Why it is an equilibrium under these assumptions

Assignment Help Business Economics

Reference no: EM131162898

Question 1:

Now, consider a case with the following assumptions:

θ = 0.05 (i.e. 5% rather than 50%).

Let the other values be the same as in the previous questions:

wh=40,000, wl=20,000, c=15,000, σh=3,000, and σl=10,000.

Explain why it is an equilibrium under these assumptions for:

• the high-ability workers to earn the degree and be paid $40,000, and

• the low-ability workers to not earn the degree and be paid $20,000

In other words, explain why:

• High-ability workers will want to earn the degree; Low-ability workers will not want to earn the degree; Employers will want to pay higher wages to people who earn the degree – they will want to pay $40,000 to workers who hold the degree and $20,000 to people who do not.

Question 2:

Finally, make all the same assumptions as in the previous question, but assume that the government prohibits the practice of paying higher wages to people who earn the degree. If all workers need to be paid the same wage, what wage will be paid? Would this government policy enhance the efficiency of the economy? Would it constitute a Pareto improvement? Explain.

Reference no: EM131162898

Questions Cloud

Utility function consistent with preference for milk-cookies : Duffy derives utility from only two goods: milk and cookies. He only consumes milk and cookies in fixed proportions: he likes to have 4 cookies with each glass of milk. Determine and graph Duffy’s budget constraint (put milk on the horizontal axis). ..

How much extra would you be willing to pay for hybrid model : The hybrid model of a car averages 40 mpg as compared to the regular model that gives only 28 mpg. If you drive 20,000 miles per year and the average cost of gas is expected to be $5.00 per gallon over the 5 years that you plan to keep the car, how m..

The linear long-run demand and supply equations : Suppose that the long-run world demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels per year. Derive the linear..

Cocoa has utility function given by the expression : Cocoa consumes two goods, X and Y. Cocoa has a utility function given by the expression: Plot an indifference curve representing Cocoa’s preferences. Label 3 points. Derive demand functions for X and Y, using Px as the price of X, Py as the price of ..

Why it is an equilibrium under these assumptions : Explain why it is an equilibrium under these assumptions for: the high-ability workers to earn the degree and be paid $40,000, and the low-ability workers to not earn the degree and be paid $20,000.

Earning the degree no longer entails psychic costs : Suppose the standards of the school are lowered so that earning the degree no longer entails psychic costs for anyone. The cost of earning the degree is now purely monetary ($c) and the same for both high-ability and low-ability workers. Under the as..

Make sense for high-ability workers to earn the degree : Consider the possibility that employers take the degree to be a reliable signal that a worker is a high-ability worker. Given this belief, employers pay workers $wh if they have the degree and $wl if they do not. rom a high-ability worker’s point of ..

Identify the model that contains each of derived attributes : Identify the model(s) that contains each of the Aggregation association, Class, Derived attributes, Extends association, Execution occurrence and Guard condition.

Write a paragraph news brief on the current state of uml : Write a paragraph news brief on the current state of UML (the current version and when it will be released, future improvements, etc.).

User Account

All Pages