A firm uses a probationary period to separate high from low ability workers. The

Question

A firm uses a probationary period to separate high from low ability workers. There are two periods and the probationary period lasts the whole 1st period. At the end of the 1st period, a successful worker is retained for the 2nd period and paid wage w2; an unsuccessful worker is fired and goes to his alternative job. In the alternative job, an H-type can earn $100,000 per period, while an L-type can earn $80,000 per period. Detection is not perfect: H-types are always revealed as such, but an L-type is mistaken for an H-type with probability 0.5. If the wage during probation is w1 = $0, which of the following 2nd period wages would attract the H-types but not the L-types? Ignore discounting.

A. w2 =180,000 D. w2 =280,000

B. w2 =220,000 E. w2 =320,000

C. w2 =260,000

Explanation / Answer

The second period wages which would attract H- types but not the L-types is w2=320,000.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.