Mock Exam 3 Solutions

Mock Exam 3 Solutions - ECON 452 Solution Mock Exam III 1.-...

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ECON 452 Solution Mock Exam III 1.- C 4.- D 7.- B 10.- D 2.- D 5.- C 8.- B 3.- D 6.- D 9.- B 11.- The best way to answer this question is to graph the information provided. MPL MPL* new MPL* 30 28 b 25 e a d 20 MPL* MPL*’ MPL c 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 Haiti labor a) We can clearly see that if migration is not allowed the real wage in the U.S. will be 20 while the real wage in Haiti will be 28. If we allow for free movement of labor, we will find that workers in the U.S. will want to move to Haiti to earn higher real wages until real wages are equalized in the two countries. So we will see that 4 million Americans will move to Haiti, such that the real wage prevailing in both countries is 24. b) When real wages are equalized at 24 there will be no further incentive to migrate to Haiti (unless American workers like their beaches). c) Output in the U.S. will decrease because of the emigration of the 4 million workers, such that output is now given by the area below the marginal product of labor (MPL) until the 7 th million worker instead of until the 11 th million worker. Output in Haiti will increase because of this immigration, such that output is now given by the area below their marginal product of labor (MPL*) until the 7 th million worker – counting from the
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left – instead of the 3 rd million worker. World output thus increases by the triangle given by abc , which represents an increase in the value of output of 2*(4*4)/2=16. d) The income of landowners in the U.S. have decreased as now land is relatively more abundant due to fewer workers in the U.S. The rents of American landowners can be calculated as 5 . 24 2 ) 7 ( 7 Re 5 . 60 2 ) 11 ( 11 Re = = = = nts Final nts Initial so rents have decreased by 36. However, the income of landowners in Haiti has increased as now land is relatively scarcer due to the inflow of workers. The rents of Haitian
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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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Mock Exam 3 Solutions - ECON 452 Solution Mock Exam III 1.-...

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