2 (Topic 1b): Inequality (10 marks) Suppose there is a technological breakthrough in an economy that increases the productivity of all skilled labour. Suppose the government responds by increasing scholarships to high- ability students who cannot afford higher education otherwise. (a) Using the long-run model with two separate markets for skilled and unskilled labour, and a production function that requires both types of labour, answer the following questions: (i) How will the demand for and supply of skilled labour change? Explain. (ii) How will the income inequality between skilled and unskilled labour, proxied by the wage premium of the skilled labour (or skill-premium) change? Explain. (iii) How will the GDP of that economy change? Explain. (2+2+1=5 marks) (b) Graphically illustrate your answer to (i) - (iii). You may draw two separate diagrams for skilled and unskilled labour or one diagram to study both. However, you must draw a production function with unskilled labour on the horizontal axis while keeping other factors fixed. Then shift the function as the other factors change. Be sure to label: (1) the axes (2) the curves (3) the initial equilibrium values (4) the direction curves shift and (5) the terminal equilibrium values