Economics of developing countries


Econ of developing countries

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Econ 314 Homework 8

Question One

In the labor market, the main factors of consideration are wages, working hours, employment and unemployment. One of the main features of the labor market is that firms will hire more labor when the marginal revenue product of labor is greater than the wage rate. In this case, the firm will suspend further hiring when the two values are equal. The main reason for stopping additional hiring by the firm is that the labor market will be at equilibrium. That is, the MRPL will equal the prevailing wage rate. On the other hand, the rule of marginal decision states that a firm will shift its spending among its production factors when the marginal benefit of the process exceeds the marginal cost.

Therefore, the labor market operating inappropriately tends to have more working hours, very minimal wages of low salaries, and few employees. The number of people who want to join the job market is higher than the number of jobs available, thus, market disequilibrium. Disequilibrium in the labor market occurs when the government sets a minimum wage: a price floor on the salary that an employer can pay its employees. Therefore, if the government stipulated price floor is higher than the labor equilibrium price, there will be an excess supply of labor in the economy.









At point W, there is unemployment since there is excess demand for labor while the market offers limited employment opportunities. When the wage rate is at point W, which is above equilibrium, the number of those who look for the job Qs is greater than the number of jobs available, Qd, the situation, therefore, results in unemployment as shown in the graph above. Therefore, to correct the failures in this case, the marginal benefit of additional must exceed the marginal cost. This will make the market better off by spending more on labor and less on capital.





Question Two






Income decides work limit, yet work limit decides to pay too. Envision that wages are created by working in a work market where piece rates are paid. This instalment dependent on errands finished, for example, 10 rupees for each gathered bushel or 100 pesos for every section of land weeded. 2 Piece rates have a simple pictorial portrayal along similar tomahawks utilized. On the off chance that pay is paid per unit of an errand—say 10 rupees for each bushel reaped—at that point, we see a connection between the number of undertakings performed (bushels gathered) and full pay. The figure beneath draws the conspicuous diagram that depicts this relationship. A piece-rate shows up as a connection between the number of assignments performed and the absolute pay of an individual.











The right-hand board addresses the intriguing case. Here supply is enormous compared with the request, so the interest bend goes through the specked hole in the total stock bend. Presently we disapprove of deciding the balance piece rate. If the rate is any more significant than v, we have an abundant supply, which cuts the piece rate down. Then again, there is overabundance interest for piece rates underneath this basic level, so compensation is offered up.

Question Three

There are three manners by which a business can complete non-monitorable errands. To begin with, it may depend on them to relatives who have an unconstrained interest in the government assistance of the ranch. This is a smart thought for small firms; however, if the size of tasks is enormous, outcasts should be employed. Second, the business may enlist flexible work to do these assignments, yet all things considered, direct oversight of work turns into a need. Indeed, even with direct supervision, notwithstanding, it is unimaginable to expect to monitor each passing snapshot of the worker’s exercises, so a judgment of accomplishment or disappointment should depend on the last yield.

Nonetheless, as I have quite recently said, the last yield is a loose marker. Likewise, it is regularly a late marker. Many leeway season undertakings, for example, furrowing, can be decided on this measuring stick solely after they reap is, at last, figured it out. At that point, flexible work recruited during the leeway season will have been paid. This carries us to the third alternative, which is to recruit a subset of the workforce of the homestead on a “perpetual” or “joined” premise, under the understood or unequivocal arrangement that their business is a long haul, however, can be repudiated if the markers of their presentation are reliably low.

Question Four

a). From the readings on the capacity curve, we learned that the more individual works, the more they earn. Considerable gains in work capacity are initially recorded as the income rises. However, it reaches a point that income decreases at a decreasing rate since the work capacity reduces. The slope of the capacity curve shows the piece rate. Thus, the falter the line, the higher the piece rate. As the piece rate falls, the ability of the individual falls sharply. Therefore, the point where the piece rate is tangent to the capacity curve determines the highest point where piece rate and the labor ability reach. Below that point, it becomes impossible to work since it is expensive to supply labor.

b). The lowest pay permitted by law at which an individual will work will ascend as the measure of non-work pay rises. This is so because a person with different kinds of revenue will esteem relaxation all the more profoundly and will want to forfeit it just for sufficiently high remuneration. In any case, at low degrees of non-work pay, individuals’ eagerness to work for anything will increment, so the thought that ties are the base piece rate at which one can work. As the non-work pay expands, the capacity based least rate falls, and somewhat, the eagerness to work turns into the limiting imperative; power doesn’t turn into an issue now. While drawing the diagram, it is feasible to consolidate the two least piece rates, as demonstrated beneath. The U-molded bends of the chart show the base value rates at which workers are willing and ready to work.

