Question 3: I found the answer online, that both have the incentive to shrink, but if I tried to find the Nash Equilibrium I got (cooperate,cooperate) Document Preview: 1 Problem Set 5 Due date: Friday, November 30 (in class) Question 1 (20 points) A study shows that, for American high school dropouts, obtaining a General Equivalency Degree (GED) by part-time study after high school has very little payoff. It also shows, however, that for immigrants who did not complete high school in their native countries, obtaining a GED has a relatively large payoff. Can signaling theory be used to explain these results? Question 2 (20 points) The following statement was overheard at a party: It is just not right that Joe, who never went to college, makes more than Ken, who has a masters degree. People with higher degrees deserve to earn more! Use human capital theory to comment on this quotation. Question 3 (20 points) A firm can be thought of as a joint venture between owners and workers. Suppose that these two groups face a work environment with the incentive given in the following table. Each entry in the table shows the level of utility attained by group members from following particular courses of action. Each entry in the table shows the level of utility attained by group members from following particular courses of action. Workers Cooperate Shirk Owners Cooperate 4, 4 5, 2 Shirk 2, 5 3, 3 a. Assuming the workers do not know the strategy employed by the owners, what is the optimal strategy for the workers? b. Assuming the owners do not know the strategy employed by the workers, what is the optimal strategy for owners? c. Is the employment contract between owners and workers self-enforcing? 2 d. The information available to each party in this case is asymmetric. If each party could be sure of what the other was planning to do, would that change the outcome of the employment contract? Explain. e. What is the jargon in economics for the previous table? To which theory does it pertain? Question 4 (10 points) Taxicab companies in the United States typically own a large number of cabs and licenses; taxicab drivers then pay a daily fee to Attachments: Problem-Set-5.pdf; Question 3: I found the answer online, that both have the incentive to shrink, but if I tried to find the Nash Equilibrium I got (cooperate,cooperate) Document Preview: 1 Problem Set 5 Due date: Friday, November 30 (in class) Question 1 (20 points) A study shows that, for American high school dropouts, obtaining a General Equivalency Degree (GED) by part-time study after high school has very little payoff. It also shows, however, that for immigrants who did not complete high school in their native countries, obtaining a GED has a relatively large payoff. Can signaling theory be used to explain these results? Question 2 (20 points) The following statement was overheard at a party: It is just not right that Joe, who never went to college, makes more than Ken, who has a masters degree. People with higher degrees deserve to earn more! Use human capital theory to comment on this quotation. Question 3 (20 points) A firm can be thought of as a joint venture between owners and workers. Suppose that these two groups face a work environment with the incentive given in the following table. Each entry in the table shows the level of utility attained by group members from following particular courses of action. Each entry in the table shows the level of utility attained by group members from following particular courses of action. Workers Cooperate Shirk Owners Cooperate 4, 4 5, 2 Shirk 2, 5 3, 3 a. Assuming the workers do not know the strategy employed by the owners, what is the optimal strategy for the workers? b. Assuming the owners do not know the strategy employed by the workers, what is the optimal strategy for owners? c. Is the employment contract between owners and workers self-enforcing? 2 d. The information available to each party in this case is asymmetric. If each party could be sure of what the other was planning to do, would that change the outcome of the employment contract? Explain. e. What is the jargon in economics for the previous table? To which theory does it pertain? Question 4 (10 points) Taxicab companies in the United States typically own a large number of cabs and licenses; taxicab drivers then pay a daily fee to Attachments: Problem-Set-5.pdf
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