Economics · Signalling Theory
Given below are two statements: Assertion (A): In Spence's signalling model, education can serve as a credible signal of worker productivity even if education does not actually increase productivity, provided the cost of acquiring education is lower for high-ability workers than for low-ability workers (single-crossing property). Reason (R): In a separating equilibrium, high-ability workers choose an education level e* that satisfies: (i) low-ability workers find it unprofitable to mimic (the wage gain does not cover the signalling cost), and (ii) high-ability workers find it profitable to signal (the wage gain exceeds the signalling cost). Choose the most appropriate answer:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1(A) is false, but (R) is true
- 2(A) is true, but (R) is false
- 3Both (A) and (R) are true, but (R) is NOT the correct explanation of (A)
- 4Both (A) and (R) are true, and (R) is the correct explanation of (A)✓
Correct answer
Both (A) and (R) are true, and (R) is the correct explanation of (A)
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