2. [40 Points] An economy has two types of workers, Qualified and Unqualified. You must hire workers without observing their type and pay them before knowing their actual output. In your firm, a worker who is hired as a qualified worker is paid a wage of 100 units and the wage for an unqualified worker is 60 units. a. [25 Points] Consider the following screening mechanism: Anyone who is educated to level N is considered as a Qualified worker, and anyone who is educated to level N/2 is considered as unqualified. Assume that the unit cost of education for a Qualified worker is 5, whereas for an Unqualified worker, it is 10. (These costs are measured in the same unit as the wages). The alternative (fallback) option for a Qualified worker pays 60 and requires 4 levels of education. The alternative (fallback) option for the Unqualified worker pays 30 and requires 2 levels of education.

1. What is the minimum level of N that will achieve a separating equilibrium? (N must be an integer.)

2. What is the equilibrium payoff to each type of workers if N is set to the lowest number that would achieve a separating equilibrium?