1) Suppose there are 1000 capable managers and 1000 exceptional managers. Exceptional managers have a value to the firm of $200 000 and capable managers $160 000. All managers are willing to work at any positive wage. Firms are perfectly competitive and have a perfectly elastic demand at the expected value of a manager that they hire in the market.

a) If there were two markets for capable and exceptional managers what would be the equilibrium wages for these two types of managers

However, now firms do not know if managers are exceptional, but the managers do know. Managers only care about money.

b) Suppose firms offer salaries of $200K and $160K. They ask the managers if they are exceptional or not. If the manager says they are exceptional they will pay them $200K, if they say they are capable they will pay them $160K. What is the firm's expected profit per manager?[

c) Suppose firms offer the same wage to all managers. What is the equilibrium wage in this market?

Now, we will consider the effect of MBAs in this market. Imagine an MBA does not increase a managers ability. However, an MBA only costs an exceptional manager $19 999 (they find it easier and so can juggle other projects alongside it) while it costs a capable manager $60 000.

d) Suppose only (and all) exceptional managers got an MBA. What would be the equilibrium wage for managers with MBAs and managers without MBAs?

e) Suppose you are an exceptional manager. If only exceptional managers get MBAs should you get an MBA (given your answer to (d))?[

f) Suppose you are a capable manager and only exceptional managers are getting an MBA. Should you get an MBA?

g) Suppose you are an exceptional manager and no other manager is getting an MBA. The managers without MBAs just get paid as in your answer to (c). However, if you get an MBA then the firms will believe you are exceptional and pay you your expected value. Is it worth you getting an MBA?

h) Suppose you are a capable manager and no other manager is getting an MBA. The managers without MBAs just get paid as in your answer to (c). However, if you get an MBA then the firms will believe you are exceptional and pay you their expected value (even though they are wrong). Is it worth you getting an MBA?

i) We started off by saying that MBAs didn't increase a manager's ability. Given your answers above is there value to any managers from getting an MBA? Which ones? What is this an example of?