Figure 21.2 shows the benefit functions for low-ability workers and high-ability workers (A and B),along with one indifference curve for each worker type (C and D).The employer cannot observe worker type directly but has created two positions,E and F,as a screening mechanism.The equilibrium shown here is:
A) a separating equilibrium.
B) a pooling equilibrium.
C) a market unraveling equilibrium.
D) an example of adverse selection.

Question

Figure 21.2 shows the benefit functions for low-ability workers and high-ability workers (A and B),along with one indifference curve for each worker type (C and D).The employer cannot observe worker type directly but has created two positions,E and F,as a screening mechanism.The equilibrium shown here is: 
A) a separating equilibrium. 
B) a pooling equilibrium. 
C) a market unraveling equilibrium. 
D) an example of adverse selection.

Quizplus · Accepted Answer

This is a separating equilibrium because the two worker types are separated into different positions (E and F) based on their ability levels. The employer is using the screening mechanism to identify and hire high-ability workers for position F, while low-ability workers are hired for position E. This separation is efficient because it allows the employer to maximize the benefits from each worker type.

Figure 212 Shows the Benefit Functions for Low-Ability Workers and High-Ability