Problem 2 (5+5+2=12 marks)
Suppose that workers in the labor market can be of two types: high productivity (H) and low
productivity (L).
If employers knew a worker's type, they would be willing to pay H-types a discounted lifetime¹
income of $10,000, and would be willing to pay L-types an income of $7,000.
However, without more information, employers do not know the workers' types. In this case,
employers would figure that they have a 50-50 chance of ending up with a H-type worker or a L-
type worker, and would thus be willing to pay a worker an income $8,500.
Workers have the opportunity to do the MAccFin program at UTSC-Management. The opportunity
cost of the program (including tuition, effort and psychological cost, and everything else that
would have to be given up to complete the program) is $1,000 for the H-type and $2,000 for the
L-type.
If some workers do the MAccFin program while others do not, employers assume that workers
who did the MAccFin program are H-types and workers who did not are L-types.
a) Case where the L-types are the first ones to consider doing the MAccFin program:
i.
Suppose the L-types do the MAccFin program. What are the H-types' net economic
benefits (benefit minus opportunity cost) if they imitate the L-types and do the
MAccFin as well? What are the H-types' net economic benefits if they do NOT do
the MAccFin? Would the H-types imitate the L-types?
ii. Anticipating the H-types' reaction discussed above in a)i), what would be the L-
types' net economic benefits if they did do the MAccFin in the first place? What
would be their possible net economic benefits if they did not do the MAccFin?
Should the L-types do the MAccFin in the first place?
b) Case where the H-types are the first ones to consider doing the MAccFin program:
i. Suppose the H-types do the MAccFin program. What are the L-types' net economic
benefits if they imitate the H-types and do the MAccFin as well? What are the L-
types' net economic benefits if they do NOT do the MAccFin? Would the L-types
imitate the H-types?
ii. Anticipating the L-types' reaction discussed above in b)i), what would be the H-
types' net economic benefits if they did do the MAccFin in the first place? What
would be their possible net economic benefits if they did not do the MAccFin?
Should the H-types do the MAccFin in the first place?
c) What kind of benefit of education do the answers to parts a) and b) illustrate? Explain
briefly.
