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Utility function for the h-type

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Reference no: EM131101897

There are two types of workers (L and H) that look ex ante identical. The output of an L-type is 2 and the output of a H-type is 4. Each has a reservation utility of 4. The utility function of the L-type is

uL = 2wL - 6eL

where wL is the wage they receive and eL is the level of education they receive.

Similarly, the utility of the H-type is

uH = 2wH - 2eH

a. If the total population is equally split between Ls and Hs, what is the pooling wage?

Now consider the case when education can be possibly used as a signal of productivity. The game is as follows. The workers decide on the level of e they wish to get. The firms observe e and can offer wages on the basis of e. The workers accept or reject the contracts offered and trade takes place.

What is the minimum level of eH for which a separating equilibrium can exist.

b. What if instead the utility function for the H-type is: uH = 2wH - 6eH. Outline the separating equilibrium in this case. Provide intuition for your result.

Reference no: EM131101897

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