Question 2. Consider a simple economy with two types of workers.There are capable workers (type A), constituting 70% of thepopulation, with remaining workers (type B) being of averageability. There are two types of job opportunities as well, labeledGood and Bad. In a Bad job, either type of worker produces 20 unitsof output. In a Good job, Type A worker produces 80 units, and theType B worker produces 0. The economy is doing well so there isenough demand for workers. This means that for each type of jobcompanies must pay what they expect the employee to produce.Companies must hire each worker without observing his type and payhim before knowing his actual output. But Type A workers can signaltheir qualification by getting educated. For a Type A worker, thecost of getting educated to level n is 0.4n2, whereas for a Type Bworker, it is n2. These costs are measured in the same units asoutput, and n must be an integer.
(a) What is the minimum level of n that will achieveseparation?
(b) Now suppose the signal is made unavailable. Which kind ofjobs will be filled by which kinds of workers and at what wages?Who will gain and who will lose from this change?
