A good salesperson can sell $500,000 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 $10,000 or a 10% commission.Assuming risk-neutral salespersons and no opportunistic behavior,can the firm determine a prospective good salesperson from a poor one?
A) Yes, because a poor salesperson will always choose the fixed salary.
B) Yes, because a good salesperson will always choose the fixed salary.
C) No, because a poor salesperson is indifferent between the two contracts.
D) No, because a good salesperson is indifferent between the two contracts.

Question

Quizplus · Accepted Answer

A poor salesperson will choose the fixed salary because they know they will not be able to sell enough to make the 10% commission worthwhile. However, a good salesperson would always choose the commission option since they know they can sell more than $100,000 worth of goods and earn more than the fixed salary. Therefore, the firm cannot determine a good salesperson from a poor one based on their contract choice alone.

A Good Salesperson Can Sell $500,000 Worth of Goods,while a Poor