Suppose That the Costs of Going to College Are Given

Essay

Suppose that the costs of going to college are given by:
Low-ability person: C = $60,000y
High-ability person: C = $30,000y
where y is years in college. There are two types of workers, those with high ability and those with low ability. Employers cannot distinguish between them, so they pay each worker $250,000, the average value of output per worker. Employers will pay workers $380,000 if they earn a four-year degree.
a. Will high-ability workers choose to get a four-year degree? What about low-ability workers?
b. Because of rampant grade inflation, the cost of going to college for a low-ability person falls to C = 32,000y. Will low-ability workers choose to get a four-year degree? Does going to college serve as an effective signal?