Consider a hypothetical economy in which each worker has to decide whether to acquire education and...

 

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Consider a hypothetical economy in which each worker has to decide whether to acquire education and become a high-skilled worker or remain low-skilled. Let IH and IL denote the incomes earned by a high- and low-skilled worker respectively. These incomes are defined as IH = (1 + f)H and as IL = (1 + f)L , where H and Lare constants (H > L) and 0s f sl is the fraction of the population that decides to become high skilled. The gain from education and acquiring skill is thus (IH - IL). However, 3 education and acquiring skill carries a positive cost of C (a constant). Assume that all individuals simultaneously choose whether to become skilled or not. a) Does there exist any complementarity in acquiring skill? Describe it. b) Suppose that H -L<C< 2(H - L). Draw on the same graph the gain from acquiring skill versus f and cost of acquiring skill versus f. Is the situation in which only a fraction of the population becomes high- skilled equilibrium? Give an algebraic expression for this fraction. In case it is an equilibrium, is it stable or unstable? Find the other equilibrium values of f and determine which one is stable. Consider a hypothetical economy in which each worker has to decide whether to acquire education and become a high-skilled worker or remain low-skilled. Let IH and IL denote the incomes earned by a high- and low-skilled worker respectively. These incomes are defined as IH = (1 + f)H and as IL = (1 + f)L , where H and Lare constants (H > L) and 0s f sl is the fraction of the population that decides to become high skilled. The gain from education and acquiring skill is thus (IH - IL). However, 3 education and acquiring skill carries a positive cost of C (a constant). Assume that all individuals simultaneously choose whether to become skilled or not. a) Does there exist any complementarity in acquiring skill? Describe it. b) Suppose that H -L<C< 2(H - L). Draw on the same graph the gain from acquiring skill versus f and cost of acquiring skill versus f. Is the situation in which only a fraction of the population becomes high- skilled equilibrium? Give an algebraic expression for this fraction. In case it is an equilibrium, is it stable or unstable? Find the other equilibrium values of f and determine which one is stable.

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a The formulation conveys the following concept a persons productivity is positively correlated with both his own and his coworkers skills But theres more observe that IH IL 1 H L implying that the ga... View the full answer