Education is a continuous variable, where e_h is the years of schooling of a high-ability worker and e_l is the years of schooling of a low-ability worker. The cost per period of education for these types of workers is c_h and c_p, respectively, where c_l > c_h. The wages they receive if employers can tell them apart are w_h and w_l. Under what conditions is a separating equilibrium possible? How much education will each type of worker get? (Hint: See Solved Problem 18.4.)

Solved Problem 18.4 - Example Only

Ifc = $15,000, wk = $40,000, and w, = $20,000, for what values of 0 is a pooling equilibrium possible? Answer 1. Determine the values of 6 for which it pays for a high-ability person to go to school. From Equation 18.4, we know that a high-ability individual does not go to school if wk E 1 . (18.5) we ' \"'1 If almost everyone has high ability, so 9 is large, a high-ability person does not go to school. The intuition is that, as the share of high-ability workers, 6, gets large (close to 1), the average wage approaches wb (Equation 13.2), so the benefit, wb - E, of going to school is small. . Solve for the possible values of B for the specic parameters. If we substitute C = $15,000, wk = $40,000, and w, = $20,000 into Equation 18.5, we find that high-ability people do not go to schoolthat is, a pooling equilibrium is possiblewhen B > 3