Question

9.Suppose that potential migrants make decisions only based on comparisons of their expected incomes. Now suppose the rural wage is $1 per day. Urban modern sector employment can be obtained with 0.25 probability and pays $3 per day. The urban traditional sector pays $0.40 per day. Using this information, and making assumptions as needed, can you make a prediction about whether there will be any rural-to-urban or urbanto-rural migration? Explain your reasoning, stating explicitly any simplifying assumptions, and show all work. Consider an approach that calculates an expected income in the urban sector of 0.25(3) + (0.75)(0.40) = 1.05; and note that this
exceeds the rural wage of 1—would you predict that there will be rural-to-urban migration? What simplifying assumptions are needed to make this a valid conclusion? Now, what would the urban traditional sector daily income have to be to induce no net rural-urban migration? If wages in all sectors are inflexible, what else adjusts in this model to lead to equilibrium (how much does it adjust and what is the intuition)?

Answer 1