3. The value of a worker's marginal product is $40 per hour for high-ability workers and $10 per hour for low-ability workers. Each worker cares about the wage (w) and amount of education (e) he or she obtains. Preferences over education- wage pairs (e, w) of high-ability workers are representable by utility function un(e, w) = w – 5e, and low-ability workers by utility function u (e, w) = w – 10e. By law, everyone is required to attend at least 10 years of school. One-third of the population has low ability and two-thirds has high ability. Reservation wage for each type is zero. a) What can you say about the educational attainment of each type of the worker in a separating equilibrium? Show your work. b) What can you say about the educational attainment of each type of the worker in a pooling equilibrium? Show your work.

3. The value of a worker's marginal product is $40 per hour for high-ability workers and $10 per hour for low-ability workers. Each worker cares about the wage (w) and amount of education (e) he or she obtains. Preferences over education- wage pairs (e, w) of high-ability workers are representable by utility function un(e, w) = w – 5e, and low-ability workers by utility function u (e, w) = w – 10e. By law, everyone is required to attend at least 10 years of school. One-third of the population has low ability and two-thirds has high ability. Reservation wage for each type is zero. a) What can you say about the educational attainment of each type of the worker in a separating equilibrium? Show your work. b) What can you say about the educational attainment of each type of the worker in a pooling equilibrium? Show your work.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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