The value of a worker's marginal product is $40 per hour for high-ability workers and $5 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 5E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 8E.By law,everyone is required to attend at least ten years of school.Three-fourths of the population has low ability,and one-fourth has high ability.What can be said about the educational attainment of each type of worker in a separating equilibrium? A) E_L = 10; 10

Question

The value of a worker's marginal product is $40 per hour for high-ability workers and $5 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U_H(E,W)= W - 5E,and the preferences of low-ability workers correspond to the utility function U_L(E,W)= W - 8E.By law,everyone is required to attend at least ten years of school.Three-fourths of the population has low ability,and one-fourth has high ability.What can be said about the educational attainment of each type of worker in a separating equilibrium? A) E_L = 10; 10 < E_H < 14.375 B) E_L = 10; E_H < 17 C) E_L = 10; E_H > 14.375 D) E_L = 10; 14.375 < E_H < 17

Quizplus · Accepted Answer

In a separating equilibrium, low-ability workers will choose the minimum required education because any additional education increases their disutility without significantly increasing their wages due to their low marginal product. High-ability workers, on the other hand, will choose more than the minimum education to signal their high ability and earn a higher wage, but there's a limit to how much education they will pursue due to the increasing disutility from additional education. The specific range for high-ability workers' education (14.375 < E_H < 17) is determined by their utility function and the marginal product of their labor.

The Value of a Worker's Marginal Product Is $40 Per