assume there are two types of workers, low- and high-ability, and let 0 = 0.25 be the proportion of high-ability workers in the population. Assume their marginal productivity and, therefore, their wages are wh = $20 and wl = $16, and that both types can use college education to signal high ability. The cost of college education for low-ability workers is cl = $5 whereas the cost for high-ability workers is ch = $2. Consider the wage for both types of workers and the high-ability workers’ college cost, ch. For which values of 0 (the proportion of high-ability workers in the population) do the high-ability workers prefer the separating equilibrium over the pooling equilibrium? (a) Any 0 > 1/2 (b) Any 0 < 1/2 (c) Any 0 < 3/4 (d) Only when 0 = 1
assume there are two types of workers, low- and high-ability, and
let 0 = 0.25 be the proportion of high-ability workers in the population. Assume their marginal
productivity and, therefore, their wages are wh = $20 and wl = $16, and that both types can
use college education to signal high ability. The cost of college education for low-ability workers
is cl = $5 whereas the cost for high-ability workers is ch = $2.
Consider the wage for both types of workers and the high-ability workers’ college cost, ch. For
which values of 0 (the proportion of high-ability workers in the population) do the high-ability
workers prefer the separating equilibrium over the pooling equilibrium?
(a) Any 0 > 1/2
(b) Any 0 < 1/2
(c) Any 0 < 3/4
(d) Only when 0 = 1
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