Questions 2 and 3 refer to the following setup: Suppose 30% of people are high-a
ID: 1109193 • Letter: Q
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Questions 2 and 3 refer to the following setup: Suppose 30% of people are high-ability individuals and 70% are low-ability. The cost of one year of postgraduate education is $10,000 to a low-ability person and $15,000 to a high-ability person. Regardless of their level of education, the lifetime VMPL of a worker is $848,000 if she is of high ability and $800,000 if she is of low ability. A person's ability level is her private information. Apart from this informational asymmetry, labour markets are competitive 2. Denote as SH the number of years of postgraduate schooling chosen by the high ability individuals. In this setting, A. a separating signaling equilibrium is feasible if SH 5 years B. a separating signaling equilibrium is feasible if SH 4 vears C. a separating signaling equilibrium is feasible if SH 3 years D. a separating signaling equilibrium is feasible if SH 2 years E. there is no value of SH such that a separating signaling equilibrium is feasible 3. Let wH and wi denote the respective equilibrium lifetime earnings of a high ability and a lovw ability individual. Which of the following is true about a pooling equilibrium? A. wH>WL- $800,000 B. WH- wr- $814,400 C. wH..WL-$824,000 D. a pooling equilibrium is feasible only if SH- 3 years E. a pooling equilibrium does not exist in this settingExplanation / Answer
2. Option D.
This is so because, Only workers with high ability are able to attain a specific level of education without it being more costly than their increase in wage. In other words, the benefits of education are only greater than the costs for the workers with the high level of ability, so only workers with a high ability will get an education.
3. Option A.
The lifetime earning of the high ability individual would always be higher than that of the low ability worker.
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