Would such a prohibition be a Pareto improvement?

Consider the possibility that employers take the degree to be a reliable signal that a Show more Question #3. 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 $w if they do not. Let high-ability workers be twice as productive as low-ability workers with wh=40000 and w=20000. Let c=15000. Let h=3000 and =10000. Given all these assumptions who will choose to get the degree? Will it be an equilibrium for firms to pay wh to workers with the degree and w to workers without the degree? Explain. Remember: equilibrium means no tendency for change. To show that something is an equilibrium in this model you must show that no one would want to change their behavior. Will low-ability workers want to change their decision about whether or not to get the degree? Will high-ability workers want to change their decision? Will employers want to change their decision about paying $wh to workers with the degree and $w to workers without the degree? Let c be exogenous. In other words do not worry about whether the school would want to change the level of tuition that it charges. Question 4. Return to the situation in Q3: Employers consider education to be a reliable signal about whether or not a worker is of high-ability and the school is exogenous (i.e. the school is not part of society). Answer the following questions under the assumptions in Q3: From a high-ability workers point of view does it make sense to earn the degree? From societys point of view does it make sense for high-ability workers to earn the degree? From societys point of view would efficiency be enhanced by a government prohibition on paying higher wages to people who earned the degree? Would such a prohibition be a Pareto improvement? Explain. Show less

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