Suppose half of workers have high productivity and half of workers have low productivity. High-productivity workers are valued at $100,000 a year and low-productivity workers are valued at $40,000 a year. Because of asymmetric information, employers cannot tell them apart, so all workers are paid according to the average economy-wide value of productivity. If high-productivity workers found a method to signal their productivity to employers, high-productivity pay would _____ by $30,000, and low-productivity pay would _____.
A) increase; increase by $30,000
B) increase; decrease by $30,000
C) decrease; increase by $30,000
D) increase; remain unchanged

Question

Quizplus · Accepted Answer

High-productivity workers would be able to signal their higher value, leading to an increase in their pay to reflect their true value of $100,000. Low-productivity workers would then be recognized for their actual value of $40,000, resulting in a decrease in their pay from the average to their true lower value.

Suppose Half of Workers Have High Productivity and Half of Workers