Assume the city of Norman is currently comprised of high productivity workers (MPHP = 80) and low productivity workers (MPLP = 25). You estimate that 30% are high productivity. (a) Let’s assume every firm had perfect information. If that was the case, what is the market wage? (b) In reality, there is always some asymmetric information. In this case, what would be the market wage? (c) Now, let’s assume the firm is willing to offer a wage of $80 to anyone with ̄e years of education. Let’s assume the cost for a high productivity work is $5 per year, and the cost for a low productivity worker is $11 per year. For what levels of ̄e will each type go to college? (d) What is the separating equilibrium?
Assume the city of Norman is currently comprised of high productivity workers (MPHP = 80) and
low productivity workers (MPLP = 25). You estimate that 30% are high productivity.
(a) Let’s assume every firm had perfect information. If that was the case, what is the market wage?
(b) In reality, there is always some asymmetric information. In this case, what would be the market
wage?
(c) Now, let’s assume the firm is willing to offer a wage of $80 to anyone with ̄e years of education.
Let’s assume the cost for a high productivity work is $5 per year, and the cost for a low
productivity worker is $11 per year. For what levels of ̄e will each type go to college?
(d) What is the separating equilibrium?
(e) Now, let’s assume you were wrong about the number of high productivity workers. In reality,
50% are considered high productivity workers. How does this impact your answers? Is each
group more or less likely to go to college now? Explain.
(f) What about if the community actually contained 80% high productivity workers. How does
this impact your answers? Is each group more or less likely to go to college now? Explain.
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