Suppose there are two types of persons: high-ability and low-ability. A particular diploma costs a high-ability person $10,000 and costs a low-ability person $18,000. Firms wish to use education as a screening device where they intend to pay $35,000 to workers without a diploma and $K to those with a diploma. In what range must K be to make this an effective screening device?

Question

Mathematics

Sara Walls

22 November, 11:00

Suppose there are two types of persons: high-ability and low-ability. A particular diploma costs a high-ability person $10,000 and costs a low-ability person $18,000. Firms wish to use education as a screening device where they intend to pay $35,000 to workers without a diploma and $K to those with a diploma. In what range must K be to make this an effective screening device?

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Answers (1)

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Amani · Answer 1

K must be in range $45000 ≤ k ≤ $53000 to make this an effective screening device.

Step-by-step explanation:

In order for the screening device to be effective, the range of k must be such that, it is more than the pay of a worker without diploma. The extra amount must at least be equal to the cost of diploma

So the value of k must be in range from (35000 + 10000) to (35000 + 18000)

Hence,

$45000 ≤ k ≤ $53000