The value of a worker’s marginal product is $40 per hour for high- ability workers and $10 per hour for low-ability workers. The preferences of high-ability workers correspond to the utility function UH(E,W)=W−5E, and the preferences of low-ability workers correspond to the utility function UL(E,W)=W−10E. By law, everyone is required to attend at least five years of school. Two-thirds of the population has low ability, and one-third has high ability. What can you say about the educational attainment of each type of worker in a separating equilibrium, and in a pooling equilibrium? Are workers better off with the most efficient separating equilibrium, or with the most efficient pooling equilibrium?
The value of a worker’s marginal product is $40 per hour for high- ability workers and $10 per hour for low-ability workers. The preferences of high-ability workers correspond to the utility function UH(E,W)=W−5E, and the preferences of low-ability workers correspond to the utility function UL(E,W)=W−10E. By law, everyone is required to attend at least five years of school. Two-thirds of the population has low ability, and one-third has high ability. What can you say about the educational attainment of each type of worker in a separating equilibrium, and in a pooling equilibrium? Are workers better off with the most efficient separating equilibrium, or with the most efficient pooling equilibrium? Demonstrate your answer by using appropriate schedules.
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