Multiple choices 1. Suppose that low-productivity workers all have a productivit
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Question
Multiple choices1. Suppose that low-productivity workers all have a productivity level equal to $10 in monetary terms and high-productivity workers all have a productivity of $16. The community has equal numbers of each type of worker. The local community college offers a course in microeconomics. High-productivity workers think taking this course is as bad a wage cut of $2, and low-productivity workers think it is as bad as a wage cut of $6. Workers can either choose to take the course or not, i.e., they cannot take a fraction of the course.
a. There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid $13.
b. There is a separating equilibrium in which high-productivity workers take the course and are paid $18 and low productivity workers do not take the course and are paid $10.
c. There is no separating equilibrium and no pooling equilibrium.
d. There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10.
e. There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low productivity workers are paid $13.
2. In Rustbucket, Michigan, there are potentially many used cars for sale, half of them are good and half of them are lemons. Owners of lemons are willing to sell them for $100. Owners of good used cars are willing to sell them for prices above $1,100 but will keep them if the price is lower than $1,100. There is a large number of potential buyers who are willing to pay $200 for a lemon and $2,100 for a good car. Buyers can’t tell good cars from bad, but original owners know.
a. There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,100.
b. There will be an equilibrium in which all used cars sell for $600.
c. The only equilibrium is one in which all used cars on the market are lemons and they sell for $200.
d. There will be an equilibrium in which all used cars sell for $1,150.
e. There will be an equilibrium in which lemons sell for $200 and good used cars sell for $2,100.
Explanation / Answer
1. Suppose that low-productivity workers all have a productivity level equal to $10 in monetary terms and high-productivity workers all have a productivity of $16. The community has equal numbers of each type of worker. The local community college offers a course in microeconomics. High-productivity workers think taking this course is as bad a wage cut of $2, and low-productivity workers think it is as bad as a wage cut of $6. Workers can either choose to take the course or not, i.e., they cannot take a fraction of the course.
b. There is a separating equilibrium in which high-productivity workers take the course and are paid $18 and low productivity workers do not take the course and are paid $10.
Here in this case , the worker choose the course, if Wh- Wl > Cost
For high paid:
Wh= 16, Wl= 10, cost for attending the course= 2
16-10 > 2
so they attend and takes a pay hike of 16+2= $18
For low paid:
Wh= 16 and Wl= 10 , cost for attending teh course= 6
16- 10 > 6
16 - 10 is equal to 6, so they do not see a benifit in opting the course,
2. In Rustbucket, Michigan, there are potentially many used cars for sale, half of them are good and half of them are lemons. Owners of lemons are willing to sell them for $100. Owners of good used cars are willing to sell them for prices above $1,100 but will keep them if the price is lower than $1,100. There is a large number of potential buyers who are willing to pay $200 for a lemon and $2,100 for a good car. Buyers can’t tell good cars from bad, but original owners know.
d. There will be an equilibrium in which all used cars sell for $1,150.
In this case of adverse selection, the sellers know the quality and the seller willing to sell at
greater than or equal to $100 and Less than or equal to $1100
and buyers intention:
greater than or equal to $200 and Less than or equal to $2100
Cars are of equal nos . Probabality of a good and bad car is 0.5
Equillibrium price= 1/2(200) + 1/2(2100)
= 100 +1050
= $ 1150
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