In Enigma, Ohio, there are two kinds of workers, Klutzes whose labor is worth $1,000 per month and Kandos, whose labor is worth $2,500 per month. Enigma has exactly twice as many Klutzes as Kandos. Klutzes look just like Kandos and are accomplished liars. If you ask, they will claim to be Kandos. Kandos always tell the truth. Monitoring individual work accomplishments is too expensive to be worthwhile. In the old days, there was no way to distinguish the two types of labor, so everyone was paid the same wage. If labor markets were competitive, what was this wage? ____________

(a) A professor who loves to talk offered to give a free monthly lecture on macroeconomics and personal hygiene to the employees of one small firm. These lectures had no effect on productivity, but both Klutzes and Kandos found them to be excruciatingly dull. To a Klutz, each hour’s lecture was as bad as losing $100. To a Kando, each hour’s lecture was as bad as losing $50. Suppose that the firm gave each of its employees a pay raise of $55 a month but insisted that he attend the professor’s lectures. What would happen to the firm’s labor force?

What would happen to the average productivity of the firm’s employees?

(b) Other firms noticed that those who had listened to the professor’s lectures were more productive than those who had not. So they tried to bid them away from their original employer. Since all those who agreed to listen to the original lecture series were Kandos, their wage was bid up to __________

(c) After observing the “effect of his lectures on labor productivity,” the professor decided to expand his efforts. He found a huge auditorium where he could lecture to all the laborers in Enigma who would listen to him. If employers believed that listening to the professor’s lectures improved productivity by the improvement in productivity in the first small firm and offered bonuses for attending the lectures accordingly, who would attend the lectures? ___________ having observed this outcome, how much of a wage premium would firms pay for those who had attended the professor’s lectures?

(d) The professor was disappointed by the results of his big lecture and decided that if he gave more lectures per month, his pupils might “learn more.” So he decided to give a course of lectures for 20 hours a month. Would there now be an equilibrium in which the Kandos all took his course and none of the Klutzes took it and where those who took the course were paid according to their true productivity?

(e) What is the smallest number of hours the professor could lecture and still maintain a separating equilibrium?