Consider a world with two “types” of people, and where everyone lives for two periods. In period 1, they can either go to college or work. In period 2, everyone works. College costs $10,000 for “high” type people. For “low” type people, college is more difficult, so they have to spend $20,000 to earn a college degree (the extra cost comes from hiring a tutor). Everyone has a discount rate of 0. Employers wish to use college as a screening device. Specifically, they want to create a separating equilibrium where “high” types will choose to go to college but “low” types will not. The employers are willing to pay $30,000 to workers without a college degree. What range of salaries for college-educated workers would create the separating equilibrium?
Consider a world with two “types” of people, and where everyone lives for two periods. In period 1, they can either go to college or work. In period 2, everyone works. College costs $10,000 for “high” type people. For “low” type people, college is more difficult, so they have to spend $20,000 to earn a college degree (the extra cost comes from hiring a tutor). Everyone has a discount rate of 0. Employers wish to use college as a screening device. Specifically, they want to create a separating equilibrium where “high” types will choose to go to college but “low” types will not. The employers are willing to pay $30,000 to workers without a college degree.
What range of salaries for college-educated workers would create the separating equilibrium?
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