Answer to Question #254669 in Microeconomics for Edem

Question

Assume in a two-sector economy made up of agriculture and manufacturing, the government introduces a subsidy of y per hour on labour in the manufacturing sector. What will be the effect of the policy on the equilibrium wage, total employment as well as employment in agriculture and manufacturing? prove with it graphs

Answer 1

A government subsidy on labor in the manufacturing sector will allow the manufacturer to increase their output production. Thus, increases the demanded quantity and lowers the price.  Increase in labor supply impact the equilibrium wage (fall). on the other hand, increase in demand and supply leads to high rate of employment in these two sectors, which will need to produce more to meet the market demand.