Problem Set # 7: Human Capital, Signaling, & Migration
Depending on how you read the question, you may have assumed that in the first period
the person was compensated based on their education choice, or that they were paid as an
uneducated person in that period.
Since this affects the answers, I will provide the answer
key for each reading of the question.
First, if person is compensated based on their educational choice:
= 20,000 + (20,000/1.1) + (20,000/(1.1)
) ≈ $54,700
= 30,000 + (30,000/1.1) + (30,000/(1.1)
) ≈ $82,100
b. Yes, the wage structure and educational costs will sort the workers by skill.
For H types,
the net benefit of attending college is ($82,100 - $24,000) = $58,100, which is a higher
return than if they choose not to attend college and receive only $54,700.
On the other
hand, L types have a net benefit of college equal to ($82,100 - $32,000) = $50,100, so they
are better off choosing not to go to college.
This means the H types will go to college and