A necessary condition for a separating equilibrium when workers can use education as a signal of their ability is
A) the high-ability wage is larger than the sum of the degree cost plus the low-ability wage.
B) the cost of a degree is larger than the low-skill wage.
C) the high-ability wage is smaller than the low-ability wage.
D) the high-skill wage is equal to the cost of a degree.

Question

Quizplus · Accepted Answer

In a separating equilibrium, high- and low-ability workers have different wage offers. The high-ability workers will only choose to get the degree if the expected return (i.e., the high-ability wage minus the degree cost) is greater than the low-ability wage. Therefore, for a separating equilibrium to exist, the high-ability wage must be larger than the sum of the degree cost plus the low-ability wage.

A Necessary Condition for a Separating Equilibrium When Workers Can