Q1. Consider the signaling model of educational choice. Assume that a low ability majority individual has the same productivity as a low ability minority (both have marginal productivity of 5) and a high ability majority individual has the same productivity as a high ability minority (both have marginal productivity of 10). Half of all majority workers and half of all minority workers are high ability. The firms do not observe workers’ ability levels.

Firms assume that majority individuals with bachelor’s degree must be high ability workers. However, because minority households have less wealth on average than majority 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 majority 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 reliably revealed by their educational choices. If the ability is not known, the worker is paid her expected marginal product.

What wages will firms pay to majority workers with a bachelor’s degree? Submit the answer rounded to the nearest integer.

Q2. Use exactly the same scenario as for Q1.

What wages will firms pay to majority workers without a bachelor’s degree? Submit the answer rounded to the nearest integer.

Q3. Based on your answers to Q1 and Q2, in the table below fill out the net benefit of each educational choice for majority workers, and then predict the education attainment of the majority workers.

Q4. Use exactly the same scenario as for Q1. What wages will firms pay to minority workers with a bachelor’s degree? Round your answer to the first decimal place (e.g. 9.9).

Q5. Use exactly the same scenario as for Q1. What wages will firms pay to minority workers without bachelor’s degree? Round your answer to the first decimal place (e.g. 9.9).

Q6. Based on your answers to Q4 and Q5, in the table below fill out the net benefit of each educational choice for minority workers, and then predict the education attainment of the minority workers.

Sep 22, 2019

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