Economics Answers

Use the following news clip to work on the following questions:

Debt Reduction at Center of State Election Campaign Queensland business leaders are demanding that the election campaign focuses on reducing a growing debt level and putting the state’s finances back on track. The state’s financial position has been under fire because of a debt blowout caused by the domestic and international market volatility and the natural disasters last year.

a. If reducing debt means spending cuts, will aggregate expenditure fall by more than, less than or exactly the same as the spending cuts? Explain.

b. Explain and draw a graph to illustrate the effects of the events described in the news clip on aggregate expenditure and aggregate demand in both the short run and the long run.

Consider the determination of real exchange rates in a large open economy with a flexible exchange rate regime. If today’s technology increase, e* will
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. If tomorrow’s technology is expected to improve, e* will
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. If M decreases, e* will
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. If the government decreases G1 while keeps G2 unchanged, e* will
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.

Note: For each of the above blanks, fill in one of the following three choices: A. increase; B. decrease; C. stay; D. none of A, B, and C.

Define the unemployment rate as UR = U/(M + U) where U is the number of people unemployed in the manufacturing sector, and M is the number of people employed in the manufacturing sector. Then the expected wage in manufacturing can be written as E(WM) = 400(1 – UR).
C Suppose the economy starts out with all 100 workers in agriculture, and then 50 people move from agriculture to the manufacturing sector. Solve for the expected wage in manufacturing, assuming there are 50 people in the manufacturing sector and a legislated minimum wage of $400.
D What is the wage in agriculture with 50 people in the agricultural sector?
E Will more people in agriculture want to move to the manufacturing sector? Why

2. Comparative Advantage.
There are two countries, Absurdistan and Parador, that both produce wine and bread using one input, labor. The production costs for each in good in each country are as follows:
Labor Hours to Produce Absurdistan Parador
Bread (1 loaf) 2 1
Wine (1 bottle) 8 6
Relative price
(loaves per bottle)

a. In the table above, fill in the relative price of wine to bread, i.e. how many loaves of bread would need to be given up to produce a bottle of wine

The optimal allocation of labor between the two sectors is achieved when the marginal product of labor is equalized across sectors, which is also where the curves intersect.

a. What is the optimal number of workers in the manufacturing sector (M)? What is the optimal number of workers in the agricultural sector (A)?

1. The Harris-Todaro Model.
Consider an economy with two sectors, manufacturing and agriculture, and 100 workers. The marginal product of labor in manufacturing is given by MPLM = 800 – 10M, and marginal product of labor in agriculture is given by MPLA = 400 – 2A, where M is the number of workers in manufacturing and A is the number of workers in agriculture.
The optimal allocation of labor between the two sectors is achieved when the marginal product of labor is equalized across sectors, which is also where the curves intersect.

a. What is the optimal number of workers in the manufacturing sector (M)? What is the optimal number of workers in the agricultural sector (A)?

b. Now suppose that the government sets a minimum wage of $400 in the manufacturing sector. How many workers will be employed in the manufacturing sector at the minimum wage? Assume that workers are paid their marginal product (WM = MPLM).

K and L are the amounts of capital and labor used in the production process. The price of labor and capital are given by w and r respectively. Q is the level of output produced. Use the midpoint method for all elasticity calculations.
P K L w r Q
1 100 100 100 100 100
2 99 105 95 100 105
3 102 103 95 105 110
A. Using data from periods 1 and 2, compute the own-wage (w) elasticity of labor demand.
B. Using data from periods 2 and 3, compute the cross- elasticity of labor demand with respect to the price of capital (r). Are capital and labor gross substitutes or gross complements?
C. Using data from periods 1 and 2, compute the elasticity of substitution of labor and capital.

The data below show real wage levels at various percentiles of the wage distribution for material-handling labourers in Fiji

Percentile 1975 1995
10th $4.26 $2.97
50th 6.02 3.89
90th 10.44 9.07

A. Calculate w90/w50, w50/w10, and w90/w10 percentile wage differentials for both years.
B. Describe the changes in wage inequality in this local market
C. Use the relative demand and supply model to explain the effect of increased immigrants into this labour market on relative wage and employment outcomes

In the labour market for carpenters, the current market clearing wage rate is R800 per day. With the aid of a diagram, discuss the welfare effects of government
Intervention in the form of legislation that sets the minimum wage rate for a carpenter at R1000 per day.

Given the demand equation, Q = 120000 -10P2 (a) for this equation, write the expression for the point price elasticity of demand as a function of P (b) Over what range of the prices is the demand inelastic?