. Five members in a family own a farm in rural Mexico. They all work on the farm

Question

. Five members in a family own a farm in rural Mexico. They all work on the farm and there are no other dependents. Their total income per year depends on the number of members working on the farm that year. Total annual income is represented by the following: 1 person working on the farm = $800 of total farm output. 2 people = $1600 TFO. 3 people =$3000 TFO. 4 people = $2300 TFO and 5 people = $2500 TFO. Each member has the opportunity to migrate to the nearest city where there are two different types of jobs. Informal sector jobs are available to everyone and pay $100. Formal sector jobs are more difficult to get and pay $650. The probability of finding a job in the formal sector is 80%. We can assume that there are no costs of migration. A) What is the expected wage in the nearby city? B) Consider the case in which each member

Explanation / Answer

A.) The expected wage in the nearby city is $650*.8 + 100*.2 (since the people who don't get a job in the formal sector can then take an informal one) = $540 B.) MR of Person 1 = $800 MR of Person 2 = $800 MR of Person 3 = $1400 MR of Person 4 = -$700 MR of Person 5 = $200 The marginal revenue of person 4 and 5 are less than $540, so they will migrate to the city, meaning 2 members will chose to migrate.

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