This question asks you to think about how education can be uied as a signal Supp

Question

This question asks you to think about how education can be uied as a signal Suppose that there are two types of workers high and low ability A firm wants to hire high-ability workers but cannot observe a worker's innate ability and so they want to use a specific diploma as a screening device Suppose that the cost of acquiring the diploma is 10,000 for the high ability workers but is 18,000 for the low-abilit) workers Finally, suppose that the earnings of individuals without the diploma are 30,000 The key for the firm is to figure out how much they need to pay workers who get the diploma so that only the high-ability workers get the degree. a. What is the lowest amount that the firm must pav for those with a diploma so that the high-ability types are willing to get the degree? b. However, as ihe film increases the pay they give to those with the degree. the more attractive the degree is to workers of both types Since the firm only wants the high-ability workers, what is the maximum amount they will offer for those with the degree?

Explanation / Answer

Answers:

The firm wish to use education as a screening device.

Without a diploma, they intend to pay: $30,000

For suppose we can take ‘X’ with a diploma intend to pay.

In order for low-ability workers to not pursue education, It must be that:

                $30,000 X - $18,000

Therefore, it requires X $48,000

In order for a high-ability worker to pursue education, It must be that:

                X - $10,000 $30,000

Therefore, it requires X $40,000

   Thus, in order to use education as a signalling device, so it must be that educated workers are paid between $40,000 and $48,000.

   Therefore, the lowest amount that the firm must pay $40,000 for with a diploma in high-ability types are willing to get the degree. And the maximum amount for high-ability pay is $48,000.

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