Question

This question is on lewis model.

Production in the modern gector Real Wage 2 kg of food Labor demand curve 20 Million workers kil) In the modern sector, where the production decisions are guided by profit motive, the real wage rate in the quantity of food is 2 kilograms per worker. Then, how many workers are employed in the modern sector? Recognize the area in the graph, which represents profit in the modern sector that can be invested to raise labor productivity. If this profit is invested to increase production in the modern sector, more workers will be needed. But is that not going to raise the real wage in the modern sector? If you think that a real wage of 2 kg of food will not increase, explain why you think so

Answer 1

answer:

If the real wage is measured in the quantity of food is 2 kilograms per worker, then the 20 million workers are employed in the modern sector because at this level labor demand is equal to the real wage rate.

the area above the wage rate curve till the labor demand curve shows the profits in the modern sector that can be invested to raise the labor productivity. if this profit is invested to increase production in the modern sector,more workers will be needed and it will not increase the real wages because real wages is constant at all level of number of workers as shown by the horizontal straight real wage curve. also the modern sector producers are profit motivated so they will not increase the real wage rate as it will decrease their profit margins