Question

Consider a manufacturing firm in a labor market that is perfectly competitive. There are two kinds of workers: productive workers whose marginal revenue product is $48,000 per year, and lazy workers whose marginal revenue product is $40,000 per year. It is difficult for the firm to differentiate between productive and lazy workers.

A local college offers a new yearlong astronomy course. Although the cost of tuition is the same for both types of workers, the psychic cost of having to work hard and get a passing grade is lower for productive workers because they can learn more quickly than lazy workers. Therefore, the cost of taking the class (including the cost of tuition as well as the psychic cost) is $5,000 per year for a productive worker and $10,000 per year for a lazy worker. Because astronomy has little relevance to manufacturing, taking the class does not increase or decrease a worker's productivity.

The firm uses the class as a way to differentiate between productive and lazy workers. That is, the firm would like to use the class as a job market signal. Workers enrolled in the class that year (with a passing grade) will earn $48,000 and workers Not enrolled that year will earn $40,000.

A. For productive workers, the NET Benefit (increase in earning minus cost) of taking the class this year is (-$5,000, -$3,000, -$2,000, $2,000, $3,000, $6,000, $8,000). For lazy workers, the NET Benefit of taking the class this year is (-$10,000, -$6,000, -$3,000, -$2,000, $2,000, $3,000, $8,000).

B. Which is True? (No one will take the class, so it can't be used as a credible signal for the firm, Only productive workers will take the class, so it becomes a credible signal for the firm, Both productive and lazy workers will take the class, so it is not a credible signal for the firm, Only lazy workers will take the class, so the firm cannot use the class as a credible signal).

C. Suppose that the local college learns that workers taking the astronomy class earn $8,000 more each year. As a result, the college increases the tuition of the class by $4,000. This increases the cost of taking the class by $4,000 for all workers. Under these new conditions, the Net Benefit of taking the class is (-$9,000, -$5,000, -$4,000, -$1,000, $1,000, $3,000, $8,000) for productive workers, and (-$10,000, -$6,000, -$4,000, -$2,000, $1,000, $6,000, $8,000) for lazy workers.

D. After the tuition increase, which is true? (Both productive and lazy workers will take the class, so it is not a credible signal for the firm, Only productive workers will take the class, so it is a credible signal for the firm, No one will take the class, so it can't be used as a credible signal for the firm, Only lazy workers will take the class, so the firm cannot use the class as a credible signal).