Q1)

1. Consider the signaling model of educational choice. Assume that a low ability majority individual has the same productivity as a low ability minority (both have marginal productivity of 5) and a high ability majority individual has the same productivity as a high ability minority (both have marginal productivity of 10). Half of all majority workers and half of all minority workers are high ability. The firms do not observe workers ability levels.

   Firms assume that majority individuals with bachelors degree must be high ability workers. However, because minority households have less wealth on average than majority households, firms do not assume that minority workers with less than bachelors degree are low ability (as it may instead simply reflect the greater cost of education for those from families with fewer resources). As a result, firms pay different wages to majority workers based on their education, but treat all minorities the same regardless of their education.

   Assume that the cost of getting bachelors degree is 3 for high ability worker and 6 for low ability workers.

   Assume that the firms pay workers their marginal product when workers ability is reliably revealed by their educational choices. If the ability is not known, the worker is paid her expected marginal product.

   What wages will firms pay to majority workers with a bachelors degree? Submit the answer rounded to the nearest integer.

Q2)

Use exactly the same scenario as for Q1.

What wages will firms pay to majority workers without a bachelors degree? Submit the answer rounded to the nearest integer.

Q3)

Based on your answers to Q1 and Q2, in the table below fill out the net benefit of each educational choice for majority workers, and then predict the education attainment of the majority workers.

	Bachelor's Degree	No Bachelor's Degree
High Ability
Low Ability

		Both High and Low ability majority workers will acquire Bachelor's degree.
		High ability majority worker will acquire Bachelor's degree, and Low ability majority workers will not acquire Bachelor's degree.
		Neither ability type of majority workers will acquire Bachelor's degree
		Low ability majority worker will acquire Bachelor's degree, and High ability majority workers will not acquire Bachelor's degree.