Question 2 (24 pts.) Consider the dual labour market model based on Ghatak and Jiang (2002) with the following modification: the entrepreneurial technology requires one entrepreneur and two workers. Suppose that w = 15, r = 0.1,1 = 150,9 = 135,1 = 0.1, F = 100. Suppose that 40 % of the population have asset holdings a = 400 and the remaining 60 % of the population a = 250. All parameters are defined as in the lecture notes. a) (2 pts.) Calculate the threshold wage w that leaves a credit-constrained individual indifferent between becoming a worker and a self-employed. b) (2 pts.) Calculate the threshold wage w that leaves a non-credit-constrained individual indifferent between becoming a worker and an entrepreneur. c) (2 pts.) Calculate the threshold level of assets required for a loan of size 1 = 150 to be approved. d) (2 pts.) Calculate the share of credit constrained individuals. e) (2 pts.) Show that w 40 is an equilibrium. f) (2 pts.) Calculate the occupational distribution. g) (2 pts.) Calculate the income distribution. h) (2 pts.) Show that w E (15,40) is not an equilibrium. i) (4 pts.) Draw a graph that depicts the labour demand and supply curves as well as the labour market equilibrium. j) (2 pts.) Briefly explain why G(1) = is not the critical share of credit-constrained individuals that induces a switch to the low-wage equilibrium. 1 k) (2 pts) Suppose that a severe recession reduces the assets holdings by half for those whose assets were equal to 250 prior to the recession. Briefly explain whether the labour market switches to the low-wage equilibrium. Question 2 (24 pts.) Consider the dual labour market model based on Ghatak and Jiang (2002) with the following modification: the entrepreneurial technology requires one entrepreneur and two workers. Suppose that w = 15, r = 0.1,1 = 150,9 = 135,1 = 0.1, F = 100. Suppose that 40 % of the population have asset holdings a = 400 and the remaining 60 % of the population a = 250. All parameters are defined as in the lecture notes. a) (2 pts.) Calculate the threshold wage w that leaves a credit-constrained individual indifferent between becoming a worker and a self-employed. b) (2 pts.) Calculate the threshold wage w that leaves a non-credit-constrained individual indifferent between becoming a worker and an entrepreneur. c) (2 pts.) Calculate the threshold level of assets required for a loan of size 1 = 150 to be approved. d) (2 pts.) Calculate the share of credit constrained individuals. e) (2 pts.) Show that w 40 is an equilibrium. f) (2 pts.) Calculate the occupational distribution. g) (2 pts.) Calculate the income distribution. h) (2 pts.) Show that w E (15,40) is not an equilibrium. i) (4 pts.) Draw a graph that depicts the labour demand and supply curves as well as the labour market equilibrium. j) (2 pts.) Briefly explain why G(1) = is not the critical share of credit-constrained individuals that induces a switch to the low-wage equilibrium. 1 k) (2 pts) Suppose that a severe recession reduces the assets holdings by half for those whose assets were equal to 250 prior to the recession. Briefly explain whether the labour market switches to the low-wage equilibrium
