Assume a competitive labour market and that the production function is: f(ls, lu) = 12ls + 3lu and firms get $1 per unit produced. Firms cannot tell if a worker is skilled or not but do see that there are two groups of workers: A and B. Ex ante these worker groups are identical and all draw a cost of education c U[0, 10]. However, firms believe that 60% of type A workers are skilled while only 20% of type B workers are skilled. Firms pay a testing cost of $3 to find out if workers are skilled or not, which is accurate 80% of the time. Firms hire both workers that they believe to be skilled and workers that they believe to be unskilled, but they offer them different wages. If a worker is interviewed and offered a job they are automatically hired (workers never refuse job offers)