suppose that firms instead think that 2 years of college education (14 years of education total) is sufficient to lead to high productivity in a worker. Firm's will now pay anyone with 2 or more years of college education wages with PV of $2,500,000, and continue to pay anyone with less education than that $1,500,000 in PV. Acquiring 2 years of college education will cost worker A $500,000 in PV, but will cost B $750,000 in PV. See figure 3 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 either worker.

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

Present Value of Lifetime Income (Millions) Cost for B $3- $2 - Cost for A .............. 81.5 ................... 12 13 14 15 16 17 18 19 Years of Education