In the signaling model,assume high school graduates are paid a stream of income whose present value is $200,000.College graduates are paid a stream of income whose present value is X.College education costs higher-productivity workers $50,000 and lower-productivity workers $150,000.What value of X will cause higher-productivity workers to go to college and lower-productivity workers to not go to college?

Question

Quizplus · Accepted Answer

In the signaling model, high-productivity workers have a lower cost of education ($50,000) than low-productivity workers ($150,000). This means that high-productivity workers will choose to go to college if the present value of the stream of income from being a college graduate (X) is greater than $50,000 + $200,000 = $250,000.

On the other hand, low-productivity workers will choose not to go to college if the present value of the stream of income from being a college graduate (X) is less than $150,000 + $200,000 = $350,000.

Therefore, the value of X that will cause higher-productivity workers to go to college and lower-productivity workers to not go to college must be between $250,000 and $350,000.

The only choice that falls within this range is D) $275,000. Thus, D) is the best choice.

In the Signaling Model,assume High School Graduates Are Paid a Stream