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Businesses employ workers from city neighborhoods and rural areas. These workers are perfect substitutes and cannot relocate in the short run. The government offers businesses a wage subsidy if they hire workers from city neighborhoods. What is the effect of the subsidy on the wage rate of rural workers and on the total hours they work?

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Answer:

This subsidy would decrease the rural workers' wages since it also decreases the wage of workers from city neighborhoods and both workers are perfect labor substitutes. Therefore, the total hours worked by rural workers would also decrease, since the wage is the price of labor, and when a price decreases, its supply decreases.

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