Question

Suppose that education does not increase an individual’s marginal productivity and that there are two types of people in the world: over-achievers and slackers. Overachievers don’t really mind going to school and for them the cost of y years of school is y/2 . Slackers, on the other hand, find school more burdensome, and for them the cost of y years of school is y. Consider two different firms. Firm 1 offers to pay workers such that the present discounted value of their lifetime earnings is $12 if workers have at least 6 years of schooling, and $8 to all other workers. Firm 2 offers to pay workers such that the present discounted value of their lifetime earnings is $12 if workers have at least 2 years of schooling, and $8 to all other workers.

(a) For each firm separately, analyze whether its educational requirements will enable them to distinguish between over-achievers and slackers.

(b) What is the minimum educational requirement a firm can offer and still expect to be able to distinguish between over-achievers and slackers?

Answer 1

Answer:-

a)

a) Gier cost: Overachirer 0.5y Slacker y year oftion о o gean firm-1: Overachirens: 0 you d education 8-0 = $8 6 yean 21-(0546) - $9 with education the rolue in more So, they will choose the 6 6 finom-1 i slocken : * 8-0 $8 6 With out education the value y more so, they will close o grey option finm-2: Ovoractiven =8-0=fe ; 2yrs = 12 (0541) 49" - They will chase 2 gear option finan-: Slacker: = so, they will choose 2 yn option also. 7 : 12-6 – $6 o i 2n = 12 -2 =$10

b) The minimum educational standard that a organization can give and still expect to be able to distinguish between over attainers and slackers will be up to the year in which the gap between the marginal productivity of the slackers receiving education or not will be the same.

If a company offers fewer years of education, instead, slackers will choose to receive education and the organization will not be able to distinguish between slackers and over-achievers.