Two rural individuals MatyaÌs and Toka are contemplating leavingtheir village for a nearby town. Given that MatyaÌs has a secondaryschool certificate, she has a higher probability of obtaining anurban sector job than Toka, who is a primary school drop out. Ifthey remain in the village and work on their family farms, theyearn $200 each per year if the yield is high and $100 per year ifthe yield is low. The yield will be high with probability 0.5 andlow with probability 0.5. Alternatively both these individuals canchoose to migrate to town, in which case they each expect to find aformal or informal sector job, paying the following earningsaccording to the given probabilities.
| Year 1 | Year 2 | Year 3 |
Formal Sector | Informal Sector | Formal Sector | Informal Sector | Formal Sector | Informal Sector |
MatyaÌs | $400 (0.4) | $200 (0.6) | $400 (0.5) | $200 (0.5) | $500 (0.6) | $300 (0.4) |
Toka | $200 (0.2) | $100 (0.8) | $200 (0.4) | $200 (0.6) | $300 (0.5) | $300 (0.5) |
(a) According to the Harris-Todaro model, on a one-year timehorizon, which individual will migrate? [2 points]
(b) On the three-year time horizon, which individual(s) willmigrate? (Assume the rate of interest at which both can borrow orlend money is i = 5%) [5 points]
(c) Assume a one-year time horizon. Suppose now that there is atraditional family support payment of $40 that all urban migrantsmust pay yearly to their relatives back in the village. At the sametime, each bears a ‘psychological cost’ associated with moving tothe city. Such a cost is $25 for MatyaÌs and $15 for Toka. Again,according to the Harris-Todaro model, which farmer will migrate totown? [5 points]
(d) Assume a one-year time horizon, Still maintaining the‘psychological’ costs associated with moving to the city, supposenow that all formal jobs also come with medical benefits, which areworth $30 a year, in additional to the wage. Informal sector jobsdo not carry any such benefits. According to the Harris- Todaromodel once again, which individuals will migrate to town? [3points]
