Question

Consider the Harris-Todaro Model with an agricultural sector and a manufacturing sector.

Agricultural wage rate - - - W -- W717 17 ------- - - - OM WM Manufacturing wage rate

1. Assume that the demand for agricultural labor (A) increases and the minimum wage (_M) in the manufacturing sector remains unchanged. Determine the new equilibrium number of agricultural workers, label it L²_A.

Answer 1

Aguuturels obom bumpomme LARM LOA Lm.

According to the above model the manufacturing sector was only able to employ OMLM amount of labour and the remaining amount of labour was hired in the agricultural sector . the high wages in the manufacturing sector attracted labour from the agricultural sector to the manufacturing sector point This lead to formation of new equilibrium and the agricultural sector started to employ amount of labours at wages WA .

Now as the demand of the agricultural sector has increased this will shift the demand curve to the rightwards . This will intersect the manufacturing sector demand curve at new point at A' curve where the wages will be Wa and the new equilibrium would be L2 A and the amount of labour employed in agricultural sector will become OA L2A .