suppose that firms collectively change their beliefs, and now think that 3 years of college education (15 years of education total) is sufficient to lead to high productivity in a worker. Firm's will now pay anyone with 3 or more years of college education wages with PV of $2,500,000, and will continue to pay $1,500,000 in PV to anyone with less education than 15 years. Acquiring 3 years of college education will cost worker A $750,000 in PV, but will cost B $1,250,000 in PV. See figure 2 for a visual representation.

(a) Again, calculate person A's and person B's net PV benefit from obtaining 3 years of college. Notice that the net PV benefit of entering the workforce immediately has not changed for A or B.

(b) What is the optimal level of education for B? What about for A?

(c) Again, what type of equilibrium does the current wage structure lead to if the labor market is composed of people exactly like person A and B? Is education still an effective signal to employers?

(d) Now, limit yourself again to just thinking about person A and person B. How does the decrease in required education change the net PV compensation (wages-costs of education) being paid to A and B together? That is, net compensation to A plus net compensation to B. How does the decrease in required education change the total amount of wages the firm has to pay in PV?

(e) Based on your answer in part (c), comment on whether this decrease in education standards could be beneficial to society. (Note: the question of benefit to society depends on a lot of info that I have not given you in this problem. You may include other considerations in your answer, but you do not need to. This is a question of economic reasoning, there is no single perfect answer.)

Present Value of Lifetime Income (Millions) Cost for B 82 $2 Cost for A $15 $1 $ 12 13 14 15 16 17 18 19 Years of Education