Imagine a country where each person is either upper class, middle class or lower class, and there is an equal proportion of each type.

Imagine a country where each person is either upper class, middle class or lower class, and there is an equal proportion of each type. Regardless of one’s true class, which is known only to the individual (private information), being thought to be upper class (UC) is worth 120; being thought to be middle class (MC) is worth 90; and being thought to be lower class (LC) is worth 0. Members of each class can signal their true class at no cost. Hence, the lowest payoff to an upper class member is 120, to a middle class member is 90, and to a lower class member is 0. Each person in the country has to take one of three tests: an upper class test (UCT), a middle class test (MCT), and a lower class test (LCT). If one passes the upper class test, they are thought of being upper class; if one passes the middle class test, they are thought of being middle class etc. Each person can choose which test to take. The cost of taking the test of one’s true class is 0, and the probability of passing a test of one’s true class is 1. The cost of taking a UCT to a MC person is X, and there is ½ chance of success. If an MC person fails a UCT, he can take the MCT at no cost and pass with certainty, signaling their true class. The cost of taking a UCT to a LC person is 30, and there is 1/10 chance of success. The cost of taking a MCT to a LC person is 20, and the probability of success is p. If a LC person takes either test and fails, then he can take the LCT and pass with certainty.

What should be the values of X and p to get a separating equilibrium where each person takes the test of her/his true class? [Hint: Since the tests are required, participation constraint is not relevant in this case. You only need to check for incentive compatibility constraint for each class—that is, does anyone have an incentive to take a test other than that of their true class?] 

Show more







Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 10% with the coupon code: best10