Use as much detail as possible to answer questions and use graphs when appropriate:

1. Assume that worker productivity is a function of innate ability and human capital accumulated during schooling.Also assume that employers initially have more difficulty evaluating the ability of minority workers than white workers.

a) How will this affect the incentive minorities face relative to whites to accumulated human capital if all human capital is observable by firms?

b) How will incentives to accumulate human capital change if some forms of human capital are unobserved by firms but still affect productivity? What effect, if any, will this have on the average productivity of minorities relative to whites?

c) Economists have found that the returns to an additional year of education are small relative to the returns to completing a degree.This jump in expected earnings following degree completion is referred to as a "sheepskin effect".

Consider twomen, one black and one white, who are considering going to the Kellogg School of Management to get an MBA. They are both 27 and have been working in similar financial firms in Chicago since they were 23.Is there reason to believe the sheepskin effect might be different for these two men?Explain why or why not.