Q1. Consider the adverse selection model, where the ability of each worker, 0, can be 1, 2 or 5. Workers observe their own abilities, but firms only observe the overall distribution of probabilities (1/3, 1/6, 1/2). Suppose that the reservation value is r(0) = 0.5+0.50. (a) What is the range of wages, for which all workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for which a firm hires a random worker? Will there be a functioning labor market in this case? (b) What is the range of wages, for which no workers accept the competitive wage? (c) What is the range of wages, for which only lowest type workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for which a firm hires a random worker in this case? Will there be functioning labor market? 2140

Q1. Consider the adverse selection model, where the ability of each worker, 0, can be 1, 2 or 5. Workers observe their own abilities, but firms only observe the overall distribution of probabilities (1/3, 1/6, 1/2). Suppose that the reservation value is r(0) = 0.5+0.50. (a) What is the range of wages, for which all workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for which a firm hires a random worker? Will there be a functioning labor market in this case? (b) What is the range of wages, for which no workers accept the competitive wage? (c) What is the range of wages, for which only lowest type workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for which a firm hires a random worker in this case? Will there be functioning labor market? 2140

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Q1. Consider the adverse selection model, where the ability of each worker, 0, can be 1, 2 or 5. Workers observe their own abilities, but firms only observe the overall
distribution of probabilities (1/3, 1/6, 1/2). Suppose that the reservation value is r(0) = 0.5+0.50.
(a) What is the range of wages, for which all workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for
which a firm hires a random worker? Will there be a functioning labor market in this case?
(b) What is the range of wages, for which no workers accept the competitive wage?
(c) What is the range of wages, for which only lowest type workers accept the competitive wage? What is expected productivity in this case? What is the range of
possible wages for which a firm hires a random worker in this case? Will there be functioning labor market?
(d) What is the range of wages, for which only lowest and medium type workers accept the competitive wage? What is expected productivity in this case? What is the
range of possible wages for which a firm hires a random worker in this case? Will there be functioning labor market in this case?

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