Imagine that there are two types of individuals: high and low. High types make up 25%...

 

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Imagine that there are two types of individuals: high and low. High types make up 25% of the society. High type individuals produce an output that is worth 15,000 TL for prospective employers. Low type individuals produce an output that is worth 5,000 TL for prospective employers. Education does not improve the productivity of either player, but has a different cost for high and low types. Each year of education costs high types 1000 TL and low types 2000 TL. Employers cannot observe whether an individual is high or low type before the employment contract is signed. a) How many years of education will high types buy to signal that they are high types? (2) b) How many years of education will low types buy when there is a seperating equilibrium? (2) c) Assume now that employers can observe the ability of each type before the contract is signed. How many years of education will each type get? Is the new equilibrium a social improvement compared to the case where employers cannot directly observe the types of individuals? (2) d) Imagine now that employers do not believe in the signalling value of education. How many years of education will each type get? What type of equilibrium will we have and what will each individual type earn? (2) Imagine that there are two types of individuals: high and low. High types make up 25% of the society. High type individuals produce an output that is worth 15,000 TL for prospective employers. Low type individuals produce an output that is worth 5,000 TL for prospective employers. Education does not improve the productivity of either player, but has a different cost for high and low types. Each year of education costs high types 1000 TL and low types 2000 TL. Employers cannot observe whether an individual is high or low type before the employment contract is signed. a) How many years of education will high types buy to signal that they are high types? (2) b) How many years of education will low types buy when there is a seperating equilibrium? (2) c) Assume now that employers can observe the ability of each type before the contract is signed. How many years of education will each type get? Is the new equilibrium a social improvement compared to the case where employers cannot directly observe the types of individuals? (2) d) Imagine now that employers do not believe in the signalling value of education. How many years of education will each type get? What type of equilibrium will we have and what will each individual type earn? (2)

Answer rating: 100% (QA)

a From the perspective of a high type the benefits of an extra year of education are 15000 1000 5000 ... View the full answer