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AAE/ECON 474 Assignment 2:

Modeling a Poverty Trap

Due Date: March 7th

Purpose

The purpose of this assignment is to practice representing and interpreting a poverty trap in a developing area.

Course Learning Outcomes

CLO5 Use economic models and empirical methods to evaluate development policy

Skills

The purpose of this assignment is to practice the following skills that are essential to your success in analyzing the ways in which development programs impact poverty:

● use graphs to represent an economic model

● draw inferences about policies and programs based on an economic model

Knowledge

This assignment will require you to be familiar with the following course content:

● poverty trap models

Task

To complete this assignment, you will do some more in-depth analysis of the nutrition and income relationship that was discussed in class. Feel free to draw graphs by hand, take pictures, and insert pictures into your handout.

1. [5 point]. A capacity curve plots work capacity (in terms of number of tasks a worker can complete in a specified period of time) of an individual against their income or earnings or wealth. Explain in your own words (a) what work capacity means and why we might use it instead of work hours and (b) what the shape of the capacity curve (hint: S-shape) implies about the effect that additional calories have on the ability to work. Your explanation may include simple graphs to illustrate ideas but it does not need to. You will do some graphing in response to other questions.

2. [10 points]. Draw several piece rates on the same graph as the capacity curve. A piece rate is the price paid per task completed. Hence, different piece rates will imply different income/earnings for a given level of work capacity. Show that work capacity can jump downward discontinuously as piece rates fall.

3. [5 point]. Workers with different levels of non-labor wealth often have different minimum piece rates, that is, different piece rates at which they would be able to work (hint: non-labor wealth will shift the capacity curve to the left or right because wealth generates its own source of income that improves an individual’s caloric intake). Use this result to draw a graph that features the minimum piece rate at which a worker is able to work on the y-axis and non-labor wealth on the x-axis.

4. [5 point]. Additionally, it is often assumed that richer people (higher non-labor wealth) will require more money to be willing to work. Draw this onto the same graph as (3).

5. [5 point]. Draw on your results from (3) and (4), and write a brief explanation of how how a situation could exist in which some people choose not to work while others wish to work but are unable to do so because their caloric intake is too low. Your explanation should refer to the graph you drew in response to (3) and (4).

6. [10 points]. In your own words, describe how a poverty trap could exist in this model. Describe how somebody could be caught in a poverty trap, in terms of her income, caloric intake, and ability to work.

7. [5 point]. Using a graph, show how a vaccination campaign might affect the capacity curve, and describe in words the mechanisms through which this effect might occur.

8. [5 point] If you assume no change in labor demand, write a brief explanation of the effect of the vaccination campaign on the equilibrium wage in this model.

Evaluative Criteria

Successful assignments will

· attempt all of the questions

· draw easily interpretable graphs and provide complete explanations