Assignment:
Signaling model
1) What is the role of the signal? What information problem does it help overcome?
2) Understand the definition of equilibrium and be able to show that a given wage function, firms' beliefs, and workers' decisions constitute an equilibrium. That is, show that firms are paying the expected marginal product of each worker (conditional on the signal received) and that each worker is making the schooling choice that maximizing their earnings net of schooling costs. Know the difference between separating and pooling equilibriums.
3) What critical assumption is necessary for there to exist a separating equilibrium between different types of workers?
4) Does having the ability to signal make some or all workers better off?