Suppose there are two types of basketball players—black and white. Suppose also that, on average, black players are no better and no worse than white players. Furthermore, suppose there are only two types of basketball teams—good and bad. Good teams hire only good players; bad teams will hire both good and bad players. The two diagrams that follow show the initial outcomes in the labour markets for good teams and bad teams. Assume there is no discrimination based on race.

(i) Good teams

(ii) Bad teams
a. As shown in the figures, the wage paid by good teams is higher than the wage paid by bad teams. What explains this wage differential?
b. Do black players earn more or less than white players, on average? Explain.
c. Now suppose the good teams discriminate against white players—rightly or wrongly they believe that black players are better than white players. Show in your diagram what happens in both labour markets.
d. In the situation in part (c), what happens to the wage differential between good and bad teams?
e. In the situation in part (c), what happens to the average black-white wage differential?