The cost,c,of a college education that serves only as a signal of a high-quality worker is $10,000.The wage of a known high-quality worker,w_h,is $30,000.The wage for a known low-quality worker,w_l,is $10,000.For what value of the share of the work force that is of high quality,s,is a pooling equilibrium possible? A) s 0.5 B) s = 0 C) s = 0.25 D) s

Question

The cost,c,of a college education that serves only as a signal of a high-quality worker is $10,000.The wage of a known high-quality worker,w_h,is $30,000.The wage for a known low-quality worker,w_l,is $10,000.For what value of the share of the work force that is of high quality,s,is a pooling equilibrium possible? A) s > 0.5 B) s = 0 C) s = 0.25 D) s < 0.45

Quizplus · Accepted Answer

A pooling equilibrium is possible when the expected wage of hiring a worker without knowing their quality is equal to the cost of education. The expected wage is calculated as s * w_h + (1-s) * w_l. Setting this equal to the cost of education, $10,000, and solving for s gives s > 0.5.

The Cost,c,of a College Education That Serves Only as a Signal