Suppose that normal workers increase a rm's revenue by $6, while smart workers increase revenue by $A, where A > 6. Firms cannot tell smart workers from normal workers ex ante, but can observe a worker's educational level. Any worker can acquire as much education as she wishes, but getting e years costs a normal worker B(e), where B > 1, while e years cost a smart worker only e.
a. Solve for e, the minimum years of education that smart workers must get to di erentiate themselves from normal workers. Your answer will be a function of the variables A and B.
b. As A increases, does e increase or decrease? Explain intuitively why this is the case. c. As B increases, does e increase or decrease?