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6questions……………………………………………………………………………………………………
QUESTION 1
1. In developing countries, where is unemployment generally higher, in rural or urban areas?
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3 (12pt)
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QUESTION 2
1. Provide 2 reasons that people might prefer work in the formal as opposed to informal sector? [2 sentences]
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QUESTION 3
Basic Model: Suppose WF is the wage in the formal, urban labor market, which has an unemployment rate of (1-P); and w’ is the wage in the rural, informal labor market with no unemployment. Suppose individuals will move from the
rural area to the city seeking employment if the expected wage in the city is higher than the expected wage in the rural area.
Let P = .9, Wl = 1 and WF = 2; will the individual migrate? (yes/no)
If Wl = 1 and WF = 3, what is the unemployment rate in the formal sector at which people stop migrating
Suppose the Government created 3,000 jobs in the formal/urban sector (at WF) filled by those who are unemployed in the urban sector at the time of the policy. What is the effect on the urban unemployment rate in the immediate)
short-run assuming no other changes to the economy?
What about the long-run after people migrate to adjust? What is the new unemployment rate in the city?
QUESTION 4
C. Additional Frictions: Now suppose that individuals have a preference for staying in the rural areas that equals V, and face transportation costs T to migrate to the urban area.
If a potential migrant was indifferent between moving or not (w! = P*WF), if V>0 and T=0, will they migrate?
Write out the equation that now represents when household will choose to migrate (that is, write an inequality with expected earnings in city on left and in rural area on right that, when true, means they will
migrate)
QUESTION 5
D. International Migration: Suppose a government decides to allow M INTERNATIONAL migrants to migrate and work in the formal, urban sector, but WITHOUT creating any additional jobs. Suppose that all of these migrants find work in the formal
sector and that ALL of the workers they displace return to the rural areas, but no others do:
What is the effect of the new immigrants on GDP of the country (including new immigrants)? (Explain why in 2-3 sentences)
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QUESTION 5
D. International Migration: Suppose a government decides to allow M INTERNATIONAL migrants to migrate and work in the formal, urban sector, but WITHOUT creating any additional jobs. Suppose that all of these migrants find work in the formal
sector and that ALL of the workers they displace return to the rural areas, but no others do:
What is the effect of the new immigrants on GDP of the country (including new immigrants)? (Explain why in 2-3 sentences)
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3 (12pt)
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QUESTION 6
these migrants find work
D. International Migration (same as above): Suppose a government decides to allow M INTERNATIONAL migrants to migrate and work in the formal, urban sector, but WITHOUT creating any additional jobs. Suppose that all
in the formal sector and that ALL of the workers they displace return to the rural areas, but no others do:
What is the effect on per capita earnings of the population who were already in the country prior to the arrival of the new immigrants? (Explain why in 2-3 sentences)
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3 (12pt)
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