfr
OW is a real wage in agriculture sector
And average product per human
OW is the rate fixed in modern sector, demand for lab increase from MP1 to MP 2
So that marginal product = OW
b) Use the same starting point as in the above question. Derive the demand for labor in the
traditional and in the modern sectors. Show graphically what the characteristics of the
equilibrium would look like when no one wants to change sectors.
SOLUTION
Lewis assume that all wages are consumed and profit is reinvented to increase demand
for labor with expansion of modern sector
Thus absorption of surplus labor depends upon distribution of income which is main
source of capital accumulation and only few ends up in agriculture sector.
Problem 2
a) What is the main difference in prediction between the Lewis mod...