Suppose that the relationship between years of education and annual wages can be
ID: 1190655 • Letter: S
Question
Suppose that the relationship between years of education and annual wages can be written in the following way.
Wagei = 1000 + 3000*Si + 2000*BAi
Where Wi is the wage of individual i, Si is the number of years of education for individual i, and BAi =1 if individual i graduates from college, and 0 otherwise.
What does the number “1000” indicate? (2 pts)
What does the number “3000” indicate? (2 pts)
What does the number “2000” indicate? (2 pts)
Do the relationships depicted above provide evidence in favor of the signaling model? Why or why not? (4 pts)
Based on the relationships depicted above why doesn’t everyone go to college? (3 pts)
Explanation / Answer
"1000" indicates the predicted value of wage even when Si & BAi are zero i.e. wage even with no education.
"3000" indicates the difference in the predicted value of Wage for each one-unit difference in Si, if BAi remains constant.
"2000" indicates the difference in the predicted value of Wage for each one-unit difference in BAi, if Si remains constant.
According to the signaling model, employers consider good student to be sincere and hard-working, so they prefer students with educational success as their employee and pay them beter salary. Yes this model provides evidence in favor of signaling model. For eg A employee with no education gets wage = 1000, while a employee with four years of education get wage = 1000+4*3000 =13000 and employee with eight year of education with a degree from college wage = 1000 + 3000*8 + 2000 = 27000. So we see there is a substantial differences in wage at different level of education.
The relationship in itself does not explain the reason for not everyone going to the college but it can be seen that people may have left education at different stages to earn
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