Open Word and answer the following questions. Save the document and print it when you are done.

1. Suppose a firm is trying to determine whether an applicant is of low or high ability and it believes people with long fingernails have higher ability. Would fingernail length be an effective signal? Draw a graph to support your answer.

2. Draw a graph that shows how education as a signal could be used to separate low- and high-ability job applicants. Explain how education as a signal works.

3. Draw a graph in which education as a signal fails because the signal level is set too high. Explain why the signal fails.

4. College education as a signal clashes with human capital theory, which says that educated workers earn more because they were made more productive by their education. What does signaling theory say about the value of education? In other words, according to signaling, why are educated workers paid more?

5. Why has it been difficult to determine with data whether human capital or signaling theory is right about college education?