1. Assume there are two types of workers in the economy, high productivity workers and

low productivity workers. The following table describes their various productivity lev-

els, proportions, and costs of schooling. Assume that the two types of workers are

indistinguishable and that schooling is not productive.

Group Marginal Product Population Proportion Cost of y years of schooling

A 1 q y

B 2 1-q y

2

(a) Suppose employers believe that there is some level of education y such that:

if y < y then productivity = 1

if y y then productivity = 2

Is there a y such that rm beliefs are self-fullling? Write out all the steps.

(b) Would low-productivity workers prefer a pooling equilibrium? Show work.

(c) Would high-productivity workers prefer a pooling equilibrium? Show work.