There are three types of workers, Good, Mediocre, and Bad. Good types have productivity qG = 500;
Question:
There are three types of workers, Good, Mediocre, and Bad. Good types have productivity qG = 500; Mediocre types have productivity qM = 300; and Bad types have productivity qB = 100. Each worker knows his or her own type, but employers in the market cannot directly observe workers’ types. The labor market is competitive, so a worker’s wage would be equal to his or her expected productivity. The distribution of worker types is 20% Good, 50% Mediocre, and 30% Bad. Workers can take a public test and present their test scores at job interviews. They can choose to get whatever score they desire by study enough hours. The relationship between test scores and study time is S = Tq, where T is the amount of study time measured in weeks of study, S is the score obtained (measured on a scale of 0 to 1000), and q = qG, qM, qB is the productivity of the worker taking the test. The cost of each week of study time to a worker is 100. The test score S is publicly observable but the amount of time T one spends preparing for the test is not.
(a) In a separating equilibrium, what is the wage, the test score, and the time devoted to studying for the test for each type of worker?
(b) Suppose the relationship between test score and study time is S = 200T for all types of workers, regardless of whether q is equal to qG, qM, or qB. What will be the equilibrium wage, the test score, and the time devoted to studying for the test for each type of worker?
Financial Accounting A User Perspective
ISBN: 978-0470676608
6th Canadian Edition
Authors: Robert E Hoskin, Maureen R Fizzell, Donald C Cherry