Author Question: A good salesperson can sell 1,000,000 worth of goods, while a poor one can sell only 100,000 worth ... (Read 112 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?

The first oral chemotherapy drug for colon cancer was approved by FDA in 2001.

Did you know?

Eating carrots will improve your eyesight. Carrots are high in vitamin A (retinol), which is essential for good vision. It can also be found in milk, cheese, egg yolks, and liver.

Did you know?

The eye muscles are the most active muscles in the whole body. The external muscles that move the eyes are the strongest muscles in the human body for the job they have to do. They are 100 times more powerful than they need to be.

Did you know?

The U.S. Pharmacopeia Medication Errors Reporting Program states that approximately 50% of all medication errors involve insulin.

Did you know?

In Eastern Europe and Russia, interferon is administered intranasally in varied doses for the common cold and influenza. It is claimed that this treatment can lower the risk of infection by as much as 60–70%.

For a complete list of videos, visit our video library