Consider a simple model of screening with education, where firms offer menus of contracts contingent on education levels. There are two types of students: high ability (H), with productivity 4, and low ability (L), with productivity 1. Assume q is the proportion of L students in the population. Acquiring education y is costly and the cost functions are c(y) =y for the L students, and cv) = y/2 for the H students. (a) Discuss in detail, present diagrammatically and demonstrate that there cannot exist a pooling equilibrium. (b) Using an appropriate diagram, consider the possibility of a separating equilibrium and derive the conditions for its existence.

Consider a simple model of screening with education, where firms offer menus of contracts contingent on education levels. There are two types of students: high ability (H), with productivity 4, and low ability (L), with productivity 1. Assume q is the proportion of L students in the population. Acquiring education y is costly and the cost functions are c(y) =y for the L students, and cv) = y/2 for the H students. (a) Discuss in detail, present diagrammatically and demonstrate that there cannot exist a pooling equilibrium. (b) Using an appropriate diagram, consider the possibility of a separating equilibrium and derive the conditions for its existence.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.6P

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