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Assume that there are two types of employees—types

H and L. When employed the two types contribute $100 and $50 respectively to the employer. To obtain x units of education, Type H has to spend $x whereas Type L has to spend $4x (see table above). As discussed in class, education has no use other than its "signaling" value. What is the education level a Type H will acquire to separate herself from Type L, i.e., to convince an employer that she is indeed Type H, and thus receive a salary of $100. (there is competition among employers, so if the expected value to an employer from hiring an employee is $y, the employer will pay her $y.

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