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3240f00 - York University Final Examination Course Director...

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York University Final Examination Course Director: S.H. Chiang Course number: ECON 3240.03A I. 1. Why do those who argue that more education signals greater ability believe that the most able people will obtain the most edcuation? Provide a theory to justify this. [[[Ans: The question can be answered by referring to the theory of signaling in chapter 9, p.9-15 of the lecture note (for details, see textbook). Given that the costs of education for types 1 and 2 are di ff erent, the employer is able to force workers with di ff erent qualities to choose di ff erent education levels by setting a standard y at the proper level. Low-quality workers are better o ff by having no education, while high-quality workers fi nd it bene fi cial by choosing the required education level y . The pays to low and high-quality workers $1 and $2 , respectively. Clearly, people with greater ability would have higher level of education. ]]]] 2. In many countries education is heavily subsidized by the government and is practically free. Given this, is the belief in (1) justi fi able? Explain. (18 points) [[[Ans: Yes. The costs of education include not only money costs but also psychic costs. Subsidies from the government does not invalidate the assumption that costs di ff er among individuals with di ff erent talents. This still leaves the employers with some room to manipulate the standard to produce a desirable outcome described in (1).]]] II. Answer two related quesitons: 1. In the traditional model of migration, migration decisions depend on age, discount rates, earning di ff erentials, and costs. Explain. (10) [[[Ans: Refer to the theory in chapter 9, pp.9.5-9.10. As shown, individuals are more likely to go to the college if they are younger, discount rates are lower, earning di ff erentials are greater, and costs are smaller. ]]] 2. The new approach attributes asymmetric information as an underlying reason for migration. Consider some potential migrants who are currently in the host country. Firms in the host country are assumed to have perfect
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