The value of a worker's marginal product is $50 per hour for high-ability workers and $15 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 4E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 10E.By law,everyone is required to attend at least ten years of school.Three-fifths of the population has low ability,and two-fifths has high ability.What can be said about the educational attainment of each type of worker in a separating equilibrium? A) E_L = 10; 13.5

Question

The value of a worker's marginal product is $50 per hour for high-ability workers and $15 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 4E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 10E.By law,everyone is required to attend at least ten years of school.Three-fifths of the population has low ability,and two-fifths has high ability.What can be said about the educational attainment of each type of worker in a separating equilibrium? A) E_L = 10; 13.5 < E_H < 18.75 B) E_L = 10; E_H = 16.125 C) E_L = 10; E_H = 10 D) E_L = 13.5; E_H < 18.75

Quizplus · Accepted Answer

In a separating equilibrium, high-ability workers will choose education levels that low-ability workers find too costly. For low-ability workers, the utility is maximized at E = 10. High-ability workers will choose E such that their utility is higher than what they would get if they were perceived as low-ability. Solving for E in the inequality 50 - 4E > 15 - 10E gives 13.5 < E < 18.75.

The Value of a Worker's Marginal Product Is $50 Per