Author Question: A good salesperson can sell 1,000,000 worth of goods, while a poor one can sell only 100,000 worth ... (Read 114 times)

deesands

  • Hero Member
  • *****
  • Posts: 514
A good salesperson can sell 1,000,000 worth of goods, while a poor one can sell only 100,000 worth of goods. Job applicants know if they are good or bad, but the firm does not. A firm will offer job applicants a choice between a fixed salary of 25,000 or 20 commission. Assuming risk-neutral salespersons and the possibility of opportunistic behavior, will this choice of contracts allow the firm to distinguish between good salespersons and bad ones before the hiring decision is made?
 
  What will be an ideal response?

Question 2

A good salesperson can sell 1,000,000 worth of goods, while a poor one can sell only 100,000 worth of goods. Job applicants know if they are good or bad, but the firm does not. A firm will offer job applicants a choice between a fixed salary and 20 commission. Assuming risk-neutral salespersons and no opportunistic behavior, what level must the fixed salary be so that the firm can distinguish a prospective good salesperson from a poor one, and thereby avoid hiring a poor one?
 
  What will be an ideal response?



raili21

  • Sr. Member
  • ****
  • Posts: 324
Answer to Question 1

Under commission, a good salesperson will earn 200,000 and a poor salesperson will earn 20,000. A fixed salary that is above 20,000 but less than 200,000 would be preferred only by poor salespersons. The 25,000 will work at screening out poor salespersons as long as the income that bad salespersons could earn elsewhere is at least 20,000, but less than 25,000. If the poor salesperson's opportunity cost of working for this firm is less than 20,000, he might accept the commission plan just to send the false signal that he is a good salesperson, and, therefore, be hired.

Answer to Question 2

Under commission, a good salesperson will earn 200,000 and a poor salesperson will earn 20,000. A fixed salary that is above 20,000 but less than 200,000 would be preferred only by poor salespersons.



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Approximately 25% of all reported medication errors result from some kind of name confusion.

Did you know?

In 1835 it was discovered that a disease of silkworms known as muscardine could be transferred from one silkworm to another, and was caused by a fungus.

Did you know?

According to animal studies, the typical American diet is damaging to the liver and may result in allergies, low energy, digestive problems, and a lack of ability to detoxify harmful substances.

Did you know?

The most common treatment options for addiction include psychotherapy, support groups, and individual counseling.

Did you know?

Historic treatments for rheumatoid arthritis have included gold salts, acupuncture, a diet consisting of apples or rhubarb, nutmeg, nettles, bee venom, bracelets made of copper, prayer, rest, tooth extractions, fasting, honey, vitamins, insulin, snow collected on Christmas, magnets, and electric convulsion therapy.

For a complete list of videos, visit our video library