Immigration - Graphical analysis

Consider the production model studied in class, but with different exponents. Suppose that the production function is Cobb-Douglas with exponents on capital and labor both equal to 1/2. Namely, we have

Y=A K^(1/2) L^(1/2)

The data for this economy is A=10, the initial capital stock is K0=200 and the initial workforce is L0=200. We will assume that everyone in this country works so that population equals employment and per-person GDP equals per-worker GDP.

Note that each worker starts off with one unit of capital to work with (i.e. K0/L0=1). We will analyze the short-run effects of an inflow of immigrants into the economy. It is short-run effects because we will keep the stock of capital fixed at its initial value.

Suppose that in 2020 the economy receives a large inflow of immigration that increases the labor force by 10% to L1=220. Answer the following questions.

BEFORE YOU MOVE ON, draw diagrams on paper for the labor market and for the capital market. Make sure you label your axes and curves carefully. Label the initial equilibrium as point A. Now shift the appropriate curves to reflect the arrival of the immigrant workers, draw the short-run equilibrium and label it as point B.

In the labor market the supply shifts to the ___________; and the demand shifts to the _____________.

1 point

No shift; Right.

Right; No shift.

Right; Left.

Right; Right.

Clear selection

Consider the changes in the labor market that you answered in the last question. As a result of these changes, the new equilibrium wage will____________; and employment will__________________;

1 point

Decrease; increase

Increase; decrease

Increase; increase

Decrease; decrease

In the capital market, the supply shifts to the _____________; and the demand shifts to the _______________.

1 point

Left; no shift.

No shift; no shift.

Right; Right.

No shift; Right.

Consider the changes in the capital market that you answered in the last question. As a result of these changes, the new equilibrium rental rate will____________; and capital used by employers will__________________.

1 point

increase; remain unchanged.

remain unchanged; remain unchanged.

increase; increase.

fall; fall

Because of immigration, real GDP (Y) will_______________________________; while per-capita real GDP (y) will___________________.

1 point

increase; remain unchanged.

increase; decrease.

increase; increase.

decrease; decrease.