### QUESTION 1**ABC Instrument**, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year, while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members dislike effort; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $0 if they slack off. Even if a salesperson slacks off, he or she requires an average salary of at least $50,000 to seek alternate employment. Thus, the relevant data are:| Effort Level | Chance of Success | Cost ||---------------|-------------------|--------------|| High Effort | 0.4 | 20,000 + 50,000 || Slack Effort | 0.2 | 50,000 |Please answer the next five questions (Q1 through Q5) using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the salesperson is successful in selling an instrument.**What is the optimal compensation scheme if ABC only wants slack effort from the salesperson?**1. f = 20,000 and b = 0 2. f = 50,000 and b = 0 3. f = 70,000 and b = 0 4. f = 125,000 and b = 0 5. f =250,000 and b = 0 6. f = 0 and b = 50,000 7. f = 0 and b = 70,000 8. f = 0 and b =100,000 9. f = 0 and b = 125,000 The optimal compensation scheme is highlighted as option 2: f = 50,000 and b = 0. **ABC Instrument**, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year, while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $0 if they slack off. Even if a salesperson slacks off, he or she requires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are:| Effort Level | Chance of Success | Cost ||---------------|-------------------|----------------|| High Effort | 0.4 | 20,000 + 50,000|| Slack Effort | 0.2 | 50,000 |Please answer the next question using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the salesperson is successful in selling an instrument.**What range of bonuses will induce high effort?**- [ ] 1. $ b \geq 20,000 $- [ ] 2. $ b \geq 50,000 $- [ ] 3. $ b \geq 70,000 $- [ ] 4. $ b \geq 100,000 $- [ ] 5. $ b \geq 125,000 $- [ ] 6. $ b \geq 250,000 $

We are going to use the concepts such as Participation constraints and incentive compatibility…

ABC Instrument, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 4ỏ percent chance of selling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $0 if they slack off. Even if a salesperson slacks off, he or she requires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are: Effort Level Chance of success Cost High Effort 0.4 20,000 + 50,000 Slack Effort 0.2 50,000 Please answer the next queston using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the sales person is successful in selling an instrument. What range of bonuses will induce high effort? O 1.b z 20,000 O 2.b 2 50,000 O 3.b 2 70,000 O 4. b 2 100,000 O 5.b 2 125,000 O 6. b 2 250,000

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC