Question

1. Suppose 40 percent of all potential workers are highly skilled and contribute $50,000 to the firm each year. The remaining 60 percent of potential workers are less skilled and contribute only $30,000 to the firm each year. Schooling costs a highly skilled worker y per year, while it costs a less-skilled worker 2y per year. In a competitive market, what wages would be paid to the high skilled workers if employers COULD distinguish between the types?
Select one:
a. $38,000
b. $50,000
c. $40,000
d. $30,000
e. $42,000

2. Suppose 40 percent of all potential workers are highly skilled and contribute $50,000 to the firm each year. The remaining 60 percent of potential workers are less skilled and contribute only $30,000 to the firm each year. Schooling costs a highly skilled worker y per year, while it costs a less-skilled worker 2y per year. In a competitive market, what wages would be paid to the low skilled workers if employers COULD distinguish between the types?
Select one:
a. $20,000
b. $50,000
c. $30,000
d. $38,000
e. $40,000

Answer 1

1. Suppose 40% high skilled (H) workers contribute $50,000 and 60% less skilled (L) workers contribute $30,000 to the firm each year.
Assume skill of worker is not a signaling device. Then the firm would be willing to pay a worker equal to,
pay to worker = (40% x $50,000) + (60% x $30,000) = $20,000 +$18,000 = $38,000
Hence, the firm willing to pay a worker chosen at random $38,000

.ANSWER : $38,000 . OPTION  A

2.Ph = $50,000 and PL = $30,000 i.e. producitivity of low and high skilled workers

If low productive workers do not invest in education, then the cost of education for low skilled workers will be greater than high skilled workers i.e. CH < CL and CL > PH-PL i.e. CL > 50,000-30000 = $20,000

then CH < (PH - PL) < CL

CH = y and CL = 2y

Case of high skilled workers: CH < (PH - PL)

y < 20,000

Case of low skilled workers : CL > (PH - PL)

2y > 20,000
Or, y > 10,000

ANSWER :  Option D