Exam 3 Solutions

Exam 3 Solutions - ECON 452 Solution Exam III 1.- C 2.- D...

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ECON 452 Solution Exam III 1.- C 4.- A 7.- D 10.- B 2.- D 5.- C 8.- B 3.- B 6.- A 9.- B 11.- The best way to answer this question is to graph the information provided. MPL MPL* new MPL* 21 15 a b 12 c 11 MPL* MPL*’ MPL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 workers (millions) U.S. labor Mexico labor a) We can clearly see that if migration is not allowed the real wage in the U.S. will be 15 while the real wage in Mexico will be 12. If we allow for free movement of labor, we will find that workers in Mexico will want to move to the U.S. to earn higher real wages until real wages are equalized in the two countries. So we will see that 1.5 million Mexicans will move to the U.S., such that the real wage prevailing in both countries would be 13.5. b) When real wages are equalized at 13.5 there will be no further incentive to migrate to the U.S. (unless Mexicans have reasons besides real wages to migrate to the U.S.). c) Output in the U.S. will increase because of the immigration of the 1.5 million workers, such that output is now given by the area below the marginal product of labor (MPL) until the 7.5 th million worker instead of just until the 6 th million worker. Output in Mexico will decrease because of this migration, such that output is now given by the area below their marginal product of labor (MPL*) until the 7.5 th million worker – counting
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from the left – instead of until the 9 th million worker. World output thus increases by the triangle given by abc , which represents an increase in the value of output of 2*(1.5*1.5)/2=2.25. d) The income of landowners in the U.S. has increased as now land is relatively scarcer due to more people working in the U.S. now. The rents of American landowners can be calculated as 1 . 28 2 25 . 56 2 ) 5 . 7 ( 5
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This note was uploaded on 03/25/2008 for the course ECON 452 taught by Professor Vacaflores during the Spring '06 term at Texas A&M.

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Exam 3 Solutions - ECON 452 Solution Exam III 1.- C 2.- D...

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