A commission-paid shoe salesman must decide whether to work hard or shirk.Working hard would increase the probability of a sale from 20% to 40% but would cost him $20.If the salesman is paid a $40 commission per sale and a $20 fixed salary and is under monitoring where he would get fired if he doesn't work hard,what would he choose to do?
A)Work hard
B)Shirk
C)Walk away from the job
D)None of the above

Question

A commission-paid shoe salesman must decide whether to work hard or shirk.Working hard would increase the probability of a sale from 20% to 40% but would cost him $20.If the salesman is paid a $40 commission per sale and a $20 fixed salary and is under monitoring where he would get fired if he doesn't work hard,what would he choose to do?
A)​Work hard
B)Shirk
C)Walk away from the job
D)​None of the above

Quizplus · Accepted Answer

If the salesman works hard, his probability of making a sale increases from 20% to 40%. This means that his expected commission per customer increases by $40*(0.4-0.2) = $16. Therefore, even after accounting for the cost of working hard ($20), he can still expect to earn an additional $16 in commission for every customer he interacts with. The fixed salary of $20 is not affected by his decision to work hard or shirk.

If the salesman shirks, his expected commission per customer remains at $40*0.2 = $8. Therefore, he would not earn the $16 additional commission and would only earn the fixed salary of $20.

Since the salesman has a higher expected earnings by working hard, it would be rational for him to choose to work hard. Additionally, the fact that he is under monitoring and will be fired if he doesn't work hard provides an additional incentive for him to put in effort. Therefore, the best choice for the salesman is to work hard.

A Commission-Paid Shoe Salesman Must Decide Whether to Work Hard