-Consider the Spence Education Game depicted in Figure 16.3. In the figure, all payoffs are in thousands of dollars per month. Suppose that 70 percent of all workers are low- productivity (LP) workers and 30 percent are high-productivity (HP) workers. Using pre- employment testing, the firm has determined that there is a 60 percent probability of hiring a high-school (HS) graduate who is also a high-productivity worker and a 75 percent probability of hiring a college (C) graduate who is a high-productivity worker. What is the optimal hiring strategy of a risk-neutral firm?
A) Hire only college graduates.
B) Hire college graduates 75 percent of the time.
C) Hire only high-school graduates.
D) Hire high-school graduates 60 percent of the time.
E) Hire high-school and college graduates 50 percent.

Question

-Consider the Spence Education Game depicted in Figure 16.3. In the figure, all payoffs are in thousands of dollars per month. Suppose that 70 percent of all workers are low- productivity (LP) workers and 30 percent are high-productivity (HP) workers. Using pre- employment testing, the firm has determined that there is a 60 percent probability of hiring a high-school (HS) graduate who is also a high-productivity worker and a 75 percent probability of hiring a college (C) graduate who is a high-productivity worker. What is the optimal hiring strategy of a risk-neutral firm?
A) Hire only college graduates. 
B) Hire college graduates 75 percent of the time. 
C) Hire only high-school graduates. 
D) Hire high-school graduates 60 percent of the time. 
E) Hire high-school and college graduates 50 percent.

Quizplus · Accepted Answer

The optimal hiring strategy for a risk-neutral firm would be to hire only college graduates, given the higher probability (75%) of hiring a high-productivity worker compared to hiring high-school graduates (60%). This strategy maximizes the expected productivity and, consequently, the expected payoff for the firm.

-Consider the Spence Education Game Depicted in Figure 16