Answer to Question #2660 in Microeconomics for Tamaira Barnes

Question #2660

The economy consists of two sectors 1 and 2, employing a homogenous workforce. Total labor supply is completely inelastic, but there is perfect worker mobility between sectors.
a) Starting from an initial equilibrium what happens to wages and employment in each sector when technical change in sector 1 improves productivity in that sector say by changing the production function from f1(L) to Af1(L) with A>1

b) Suppose there is a minimum wage imposed on sector 2, which is binding both before and after the technical change takes place in sector 1. What happens to the wages and employment in each sector after the technical change takes place?

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