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 a 20% commission.Assuming risk-neutral salespersons and no opportunistic behavior,what level must the fixed salary be so that the firm can determine a prospective good salesperson from a poor one?
A) between $0 and $20,000
B) between $20,000 and $200,000
C) greater than $200,000
D) zero

Question

Quizplus · Accepted Answer

For a good salesperson, the commission would be 20% of $1,000,000, which is $200,000. For a poor salesperson, the commission would be 20% of $100,000, which is $20,000. To distinguish between a good and a poor salesperson, the fixed salary must be attractive to the poor salesperson but less attractive than the commission for the good salesperson. Therefore, the fixed salary must be between $20,000 (the commission for a poor salesperson) and $200,000 (the commission for a good salesperson).

A Good Salesperson Can Sell $1,000,000 Worth of Goods,while a Poor