149. Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kan

Question

149. Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $4,000 per month. You can’t tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity. Kandos, however, have more patience than klutzes. Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $100 for a kando. There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $4,000 per month and anybody who does not is paid $1,000 per month

a) if 12 < H< 30

b) if 12< H < 60

c) For all positive values of H

d) Only in the limit as H approaches infinity

e) If 10< H < 25

Please show reasoning

Explanation / Answer

149. Option a if 12 < H< 30

Net benefit of taking the lecture = $4000 – $1000 = $3000 per month [i.e. the gain from taking the lecture)

Cost of taking lecture is $250 per hour for Klutz and Cost of taking lecture is $100 per hour for Kando.

The maximum amount of hours that Klutz will consume will be where net benefit = net cost.

For Klutz:
250*H = 3000
H =12 i.e. this is the maximum number of lecture hours that Klutz will take.

For Kando:
100*H = 3000
H = 30 i.e. the maximum number of lecture hours that Klutz will take.

Hence the separating equilibrium will be somewhere in between i.e. 12 < H <30.

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