Suppose that a firm wants to hire a new worker. Suppose that high ability candidates’ productivity is worth about $40,000 per year while low ability candidates’ productivity is worth about

Suppose that a firm wants to hire a new worker. Suppose that high ability candidates’ productivity is worth about $40,000 per year while low ability candidates’ productivity is worth about $20,000 per year. Also suppose that 50 percent of the population is high ability while 50 percent of the population is low ability. Finally, assume that the nature of production is such that firms cannot observe workers’ true abilities. 1. Suppose that no education or other training exists and that firms have to hire workers “blind.” wage will they offer? 2.Now suppose that the firm hires a training firm to “train” their candidates. The training firm focuses on basic skills that is costless (except foregone earnings) to learn for high ability candidates. Workers get no pay during their training period. They project that attending the training for each year costs low ability workers $30,000 in effort. The firm covers the other tuition costs of the training. Suppose that the world lasts 10 years total which includes training and work (and then workers retire). If the worker chooses not to get training, the worker gets 20,000. Set up an inequality which s us know if the high ability type will want to attend training for some number “q” of years. For simplicity, assume no discounting (i.e. discount rate is zero). 3.Set up an inequality showing when the low-ability types will not choose to attend the training for q years. 4.The firm can decide how many years of training to assign. If the firm chose to offer training, how would they decide the right number of hours? Explain how we would solve for the optimal number of years of training. 5.Suppose that another firm arrives and begins to offer $40,000 to workers who attend training for q years. Should the original firm continue to subsidize the training? Why or why not or can you tell?

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