) Consider a production of a good, X. The market for X is competitive and thus there are many firms producing X. The production of X requires only labour inputs. Moreover, the marginal product of labour for X is constant. However, there are exactly two kinds of workers in the population. One kind has a constant marginal product worth $20 and the other kind has a constant marginal product worth $15. The labour market is competitive and there are equal numbers of workers of each kind in the population. (a) Suppose that the price of X is $1 per unit. The equilibrium wage rate for high- productivity workers is $ workers is $ and the equilibrium wage rate for low-productivity (b) Consider the case of information asymmetry: each firm cannot directly tell the difference between the two kinds of workers. Even after it has hired them, it won't be able to monitor their work closely enough to determine which workers are of which type. In this case, one wage rate will be offered to both kinds of workers, and the equilibrium wage rate will be $ (c) Suppose that a local college offers a course, which is unrelated to the productivity for producing X. The high-productivity workers think that completing this course is just as bad as a $3 wage cut, and the low-productivity workers think it is just as bad as a $6 wage cut. Each firm can observe whether or not an individual worker completed the course. If some workers come to a job interview with the certificate and the others come without the certificate, then firms may be able to distinguish high-productivity workers from low-productivity workers. If this self-selection of workers really distinguishes workers, then the firm will offer $ to the workers with the certificate and $ to the workers without the certificate.
) Consider a production of a good, X. The market for X is competitive and thus there are many firms producing X. The production of X requires only labour inputs. Moreover, the marginal product of labour for X is constant. However, there are exactly two kinds of workers in the population. One kind has a constant marginal product worth $20 and the other kind has a constant marginal product worth $15. The labour market is competitive and there are equal numbers of workers of each kind in the population. (a) Suppose that the price of X is $1 per unit. The equilibrium wage rate for high- productivity workers is $ workers is $ and the equilibrium wage rate for low-productivity (b) Consider the case of information asymmetry: each firm cannot directly tell the difference between the two kinds of workers. Even after it has hired them, it won't be able to monitor their work closely enough to determine which workers are of which type. In this case, one wage rate will be offered to both kinds of workers, and the equilibrium wage rate will be $ (c) Suppose that a local college offers a course, which is unrelated to the productivity for producing X. The high-productivity workers think that completing this course is just as bad as a $3 wage cut, and the low-productivity workers think it is just as bad as a $6 wage cut. Each firm can observe whether or not an individual worker completed the course. If some workers come to a job interview with the certificate and the others come without the certificate, then firms may be able to distinguish high-productivity workers from low-productivity workers. If this self-selection of workers really distinguishes workers, then the firm will offer $ to the workers with the certificate and $ to the workers without the certificate.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:(3) Consider a production of a good, X. The market for X is competitive and thus there are
many firms producing X. The production of X requires only labour inputs. Moreover, the
marginal product of labour for X is constant. However, there are exactly two kinds of workers
in the population. One kind has a constant marginal product worth $20 and the other kind
has a constant marginal product worth $15. The labour market is competitive and there are
equal numbers of workers of each kind in the population.
(a) Suppose that the price of X is $1 per unit. The equilibrium wage rate for high-
productivity workers is $
workers is $
and the equilibrium wage rate for low-productivity
(b) Consider the case of information asymmetry: each firm cannot directly tell the difference
between the two kinds of workers. Even after it has hired them, it won't be able to
monitor their work closely enough to determine which workers are of which type. In this
case, one wage rate will be offered to both kinds of workers, and the equilibrium wage
rate will be $
(c) Suppose that a local college offers a course, which is unrelated to the productivity for
producing X. The high-productivity workers think that completing this course is just as
bad as a $3 wage cut, and the low-productivity workers think it is just as bad as a $6 wage
cut. Each firm can observe whether or not an individual worker completed the course. If
some workers come to a job interview with the certificate and the others come without
the certificate, then firms may be able to distinguish high-productivity workers from
low-productivity workers. If this self-selection of workers really distinguishes workers,
then the firm will offer $
to the workers with the certificate and $
to the workers without the certificate.
(d) Now consider the workers' point of view. For high-productivity workers, what is the
net-payoff of completing the course and the payoff of not completing the course?
(e) How about for low-productivity workers?
(f) Based on (c), (d) and (e), explain whether the wage offer for those with the certificate
and the wage offer without it will be an equilibrium, or not. Also, what do we call this
type of equilibrium?
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