Consider the signaling model explanation of wage determination. Assume that a low ability
white individual is equally productive as a low ability minority (both have marginal productivity of 5) and a high ability white individual is equally productive as a high ability minority (both have marginal productivity of 10). Half of all whites and half of all minorities are high ability. The firms do not observe workers’ ability levels.
Firms assume that white individuals with bachelor’s degree must be high ability workers. However, because minority households have less wealth on average than white households, firms do not assume that minority workers with less than bachelor’s degree are low ability (as it may instead simply reflect the greater cost of education for those from families with fewer resources). As a result, firms pay different wages to white workers based on their education, but treat all minorities the same regardless of their education.
Assume that the cost of getting bachelor’s degree is 3 for high ability worker and 6 for low ability workers.
Assume that the firms pay workers their marginal product when worker’s ability is known. If the ability is not known, the worker is paid her expected marginal product.
1. What wages will firms pay to white workers with and without bachelor’s degree?
2. Will high ability white workers obtain a bachelor’s degree? Will low ability white workers obtain a bachelor’s degree? Show your calculations to earn points.
3. What wages will firms pay to minority workers with and without bachelor’s degree?
4. Will high ability minority workers obtain a bachelor’s degree? Will low ability minority workers obtain a bachelor’s degree? Show your calculations to earn points.