Suppose workers with a college degree are paid a lifetime income of $500,000 and workers without a college degree are paid $300,000. The cost of obtaining a college degree for high-productivity workers is $100,000. For a college degree to serve as a useful productivity signal, the cost of a college degree for low-productivity workers must be:
A) greater than $200,000.
B) less than $200,000.
C) greater than $100,000.
D) less than $100,000.

Question

Quizplus · Accepted Answer

For a college degree to serve as a useful productivity signal, the cost for low-productivity workers to obtain the degree must be so high that it is not worth it for them to get the degree. If high-productivity workers gain a net benefit of $400,000 ($500,000 - $100,000) from obtaining a degree, then for the degree to not be worth it for low-productivity workers, the cost must be greater than the difference in lifetime income without the degree ($500,000 - $300,000 = $200,000). Therefore, the cost must be greater than $200,000 for low-productivity workers.

Suppose Workers with a College Degree Are Paid a Lifetime