A high quality worker, G1, and a low quality worker, G2, apply for a 4-year position at a consulting firm. Both ponder going to college for 4 years to signal high quality. G1 incurs no cost other than tuition of $50,000 per year. G2 incurs additional (mental) cost of $20,000 per year. The consulting firm wants to hire a high quality worker.
(a) Assume the time students go to college is set at 4 years and cannot be changed. If the firm offers quality-separating wages what premium should the firm offer to college graduates? What are the lower and upper thresholds?
(b) Now assume the time students go to college is not predetermined. The firm that wants to hire a high quality worker now sets a salary premium of $30,000 instead. What is the quality-separating college time?