Suppose 10% of all workers are of high ability. If a firm knows a worker\'s abil

Question

Suppose 10% of all workers are of high ability.  If a firm knows a worker's ability, workers of low ability are paid $20,000 and workers of high ability are paid $30,000.  Obtaining a university degree can signal high ability, and the cost of degree is $c.

a.)  Under a pooling equilibrium, how much would a worker with degree be paid?  How much would a worker without degree be paid?

b.) Under a separating equilibrium, how much would a worker with degree be paid?  How much would a worker without degree be paid?

c.)  What values of c would make a separating equilibrium possible?

* please answer in a simple but understandable form to help me get ready for exam*

Explanation / Answer

A)

Under a pooling equilibrium, all workers are paid

(.1 * 30,000) + (.9 * 20,000) = $21,000.

The high-ability worker must pay $11,000 to gain $9,000.

Firm will not; so, a pooling equilibrium is possible.

B)

Under a separating equilibrium, the high-ability worker must pay $11,000 to gain $10,000.

Firm will not; so, a separating equilibrium is not possible

C)

values of c that would make a separating equilibrium possible are mentioned as in (B).

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