Labor Economics 5th Edition by George Borjas

Exercise 11

Suppose 100 men and 100 women graduate from high school. After high school, each can work in a low-skill job and earn $200,000 over his or her lifetime, or each can pay $50,000 and go to college. College graduates are given a test. If someone passes the test, he or she is hired for a high-skill job paying lifetime earnings of $300,000. Any college graduate who fails the test, however, is relegated to a low-skill job. Academic performance in high school gives each person some idea of how he or she will do on the test if they go to college. In particular, each person's GPA, call it x , is an "ability score" ranging from 0.01 to 1.00. With probability x , the person will pass the test if he or she attends college. Upon graduating high school, there is one man with x =.01, one with x =.02, and so on up to x = 1.00. Likewise, there is one woman with x =.01, one with x =.02, and so on up to x = 1.00.
(a) Persons attend college only if the expected lifetime payoff from attending college is higher than that of not attending college. Which men and which women will attend college What is the expected pass rate of men who take the test What is the expected pass rate of women who take the test
(b) Suppose policymakers feel not enough women are attending college, so they take actions that reduce the cost of college for women to $10,000. Which women will now attend college What is the expected pass rate of women who take the test