A salesperson works for a car dealership for 40 hours per week,but may choose not to work hard all of the time.The dealership's owner cannot observe the salesperson's effort,but can observe the number of cars sold.The salesperson's personal cost of working at the dealership is C(H)= 1,200 + H²,where H is the number of hours during which he works hard.The corresponding marginal cost of effort is MC = 2H.Without any effort,the salesperson will,on average,generate a profit of $1,200.With each hour of high effort,he has a 5 percent chance of selling a car.Each car sale generates a profit of $900.Suppose the owner gives the salesperson $1,200 in base pay plus a bonus of $500 for each car he sells.How many hours of hard work will the salesperson choose? A) 20 B) 22.5 C) 12.5 D) 25

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Quizplus · Accepted Answer

The salesperson will choose the number of hours where the marginal cost of effort equals the marginal benefit. The marginal benefit per hour is 0.05 (probability of selling a car) * $500 (bonus per car) = $25. Setting MC = 2H equal to $25 gives H = 12.5.

A Salesperson Works for a Car Dealership for 40 Hours