Being that the workers are intended for expanding work pay, the falling apart of the bend relates to the zone wherein capacity is the functional requirement. Then again, the rising piece of the curve addresses the area wherein ability is the employable requirement.

The piece-rate will determine the future equilibrium. The labor may remain constant in the future; however, the willingness to supply that labor will depreciate as the piece rate decreases. Thus, the new equilibrium will be achieved at a lower point of the capacity curve.

c). One of the main effects of unemployment is that it affects individuals’ purchasing power; on the other hand, the lower purchasing power of individuals results in unemployment for workers since there will be no work to do or people to serve. With the reduced purchasing power of consumers, companies will try to cut their costs by laying off their workforce to measure continued savings for survival. The worst part of it is that few people left in the workforce are likely not to receive salary increment despite the additional work done. Unemployment affects the company’s general performance since the customers will reduce; thus, to survive, the expenditures must be reduced by laying off some workers, increasing working hours, and limiting wages. This will then affect the employed labor.

d). Individuals without non-labor income will indeed do much better than those without since they will have different sources of revenue. Working in similar environments with similar wages, privileges, and working conditions, at the end of the day, those with non-labor income, such as income from leased land, will have total income, thus spending more and leading a better life. Exceedingly, those with non-labor income will not be forced to work extra hard and or go for overtime jobs since their income level is enough to sustain their expenditures.

Question Five

a). The principal point that we draw from irregularity is that rustic wages have an implicit propensity to vacillate, both over the long run and as in they are just incompletely unsurprising. Hazard avoidance can be caught by hypothesizing that an individual gets decreasing negligible utility from pay. An extra $10 implies more when you are acquiring $100 each month than when you are procuring $1,000 each month. This inclination for the minimal utility to decrease is associated with hazard avoidance in an accompanying manner. An individual might consistently want to move amounts of cash from his big league salary state to his low-pay state because the deficiency of utility from a financial decrease in the big league salary state is not exactly a similar money related addition in a big-league salary state. Due to this explanation and how the business is risk-averse will favor contract w1 because of the conceivable diminished money-related decrease.


b). On the off chance that businesses are hazard impartial and laborers are hazard unwilling, comparative mentalities apply to variances too, and there ought to be an extension for authoritative smoothing of wages over the leeway and pinnacle seasons. This is a type of perpetual work, the second sort of ongoing work that we alluded to toward the start of this segment. For instance, the business pays a worker 150 every month consistently, regardless of whether it is slack or pinnacle. Since the company unwilling to change, he will lean toward this to a shifting revenue stream with a similar standard worth. To be sure, if the business conceals the sum a piece, say to Rs 140 every month, the company will in any case incline toward this to the fluctuating stream.

c). First of all, the employer is risk-averse. This means that he prefers lower wages with known risks rather than higher wages with unknown risks. From the previous section, it is understood that an individual, for this case, an employee, will like to transfer sums of money from a monetary reduction in the high-income state to a low-income state due to the potential risks. Therefore, if wages happen to be $100 in this firm, the laborer will break the contract and run away since the expected dangers of this high income will be too much. The laborer prefers a lower wage spot of $50, which has limited risks. Thus, he may not accept any risks in the name of increased wages.

d). Indeed, running away may have a long-term impact on the laborer’s employment history. However, it is not a must for a laborer to seek a permanent contract. First, permanent contracts are only beneficial to the employer and not the laborer. The permanent contract will only be good for the laborer when the season is at the peak. However, when the season is at slack, the employee will be tied by the contract despite little or no compensations from the employer. If the action by the laborer to cut the contract and quit duties upon an increment of the spot wages may impact his future permanent opportunities, be it, being risk-averse helps laborers settle on valuable contract and suitable working environments.

Question Six

The justification drawn out of the agreement for this situation is understood protection (or utilization streamlining the leeway and pinnacle seasons), yet there is a motivator issue here. If leeway compensation is expanded and top wages are diminished to perpetual specialists, at that point, there is an inclination to break the agreement in the pinnacle season when easygoing wages are higher than the contracted lasting pay. If the deal will be respected relies upon the size of the addition in question and how simple it is for a freak to reemerge the ongoing work market sometime in the future. We contend that both these contemplations limit the occurrence of unending work.

Just restricted protection can be given to deal with conditions, so the hole between top easygoing wages and the contracted compensation isn’t excessively high. In dealing with the situation, the economy should not have an excessive number of perpetual agreements accessible. Undoubtedly, if a perpetual laborer’s deviation can be handily spread the word about for every single likely manager, the quantity of accessible lasting arrangements matters less: businesses won’t employ the degenerate in any case. It follows that less versatile economies wherein the progression of data is a higher will, in general, show a more significant occurrence of lasting agreements. Turning this around, if an increment portrays the improvement in versatility and obscurity, this kind of perpetual agreement will probably shrink away with time.

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