Question

Problem III: There are two people who apply for a job. One is highly skilled, the other one is not. Their productivities (profits that they bring to the employer) are $1000 and $300, respectively. Their reservation wages are $500 and $100, respectively

. a) Assume the employer can distinguish who is highly skilled and who is not. Who will get hired and at what wage? Assume he can hire both or just one of them depending on which is more profitable. What will be the profit for the employer?

b) Assume the employer cannot distinguish between workers, but the workers know who they are. What is the wage that he would offer, who will get hired and what will be the profit for the firm in this case?

c) Propose a signaling contract (it doesn’t need to be optimal) based on education that could improve the outcome. Assume the costs for one year of education are $10 and $50, respectively for the high skill and low skill worker. You need to find wages for the two types, and a level of education that results in a separating equilibrium and that both workers will accept.

Answer 1

Answer:

If employer can distinguish between the two Skilled and unskilled worker the he would hier the both as both profitable to the emmployer . One skilled is being paid 500 But Bringing profit twice and unskilled getting paid 100 and bringing profit 3 times more . I.e 300

The profit on both hiring will be in case skilled labour 500 and in unskilled labour 200

Answer:

In such case the unskilled will get hire at 100 and profit will be 300-100=200

Answer:

Skilled =500-10=490 for level of education the wages be

Unskilled -100-50=50

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