This take-home assignment is optional. Attempt as many questions as you wish.
Hand in your answers to me in person by the deadline (no electronic submissions).
Each question is worth a point, for a total of 25 points. Your point tally will be
added to your current MidTerm score (up to the maximum possible score).
Analysis of Migration With Demand-Supply Diagrams
The world consists in only two countries named A and B. The countries are isolated from
each other and are considering opening up to immigration (trade in workers). In each country there is a (perfectly) competitive market for educated/skilled labor (indexed by e) and
uneducated/unskilled labor (indexed by u). A pre-trade equilibrium is indexed by 0, while a
post-trade equilibrium is indexed by 1. Thus, pre-trade unskilled-labor wage in country A is
w
u0
A , post-trade skilled-labor supply in country B is L
e1
B . The market for unskilled labor is well
understood, the market for skilled labor less so. The following empirical facts are known.
• In both labor markets in both countries, the measured wage-elasticity of labor-supply is
approximately zero.
• In pre-trade equilibrium, country A employs 1 million unskilled workers and 2 million
skilled workers, country B employs 2 million unskilled workers and 1 million skilled workers: L
u0
A = 1, L
e0
A = 2, L
u0
B = 2, L
e0
B = 1.
• In both countries, the unskilled-labor demand curve may be approximated by the relation
w
u = 3 − L
u
, where w
u denotes the unskilled wage rate (in dollars per ‘million of manhours’) and L
u denotes the quantity of unskilled labor (in units of ‘one million workers’).
• Demand curves for skilled labor are not known in either country, but pre-trade wages are
observed in both countries, w
e0
A = 2, w
e0
B = 4.
Your job is to explore some of the implications of free migration (free trade in labor markets).
You will be guided by a series of questions below. Some questions are independent of one
another, so you should attempt them all. All questions may be answered with the help of
properly scaled, accurately drawn graphs and without algebra — you may also opt to use
algebra. Hint: Suppose labor markets are perfectly competitive, use a supply-demand diagram
in (L, w) and assume markets clear.
1. In a no-trade equilibrium, is the wage of unskilled labor greater in country A or B?
2. In a no-trade equilibrium, is the wage of skilled labor greater in country A or B?
CALIFORNIA STATE UNIVERSITY FULLERTON
FALL 2021 — MIDTERM — TAKE-HOME
ECON 201: Principles of Microeconomics Dec 9th, 2021 Page 2 of 3
3. In a no-trade equilibrium, compute unskilled-labor wages in country A.
4. In a no-trade equilibrium, compute unskilled-labor wages in country B.
5. Does country A have a comparative advantage in skilled or unskilled labor?
6. Does country B have a comparative advantage in skilled or unskilled labor?
7. Suppose both countries open up to trade. One government advisor suggests that, in the
market for unskilled labor, the post-trade equilibrium wage in country A will equal the
pre-trade equilibrium wage in country B. This is equivalent to assuming that country A is
“very small” relative to country B. According to this prediction, will country A experience
an inflow or an outflow of unskilled workers?
8. How many workers will migrate?
9. Another government advisor suggests instead that, in the market for unskilled labor, country
B is “very small” relative to country A. According to this prediction, will workers migrate
from country A to country B or the other way?
10. How many workers will migrate?
11. The chief government advisor reminds everyone that neither country can be considered to
be small relative to the other and that, in general equilibrium, the post-trade wage should
be equalized in the two countries, such that world labor demand equals world labor supply.
If the chief government advisor’s prediction turns out to be correct, will the unskilled wage
in country A rise or fall more or less than suggested earlier?
12. By how much will the unskilled wage in country A change?
13. If the chief government advisor is correct, will workers migrate from country A to country
B or the other way?
14. If the chief government advisor is correct, how many workers will migrate?
15. If the chief government advisor is correct, will predicted migration flows be greater or smaller
than suggested earlier?
16. The chief government advisor was correct! Compute the wage-elasticities of unskilled-labor
demand as measured between the pre-trade and post-trade equilibrium wages, using the
mid-point formula. Is demand in country A elastic or inelastic? Is demand in country B
elastic or inelastic?
CALIFORNIA STATE UNIVERSITY FULLERTON
FALL 2021 — MIDTERM — TAKE-HOME
ECON 201: Principles of Microeconomics Dec 9th, 2021 Page 3 of 3
17. Evaluate the welfare effects of free trade associated with the market for unskilled labor
(ignoring welfare effects in the market for skilled labor and ignoring the welfare of recent
immigrants). Consider country A. Does consumer surplus rise or fall? Does producer
surplus rise or fall? Does total surplus rise or fall?
18. Now consider country B. Does consumer surplus rise or fall? Does producer surplus rise or
fall? Does total surplus rise or fall?
19. Identify the different components of welfare (consumer surplus, producer surplus, etc.) on
a demand-supply diagram of country A. Compute the change in total surplus.
20. Identify the different components of welfare (consumer surplus, producer surplus, etc.) on
a demand-supply diagram of country B. Compute the change in total surplus.
21. Identify the area associated with the welfare of the emigrants.
22. Suppose you find that free trade causes total surplus to rise in country A and in country
B by the same amount (measured in $). Does this suggest that the benefits of trade are
shared equally internationally?
23. In skilled/educated labor markets, demand curves are unknown. The following is observed.
The pre-trade wage rises in country A from $2 to $3 and falls in country B from $4 to $3. In
equilibrium, half a million skilled workers migrate from country A to country B. Is demand
in country A elastic or inelastic? In country B?
24. Free trade may change workers’ incentives to acquire education and skills – currently uneducated workers may decide to return to school. The chief government advisor correctly
points out that, in the long run, the wage-elasticity of labor-supply should be significantly
different from zero, suggesting a serious flaw in an analysis based on the assumption of zero
wage-elasticity of labor-supply. If labor-supply curves are elastic, will migration flows be
increased, decreased, or unchanged?
25. Suppose more workers wish to migrate from country A to country B than in the opposite
direction (unskilled workers migrating one way, skilled workers migrating the other way).
Country A enforces a one-to-one policy of “one worker in, one worker out.” In other words,
country A allows the mix of skilled and unskilled workers to be determined by free migration
subject to the constraint that its total workforce remain fixed. How does the policy affect
world equilibrium migration flows?