(A) When there exists a continuous distribution of heterogeneous of workers with different unobserved productivity:
1. A menu of contracts will be offered and only the most productive will be hired
2. A menu of contracts will be offered and only the most productive will be hired if there are enough high types
3. One contract will be offered and those who are indifferent or better off accepting the contract will do so
4. The incentive pay of the wage b will be equal to the price of the good or service sold p.
(B)Which of the following statement is correct?
1. When workers have unobservable heterogeneous skill levels and firms offer optimal separating wage contracts, the low skilled workers earn an information rent.
2. When workers have unobservable heterogeneous skill levels and firms offer optimal separating wage contracts, the high skilled workers participation constraint is binding.
3. When workers have unobservable heterogeneous skill levels and firms offer optimal separating wage contracts, the low skilled workers produce less and just satisfying their participation constraint while the high productivity workers will achieve a higher than reservation utility.
4. Measures that are negatively correlated with a worker's output should never be included in a wage contract.