Assignment -
Q1. Suppose a country has 40 individuals (Total Labor Force) who are trying to decide whether to stay in the agricultural sector or migrate to city and work in manufacturing sector. Assume the labor demand curve in the agricultural sector is given by LA = 40 - wA and the labor demand curve for the manufacturing sector is given by LM = 28.5 - (wm/2).
a) Using these two demand curves draw the graph of Harris-Todaro Model and mark the points and axes clearly.
b) Assuming there are no institutionally determined wages, that is in both sectors the wages and the labor are determined by the market, solve for the equilibrium wA, wM ,LA ,LM.
c) Now suppose the institution determined wage in the manufacturing sector is 35. Use the equilibrium condition of Harris Todaro model that is the condition on wages that should make a potential migrant to be indifferent between two sectors and solve for the equilibrium values of wages and labor in both sectors? How many will be unemployed in the manufacturing sector if the institution determined wages are implemented?
d) Suppose now, the unemployed in urban sector join the informal labor force for the wage of 15. What should be the new wage at the agriculture sector so that further migration is deterred?
Q2. Draw the basic Harris - Todaro Model. Let Wa represent wages in agricultural sector. Let Wm represent minimum wages at manufacturing sector. Assume people can migrate costlessly. Analyze two policies that are aimed to reduce migration and informal sector labor force. Which policy might be more effective?
Q3. Consider a bank that would like to offer loans in a village. The bank has access to money at a national interest rate of r = 0.05 (5%). Assume the fraction of credit-worthy people in the village is p, and the fraction of non-creditworthy people is (1 - p). The bank cannot distinguish between these two types. Suppose each member of the village would like a loan of $1.
a) If the bank wants to break even, what interest i should it charge?
b) Suppose there is a moneylender in the village who offers loans at an interest rate of 50%. This means that the bank cannot charge a higher interest rate than 50%. For what values of p will the bank decide to quit offering loans to the village? (Hint: Solve for the proportion of credit worthy so the banks can lower the interest rate to .5)
c) Suppose even the non-creditworthy people are not entirely non-creditworthy. In other words, they are able to repay the principle of $1 but not the interest. In that case, what interest rate would the bank charge to break even?
Q4. Consider a village where individuals each have an income of $2 per month. They can each decide whether to consume the income as it comes or to save up for a good that costs $4 but gives utility worth $5. Suppose one of these individuals, Individual A, has a discount factor of δ = 3/10. Another of these individuals, Individual B, has a discount factor of δ = 7/10.
a) What is Individual A's total utility over two months if he/she saves for the good? Compute the utility if consumed instead of saving. Answer the same questions for individual B.
b) Suppose they both have the option of forming Rosca together. Will they join the Rosca? Compute their expected utility to answer this.
c) Discuss briefly pros and cons of Rosca. Why it's popular in poor countries?
Q5. Explain the pros and cons of Microfinance. Give one example of a functioning Microfinance institution and briefly discuss its functioning and achievements.
Q6. Recall the lecture on Microeconomic theory of fertility.
a) Draw the graph of the model of fertility and mark the optimal no of children and other goods.
b) Suppose the family income doubles. Show the new optimum and discuss briefly about the new optimal no of children and consumption combination of other goods.
Q7. Explain the negative consequences of population growth? Give examples of few developing and poor countries, which are affected by these consequences.