Imagine a signalling model where there are two types of workers, low productivity workers with a productivity of 10, and high productivity workers with a productive of 20. The proportion of low productivity workers is .5. Firms are competitive and obtain profit equal to the productivity of the worker they hire. Workers can obtain one of three levels of education: e1,e2, and e3. Workers get utility equal to their wage minus the cost of education. Wages must be between 10 and 20. The cost of getting an education for low productivity workers is: e1 = 0, e1 = 7, e2 = 14. The cost of getting an education for high productivity workers is e1 = 0, e2 =4, e3 = 8. What is the separating equilibrium in this model? Be sure to indicate firm beliefs and description of the equilibrium. wages in your

Imagine a signalling model where there are two types of workers, low productivity workers with a productivity of 10, and high productivity workers with a productive of 20. The proportion of low productivity workers is .5. Firms are competitive and obtain profit equal to the productivity of the worker they hire. Workers can obtain one of three levels of education: e1,e2, and e3. Workers get utility equal to their wage minus the cost of education. Wages must be between 10 and 20. The cost of getting an education for low productivity workers is: e1 = 0, e1 = 7, e2 = 14. The cost of getting an education for high productivity workers is e1 = 0, e2 =4, e3 = 8. What is the separating equilibrium in this model? Be sure to indicate firm beliefs and description of the equilibrium. wages in your

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 19.4IP

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Question 13 Consider a market in which there are two types of workers L and H. Each type of worker has a different level of productivity, but that productivity is unobservable ex ante to potential employers. Before seeking employment at a firm in the market, all workers can (if they choose) get some level of education e. This choice of education e is observable to all, including potential employers. Assume that the market is competitive, so expected profits must be zero in equilibrium. The L-type workers have a productivity of 2 if they work for a firm in the market. They also have an outside option of 2. The utility function of the L-type workers UL - wL- eL, where wl is the wage received and eL is the level of education they obtain. The H type worker has an outside option of 2 and a productivity of 4 if they are employed by a firm in the market. The utility function for a H-type worker is UH=wH - (%)eH, where wH is the wage paid to a H-type and eH is the education they choose to get.…
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23. Compensating wage differentials arise to compensate workers for the wage characteristics of jobs. A) True B) False 24. The combinations of capital and labor that yields the same level of output can be represented with an indifference curve. A) True B) False . 25. The larger the wage differential between the risky job and the safe job, the larger the number of firms that will choose to offer a risky work environment. A) True B) False
The figure depicts the efficiency wage equilibrium of a worker and a firm. According to this figure: Isocosts Worker's best response curve 0.7---- 0.5+ -- 4 6 10 12 Hourly wage, $ At B, the MRS is higher than the MRT. O The firm is able to increase its profits from those attained at A by inducing the worker to exert higher effort in return for a higher wage. O The firm would maximise its profits by paying an hourly wage that is $6 above the worker's reservation wage. O At C, the marginal rate of substitution (MRS) between higher wage cost and higher effort exceeds the marginal rate of transformation (MRT). Effort per hour 近