ECO343H5 Midterm: Test 01, 2009

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Suppose trinidad and bermuda both share the same currency and living standard, but the wage for taxi drivers is lower in trinidad than bermuda. Use a set of two properly labeled diagrams (one for each country) side-by-side to help explain the adjustment mechanism that would equalize the wage for taxi drivers in these countries. Briefly discuss three factors that might prevent such mechanism from functioning. (18 marks: assume there is no non-labour income. Use two properly labeled diagrams to derive the backward-bending labour supply curve of an individual (whose indifference curves are convex) from the basic income-leisure model. Demonstrate in your diagrams along with explanation on how the income and substitution effects influence the slope of the labour supply curve. What is the economic intuition behind this phenomenon? (25 marks) Use a properly labeled diagram to help you explain your answer. (14 marks) Explain the economic intuition behind this phenomenon. (23 marks)

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