Reference no: EM132166651

Suppose there are two types of workers in population: 30% of the population is high-ability workers and 70% of the population is low-ability workers. Firms wish to allocate high-ability workers to high-ability required jobs and pay $500,000, and to allocate low-ability workers to low-ability required jobs and pay $350,000. However, although workers know their own type, firms do not know whether a particular applicant is a high-ability worker or a low-ability worker.

1. Without any other information, what would be the average salary offered by firms? (In other words, what is the average salary in the "pooled equilibrium?")
2. Firms now wish to use education as a screening device where they intend to pay $500,000 to workers with at least "E" years of post-high-school education and $350,000 to workers with less than "E" years of post-high-school education. Assuming one year of post high-school education costs $30,000 to high-ability workers and $50,000 to low- ability workers, in what range must "E" be to make this an effective screening device?