Discussion:
If a pool of workers, 60% are Low-productivity workers with an estimated present value of lifetime output equal to $180,000. The rest (40%) are High-productivity workers with an estimated present value of lifetime output equal to $290,000.
a) Given the asymmetric information situation a prospective employer faces in hiring from this labor pool, what is the average salary that they would pay without a signal?
b) If employers estimate that the marginal cost of schooling is $32,000 for Low-productivity workers and $22,000 for High-productivity workers, then what is the range of threshold-years of schooling that employers can use to decide whether or not to pay a worker the higher salary (equal to their estimated lifetime output).
c) Does the range of threshold-years change if the marginal cost of schooling is estimated to be equal between the worker types? What happens to the threshold if the marginal cost of schooling is $25,000 for both types?
d) Does the range of threshold-years change if there are an equal number of workers of each type in the pool? Why or why not?