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.Would it be Pareto efficient for the government to ban schooling beyond 10 years rather than allow a separating equilibrium? A) Yes, because both U_L and U_H would rise. B) Yes, because although U_H would fall, U_L would rise. C) No, because although U_L would rise, U_H would fall. D) No, because both U_L and U_H would fall.

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Quizplus · Accepted Answer

Banning schooling beyond 10 years would hurt high-ability workers who have a high marginal product of $40 per hour and whose utility function depends on the level of education they have. Therefore, U_H would fall. On the other hand, low-ability workers with a marginal product of $5 per hour would experience an increase in their utility function as they are not affected by the education ban. Hence, U_L would rise. Therefore, it is not Pareto efficient to ban schooling beyond 10 years as it would harm a group of individuals without benefiting another.

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