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. A college degree can signal ability, and the cost of the degree is $11,000. Will there be a pooling equilibrium or a separating equilibrium?
What will be an ideal response?
Under a pooling equilibrium, all workers are paid (0.1 ? 30,000 ) + (0.9 ? 20,000 ) = $21,000. The high-ability worker must pay $11,000 to gain $9,000. She will not; so, a pooling equilibrium is possible. Under a separating equilibrium, the high-ability worker must pay $11,000 to gain $10,000. She will not; so, a separating equilibrium is not possible.
You might also like to view...
Refer to Market Diagram. What area represents the producer's surplus earned in the monopoly equilibrium?
The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.
a. Area A + C + F.
b. Area C + F.
c. Area C + D + F + G.
d. Area C + D + E.
On the Lorenz curve, which of the following indicates that income inequality has increased from Year A to Year B?
a. The Year B line is to the left of the perfect equality line, and the Year A line is to the right. b. The Year A line is longer than the Year B line. c. The Year B line is farther from the perfect equality line than is the Year A line. d. The Year A line is farther from the perfect equality line than is the Year B line.
Refer to the accompanying figure. It is efficient for this farmer to:
A. grow 1,000 bushels of wheat and 500 bushels of corn. B. grow 250 bushels of wheat and 500 bushels of corn. C. grow 500 bushels of wheat and 250 bushels of corn. D. grow 500 bushels of wheat and 500 bushels of corn.
Which of the following conditions do NOT exist in long-run equilibrium?
a. Domestic nominal interest rates are such that the supply of real balances is equal to demand. b. The domestic real return is equal to the foreign real return through the equilibrium exchange rate. c. There are no price level or exchange rate changes and therefore the expected future exchange rate is equal to the actual exchange rate. d. Domestic nominal interest rates are such that the supply of real balances is greater than demand.