Suppose that new high-technology farming equipment is developed. These new machines are substitutes for low-income workers such as farm laborers, but they are complements for high- income workers such as farm technicians and farm owners. This new technology will ______________ wages in for low-income workers and ______________ income inequality.

Question

BlackTom AI · Accepted Answer

Let's evaluate how the new technology affects different groups and overall inequality.
Option 1: 'decrease, increase' — This claims wages for low-income workers fall while income inequality rises. Since the equipment is a substitute for low-income farm laborers, the adoption reduces demand for their labor and pushes their wages down. For high-income workers (farm technicians and farm owners), the same technology is a complement, which can raise productivity and potentially raise or stabilize their earnings, widening the gap between low- and high-income workers. This combination would indeed lower wages for low-income workers and increase overall income inequality, making this option plausible.
Option 2: 'increase, increase' — If wages for low-income workers rose, the substitution effect would have to be offset or reversed, which is unlikely given they are substitutes for low-skilled labor. The technology reduces the demand for low-income labor, so raising their wages would require unusual circumstances (e.g., labor shortages, policy interventions) not implied by the description, making this option inconsistent with the substitution/complement effects described.
Option 3: 'increase, decrease' — This would imply low-income wages rise while inequality falls. A substitute for low-income labor would more plausibly depress their wages, not raise them, so this option contradicts the basic substitution effect. Additionally, reducing inequality would require high-income wages to rise less or fall, which also doesn’t align with the stated complement relationship for high-income workers.
Option 4: 'decrease, decrease' — A decrease in both wages would ignore the fact that the technology is a complement for high-income workers, which tends to support or raise their earnings through higher productivity or profits. Therefore, this option misreads the complementarity for high-income workers and is inconsistent with the described technology’s distributional effects.
Overall, the pattern of substitution for low-income workers and complementarity for high-income workers aligns with Option 1, yielding lower wages for low-income workers and higher income inequality relative to the baseline.

ECON-102-AB-CRN32076 Final Economics Fall 2024

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