Consider a simple signaling model à la Spence. Workers are born with either high ability with probability (wp) of .5 or low ability wp of .5. Productivity for higher productivity worker is 10 and the productivity of low productivity is 6. Each worker knows her/his productivity, but it can't be known to the employer. a. What is the average productivity of the worker? b. Explain the problem of adverse selection problem when the employer pays the average productivity of the worker for all workers? c. If the worker is allowed to create the signal with the education, and if the education costs 2 for high productivity workers and 4 for low productivity workers, what would be the range of wage combinations for high/low productivities to create a separating equilibrium?
