F412:18 3A1908= . . . 88% owl.uwo.ca Page 3 of 18 QUESTION 3 Suppose there are two types of persons: high-ability and low-ability. A particular diploma costs a high-ability person $80,000 and costs a low-ability person $200,000. Firms wish to use education as a screening device where they intend to pay $250,000 to workers without a diploma and $K to those with a diploma. a) In what range must K be to make this an effective screening device? b) Suppose the government subsidizes low-ability persons by $120,000 for the diploma. What happens to the signaling value of the diploma? Page 4 of 18