Suppose there are two types of economics majors, “stars” and “everyone else” and both types would like jobs at a consulting company.
1.Let’s say there are 20 stars who are willing to work for $90,000 or more. And there are 80 non-stars who are willing to work for $40,000 or more. (Remember, in the labor market, consumers supply their labor and firms demand labor.) The firm is willing to hire an infinite number of employees (unrealistic, but let’s go with it for now). They will pay $100,000 for stars and $50,000 for non-stars.
a.In a world of perfect information, what would happen to the market for stars and the market for non-stars? Use graphs to answer and explain in words.
b.In a world of asymmetric information (in which candidates know their quality but firms do not), what will happen? Use graphs to answer and explain in words. c.What can firms and stars do, practically speaking, to overcome the adverse selection?
Answers
Answer:
Suppose there are two types of economics majors, “stars” and “everyone else” and both types would like jobs at a consulting company.
1.Let’s say there are 20 stars who are willing to work for $90,000 or more. And there are 80 non-stars who are willing to work for $40,000 or more. (Remember, in the labor market, consumers supply their labor and firms demand labor.) The firm is willing to hire an infinite number of employees (unrealistic, but let’s go with it for now). They will pay $100,000 for stars and $50,000 for non-stars.
a.In a world of perfect information, what would happen to the market for stars and the market for non-stars? Use graphs to answer and explain in words.
b.In a world of asymmetric information (in which candidates know their quality but firms do not), what will happen? Use graphs to answer and explain in words. c.What can firms and stars do, practically speaking, to overcome the adverse selection?
Step-by-step explanation:
Suppose there are two types of economics majors, “stars” and “everyone else” and both types would like jobs at a consulting company.
1.Let’s say there are 20 stars who are willing to work for $90,000 or more. And there are 80 non-stars who are willing to work for $40,000 or more. (Remember, in the labor market, consumers supply their labor and firms demand labor.) The firm is willing to hire an infinite number of employees (unrealistic, but let’s go with it for now). They will pay $100,000 for stars and $50,000 for non-stars.
a.In a world of perfect information, what would happen to the market for stars and the market for non-stars? Use graphs to answer and explain in words.
b.In a world of asymmetric information (in which candidates know their quality but firms do not), what will happen? Use graphs to answer and explain in words. c.What can firms and stars do, practically speaking, to overcome the adverse selection?