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1. Total labour supply is fixed at 100. Output is produced using labour and capital; and the short run labour demand curve in the urban sector is LDu-5w and in the rural sector is -5w. Restrictions on labour mobility mean that there are 25 workers in the urban and 75 workers in the rural area. We assume that there is no unemployment in this model. Labour markets are competitive apart from the union maintaining the wage in the urban sector.
(a) What is the wage and level of employment in the urban and rural sector?
(b) If restrictions on labour mobility were lifted what would be the total gain/loss to (1) workers that were in the urban area before the change, (2) workers that were in the rural area before the change
(c) What would be the total change in short run output if restrictions on labour mobility were lifted. (d) Summarise who gains and who loses from lifting restrictions on migration.
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