A population has the following characteristics:
Group Marginal Product Cost of Education Proportion of population
1 1 y 3/4
2 2 y/3 1/4
(a) Formally describe the employer''s beliefs in probabilistic terms and the wage schedule that would be offered based on these beliefs.
(b) What are the optimal educational choices for high ability (MP=2) and low ability (MP=1) workers?
(c) Are observed wages correlated with education? Is this a self---fulfilling equilibrium? Find the range of Y over which an employer’s beliefs would be self---confirming.
(d) Is it possible that all workers are worse off under a signaling equilibrium? Explain. Compare the net income of a high ability worker in a labor market with and without signaling.
(e) Can the model of job market signaling be used to explain income differences between women and men in the labor market? Explain.