-Consider the Spence Education Game depicted in Figure 16.4. In the figure, all payoffs are in thousands of dollars per month. Suppose there is a 30 percent of workers are low- productivity (LP) workers and 70 percent are high-productivity (HP) workers. Using pre- employment testing, the firm decides to adopt a separating strategy by assuming that only high-productivity workers go to college and that workers who have only graduated high school are low-productivity types. What is the firm's conditional expected payoff from hiring a college graduate?
A) $4,000
B) $3,500
C) $4,450
D) $5,760
E) $6,000

Question

-Consider the Spence Education Game depicted in Figure 16.4. In the figure, all payoffs are in thousands of dollars per month. Suppose there is a 30 percent of workers are low- productivity (LP) workers and 70 percent are high-productivity (HP) workers. Using pre- employment testing, the firm decides to adopt a separating strategy by assuming that only high-productivity workers go to college and that workers who have only graduated high school are low-productivity types. What is the firm's conditional expected payoff from hiring a college graduate?
A) $4,000 
B) $3,500 
C) $4,450 
D) $5,760 
E) $6,000

Quizplus · Accepted Answer

The firm's conditional expected payoff from hiring a college graduate is based on the assumption that only high-productivity workers go to college. Since 70% of workers are high-productivity and they are the only ones going to college, the firm expects to hire only high-productivity workers as college graduates. Therefore, the payoff is the high-productivity worker's payoff, which is $6,000.

-Consider the Spence Education Game Depicted in Figure 16