Question

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.

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 whether G(1) = is the critical share of credit-constrained individuals
that induces a switch to the low-wage equilibrium.

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.

Answer 1

Answer:

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