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1 BUSINESS AND INDUSTRIAL ECONOMICS [A-L] Mid-term exam, May 8th, 2015 SURNAME AND NAME __________________________________________________________________________ STUDENT ID____________________________________________________________________________________ You have 1 hour and 30 minutes to answer all multiple-choice questions, one open question at your choice, and the exercise. Multiple-choice questions 1) Imagine that la bour market is perfectly competitive and workers can signal their ability through education. Firms pay workers their expected productivity a, conditional on their education level e. Specifically, the expected productivity of high -ability workers is aH=600 and their cost of education is cH(e)=5e2, while the expected productivity of low-ability workers is aL=100 and their cost of education is cL(e)=20e2. Find the level of education eH that allows high-ability workers to credibly signal their ability on the labour market. a) 5 < 𝑒𝐻 < 20 b) 𝑒𝐻 > 5 c) It is not possible to determine eH, as salary wH is unknown d) 𝑒𝐻 = 20 e) 𝑒𝐻 = 20 Solution. This question contains a small mistake. According to the Spence model, it must be: (1) aH - aL > cH(eH) and (2) aH - aL < cL(eH). Therefore, we have (1) 600 -100>5e2→500>5e2→100>e2 → e<10 and (2) 600 - 100<20e2→500<20e2→25<e2 → e>5. We conclude that high-ability workers should acquire the level of education such that: 𝟓 < 𝒆𝑯 < 𝟏𝟎. Therefore, if you choose the interval (the Spence model “requires” an interval), you have a bonus. If you write down the right answer, you have an extra -bonus. IN CONSIDERATION OF THIS, THE QUESTION HAS NO MALUS. 2) Silvia and Caterina are working on a joint project for the course of Business and Industrial Economics. In the future, they will never work together again. They have two…