Suppose that Hal (a high productivity worker) and Lou (a low productivity worker

Question

Suppose that Hal (a high productivity worker) and Lou (a low productivity worker) are deciding whether or not to complete a four-year college degree. Even though Hal and Lou are thinking of attending the same college, Lou has higher "emotional costs" associated with each year attended. Suppose that Hal's cost of college attendance is given by: C_hal(s) = $20,000*S (where S = years of schooling), and Lou's cost of attendance is given by: C_lou(s) = $30,000*S Suppose a firm offers all college graduates earnings equal to $300,000 (in present value) and all high school graduates earnings equal to $200,000 (in present value). Will Hal choose to go to college? Will Lou choose to go to college? Is this a separating equilibrium? Suppose the firm now offers high school graduates earnings equal to $150,000 (in present value). Does this affect Hal's schooling decision? Does this affect Lou's schooling decision? Is this separating equilibrium? Assuming that the firm continues to offer $300,000 (in present value) to college graduates, what range of wages for high school graduates will generate a separating equilibrium? What are the key assumptions that differentiate the signaling model from the human capital model?

Explanation / Answer

a. Hal earning in case of Not attending college = $200,000

Hal earning in case of attending college = $300,000 - $20,000*4 = $220,000

So, HAL EARNINGS ARE MORE IN CASE OF COMPLETING COLLEGE , SO HAL WILL CHOOSE TO GO TO THE COLLEGE.

Lou earning in case of Not attending college = $200,000

Lou earning in case of attending college = $300,000 - $30,000*4 = $180,000

So, Lou EARNINGS ARE MORE IN CASE OF NOT COMPLETING COLLEGE , SO HAL WILL CHOOSE NOT TO GO TO THE COLLEGE.

Yes, It is a seprating Equilibrium as both chooses different options.

b. School Graduate earnings = $150,000

Hal earning in case of Not attending college(School Graduate )= $150,000

Hal earning in case of attending college = $300,000 - $20,000*4 = $220,000

So, HAL EARNINGS ARE STILL MORE IN CASE OF COMPLETING COLLEGE , SO HAL WILL STILL CHOOSE TO GO TO THE COLLEGE.

Lou earning in case of Not attending college(School Graduate )= $150,000

Lou earning in case of attending college = $300,000 - $30,000*4 = $180,000

So, Lou EARNINGS ARE NOW MORE IN CASE OF COMPLETING COLLEGE , SO Lou WILL NOW CHOOSE TO GO TO THE COLLEGE.

NO,this is n't a seprating equilibrium as both are choosing to go to the college.

C. For a seprating equilbrium to occur, Lou should not go to the College and Hal should go to the college, For this to happen, the Earnings given to the school graduates must be grater than earnings Lou gets from attending college

S0 , Wages or Earning of School Graduates greater than $180,000 for seprating equilibrium to occer.

W > 180,000.

D. The key assumption in case of Human capital model is that degrees are qualitatively similar which means studying one major instead of another does not affect human capital value for individuals, then a student graduating in one major should receive the same earnings as another student graduating in a different major. Whereas in case of Signalling Model Degrees of different subjects sends different signals and hence are qualitatively different.

If you don't understand anything , then comment , I will revert back on the same. :)

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