Question

Question 1

1. (10 marks) Suppose that schooling (s) is the only variable that affects earnings. The following equations describe the weekly salaries of tall and short workers: Wtall = 700 + 100s Wshort = 400 + 80s

On average, tall workers have 15 years of schooling and short workers have 12 years of schooling.

a) (4 marks) What is the short-tall wage differential in the labour market?

b) (6 marks) Use the Oaxaca decomposition approach to calculate how much of this wage differential could be due to discrimination.

Question 2

2. (10 marks) Suppose there are two types of persons, high-ability and low-ability. A particular degree costs, in terms of both monetary and psychic costs, a high-ability person $40,000 and costs a lowability person $80,000. Firms wish to use education as a screening device where they intend to pay $90,000 (life-time earnings) to workers without a diploma and $K to those with a diploma.

a) In what range must K be to make this an effective screening device?

b) What level of K would result in either type not getting an education?

c) Comment on the required relationship between productivity and costs for signalling to work and thus have value?

3. (10 marks) Consider an eighteen-year-old high school student that is about to graduate. She lives for two periods. If she decides to attend university, she has zero earnings in Period 1 and she earns $1,200,000 in Period 2. However, if she decides NOT to attend university, she earns $500,0000 in Period 1 and $550,000 in Period 2. Suppose university is free (i.e. no tuition) and the discount rate is 0.05 to discount the earnings in Period 2.

a) Should she attend university? Show your work.

b) Based on the information above, what is the internal rate of return?

Answer 1

****EVENTHOUGH HOMEWORKLIB POLICY IS TO ANSWER FIRST QUESTION ONLY, I HAVE ANSWERED ALL FOR SAKE OF YOU, SO PLEASE GIVE POSITIVE RATING TO MY ANSWER, THANK YOU*****

= 700HOOS labour market = wtan - Wshort Solution:- 1) Given that, Weall sctall) = =15, - wtall 2200, Short-tall wage differential and 2200 -1360 Wshort= 400+ 809 scshort) =12 700+ 10o (15) -700 + 1500 w short - 4oot 8o5 400 + 80(13) 400 + 9 SO 1360 840 for suppose Wtall = auſtald+b(tall) sltau Wshort = a (short + b (Shoroscshort > In caxaca wage de composition, the difference in co-efficient represents potontial discrimination - la (tall) - a (Shost)+ (blaid-b(short)) *s (short) = 700-400) + (10080 * 12 300 + 20013 - 3oot 240 S40° Hence the wage differential due to discrimination is 540.

K 2 To make an effective scorening following conditions must be satisfied 1) payoff for the high abplity from the education must be more than pay off without education. 440000 > 90.000 > k> 99000+ 40,000 - » K> 130,000 pay off for the low ability without the education should be higher than pay off without education 90,000 > K- 80,000 90,000 +89000 >K KL 1,70,000 Honce range of kis = (1,30,000 1,70,000). Any level of ka 2130,000 000 weil desult in no type getting an education a there must be a negative selation in between productivity and cost of the signalling, le the high ability type must be able to gain education at a lower cost. or else Signalling won't be efficient for effec&ve. b

ANSwer РОО Y2eaning (if she attends 2 (1+1 1909000 Cito.05) 1,200,000 (1005) 1,200,000 1.1025 $ 108,843553 YI Y2 (1+i) (1+2 s Puppf she don't + NI = 00,000 + s 50,000 (I tooos! Cito-os) 500,000 + 550.000 1-05 1-1025 476190.4 + 498866*2 = $ 975,056.6

=) AS Po attends > PW Hence doesn't attends, she must attend os correct answer. 6 let t'be IRR and PO attend - PW doesn't 42 YU YZ Cito)? (1to) (148) > 1,200,000 - 500,000 550,000 (1+0)? (1+) (1+2 120 = SOCI+) +55 =) 120-555 = so +500 + + = ) sor w 15 5 = 15 50 -0.3 X100% so (5= 30.12