Suppose that education does not affect worker's productivity, but it is more costly for low-ability workers to obtain the education. If firms cannot distinguish between different workers they must pay them all the wage equal to the expected productivity. If they can distinguish between workers with different abilities, they pay each worker their marginal product of labour and make zero profits. 70% of workers in the population have low ability. The productivity of low-ability workers is Y₁ = 20000, and the productivity of high-ability workers is Y = 50000. The cost of education to high-ability workers is CH (S) =, and the cost of education to low-ability workers is CL = S. 1. Suppose firms cannot observe worker's education. What wage will they offer to a high- ability worker? What is the optimal level of schooling for the high-ability worker? Why? 2. Suppose that firms can observe worker's educational attainment and believe that workers with the level of schooling above some benchmark S* are high-ability workers. For what values of S* high-and low-ability workers choose different levels of educational attainment (separating equilibrium)? 3. What will be the optimal level of schooling for high- and low-ability workers in a separating equilibrium?
Suppose that education does not affect worker's productivity, but it is more costly for low-ability workers to obtain the education. If firms cannot distinguish between different workers they must pay them all the wage equal to the expected productivity. If they can distinguish between workers with different abilities, they pay each worker their marginal product of labour and make zero profits. 70% of workers in the population have low ability. The productivity of low-ability workers is Y₁ = 20000, and the productivity of high-ability workers is Y = 50000. The cost of education to high-ability workers is CH (S) =, and the cost of education to low-ability workers is CL = S. 1. Suppose firms cannot observe worker's education. What wage will they offer to a high- ability worker? What is the optimal level of schooling for the high-ability worker? Why? 2. Suppose that firms can observe worker's educational attainment and believe that workers with the level of schooling above some benchmark S* are high-ability workers. For what values of S* high-and low-ability workers choose different levels of educational attainment (separating equilibrium)? 3. What will be the optimal level of schooling for high- and low-ability workers in a separating equilibrium?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 13 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education