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2011HW3 - Economics 210C Problem Set#3(Due May 24 Spring...

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Economics 210C Problem Set #3 (Due May 24) Spring 2011 1. In Spence signaling model, (i) the job applicant chooses how much education to invest; (ii) the employers cannot observe the applicant’s productivity, but they observe the signal (i.e. the education level chosen by the applicant), form beliefs on the relationship between the observed signal and unobserved productivity, and make wage offers based on their beliefs; and (iii) the applicant decides whether to accept a wage offer or reject all of the offers. Now consider a screening model, in which education is used by employers to screen applicants. Specifically, two firms simultaneously announce manus of contracts ( e, w ) and, subsequently, the job applicant decides whether to accept a contract or reject all of them. Assume that there are two types of workers, type h with productivity θ h = 2 and type l with productivity θ l = 1. For each worker a firm hires at wage rate w , its profit changes in the amount of θ - w , where θ is the type of the worker. The
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