Regional Intergration and Migration: An Economic Geography Model with Hetergenous Labour Force



The second step of the consumer’s problem is to choose the optimal allocation of income
between
A and M so that the utility is maximised

Maximising U = MμA1 μ subject to. PM + PaA=Y , gives us the uncompensated demand
for
A and for each variety, mj :

A = (1 - μ )Y / Pa

(7)


mj =


p~r^μ μ

P-(σ-1)


(8)


From the consumer’s utility maximisation problem we can also express the indirect utility
function, substituting (7) and (8) in (1) yields:

U = μμ (1 - μ )1-μY
PμP (1^μ)

(9)


the term PμPA°^μ) can be interpreted as the regional cost-of-living index in the economy.
What is the welfare effect of an increase in the number of variety? Assuming that all varieties
are available at the same price
pi = pj, j [1,..., n ], we can rewrite the manufacturing goods
price index as:

1-σ

Pr


1

1-σ


1

= Pn1-σ


12




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