Question

A large steel producer has two types of job offers: ED (Engineer Development) and EM (Engineer Mechanical). Both jobs require an Engineer degree. The ED job requires high analytical skills and computer software development to work in the steel plant. The market entry wage is $130,000. The EM job is less demanding and requires no software development knowledge. Market entry wage is $68,000 for an EM. The firm’s hiring policy is: Individuals successfully taking and passing Z computer courses during college will be regarded as ED and paid $138,000; otherwise, he or she will be regarded as EM type and paid $76,000. ED’s opportunity cost to complete a tough course is $3,650, and EM’s opportunity cost to complete a tough course is $10,200. (1) Develop the incentive-compatibility condition for both types of workers. (2) The Z values meeting the separating equilibrium are: (3) If Z= __________. choose value), ED’s income = $_________, and EM’s income =$__________ At this value of Z, can the firm differentiate between ED and EM? Explain. What would you recommend to the firm in order to reach a separating equilibrium?

Answer 1