Question 3 (18 points)
Look at the table below giving the production function in a hypothetical country.
a) (5 points) Complete the columns for marginal output and average output.
Now suppose there are two countries with 2 factors of production labor and capital. Each country has a fixed amount capital and labor.
b) (2 points) Suppose Home is capital abundant and has only 2 units of labor while Foreign is labor abundant and has 8 units of labor. Calculate the rewards of labor and capital in each country.
c) (3 points) Now suppose the two countries open their borders to migration. Which is going to be the host country for migration and which is going to be the source country? How many workers are going to migrate?
d) ( 5 points) Calculate the impact of migration on the following: i) wages of native workers in the host country; ii) wages of workers left behind in the source country; iii) impact on capital owners in the host country; impact on capital owners in the source country; v) world output.
e) (3 points) In light of the answer to part d) above, state who is going to oppose migration and who is going to support it.
f) (2 points) If you were a policymaker interested in maximizing world output, would you support or oppose migration?
Question 4 (4 points)
We discussed 2 reasons why a country could run a trade deficit and hence be an international borrower. In which of these 2 cases should one be worried about the sustainability of the deficit and the ability of the country to pay back foreign loans in the future? Why?
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