Question

10. Suppose that a firm finds that its low-productivity workers have a marginal revenue product of $21,000 per year and that its high-productivity workers have a marginal revenue prod- uct of $35,000 per year. The cost of receiving a year’s worth of higher education is $4,000 for a low-productivity worker and $3,200 for a high-productivity worker. (This cost can be thought of as repayment on loans that have been incurred in the process of obtaining the education.) The firm plans to offer a wage of $21,000 to workers without higher education and $35,000 to workers who attain a “certain” level of higher education.

    1. If this firm uses this pair of wage offers and wishes to create a separating equilibrium using education as a separating device, how many years of education should be re- quired to receive the higher wage?

    2. Why does education work as a signal in this instance?

    3. Does education increase the marginal productivity of workers in this instance?

Answer 1

Solution:

The hilter kilter data emerges due to absence of data. At that point, if any gadget can transfer the data about the nature of the item, it can assist with forestalling deviated data. "Signal" is such a gadget which transfers some data about the nature of the products and enterprises in exchange. Signal was presented by Michael pence. As indicated by him a sign, for example, guarantee in utilized vehicle market or training in work market would possibly be successful on the off chance that it is costlier for the merchants of low quality great.

a. Let u is the measure of year expected to get the high paid activity. The expense of going to u long periods of occupation for high profitable specialist is 3200u. At that point it will be worth for the high efficiency specialist to secure u long periods of instruction if 3200u-35000 or on the other hand. u=10.94=11

Then again, the expense of going to u long stretches of employment for low beneficial specialist is 4000u. At that point it will be worth for the low profitability laborer to procure u long stretches of training if 4000u=35000 or on the other hand, u=8.75=9

Along these lines, if the businesses need to make a separate harmony it ought to pick u such a way that 9<u<11

That is, the lucrative activity would be advertised to those going to 1 0 years of higher instruction. Right now, would be exorbitant for low beneficial specialist to achieve this degree of instruction with their expense of training $40000 surpassing $35000. The main individuals who go after the position will be high profitable laborers.

b. The training goes about as a sign in the activity showcase. By and large it is accepted that the higher profitability laborer will get a higher training. The rationale behind this idea is that the high profitable individual will geta degree in moderately less time and exertion than a low profitable individual. Thus, advanced education is expensive for low profitable laborer. Along these lines advanced education isolates the high profitable laborer from their low profitable partner. Right now, would be exorbitant for low profitable laborer to achieve this degree of instruction with their expense of training $40000 surpassing $35000. The main individuals who go after the position will be high gainful laborers. Thusly long periods of instruction works as a sign to isolate the laborers.

c. Education works as a signal or separatingdevice for the potential employers. It does increase person's skill but not always increases the productivity of a person. A highproductive individual will get the higher education because it is relatively easier andcheaper for them.Therefore, the worker not get a high salarybecause of education make them highproductive, but because of education theemployer is able to separate him from thecrowd as a high productive worker and each factor must be paid according to their marginal product.