Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q^s_H = 0.04(W - 1,500)and the supply of low-quality workers is Q^s_L = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,what is the deadweight loss due to asymmetric information? A) $750,000 B) $1,500,000 C) $1,125,000 D) $500,000

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Quizplus · Accepted Answer

The deadweight loss due to asymmetric information is the difference between the efficient wage and the equilibrium wage. The efficient wage is the wage that maximizes the total surplus in the market, which is the sum of consumer surplus and producer surplus. The equilibrium wage is the wage that equates the quantity of labor supplied to the quantity of labor demanded.In this case, the efficient wage is $15,000 per month, which is the value of a high-quality worker to employers. The equilibrium wage is $12,000 per month, which is the wage that equates the quantity of labor supplied to the quantity of labor demanded. The deadweight loss due to asymmetric information is therefore $3,000 per month, or $36,000 per year.

Suppose All Workers in a Certain Labor Market Are of Either