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Each entry-level software programmer in Palo Alto, California, has either high or low ability. All potential employers value a high-ability worker at $12,000 per month and a low-ability worker at $6,000. The supply of high ability workers is QH = 0.1(W - 7,000) and the supply of low- ability workers is QL= 0.1(W - 2,000), where W is the monthly wage.
a) If workers' abilities are observable to employers, how many workers of each type will employers hire?
b) If workers' abilities are not observed by employers, how many workers of each type will employers hire?
c) What is the deadweight loss due to asymmetric information?
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