QUESTION 1ABC Instrument, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrrequires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance oselling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one managesell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members dmind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000year 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 $50,000seek alternate employment. Thus, the relevant data are:Effort Level Chance of success CostHigh Effort0.420,000 + 50,000Slack Effort0.250,000Please answer the next five questions (Q1 through Q5) using the above information. Let "f" be the fixed salary and "b" be the bonus pthe sales person is successful in selling an instrument.What is the optimal compensation scheme if ABC only wants slack effort from the sales person?O 1.f = 20,000 and b = 02. f = 50,000 and b = 03. f = 70,000 and b = 04. f = 125,000 and b = 0O 5. f=250,000 and b = 0O 6. f = 0 and b = 50,0007.f= 0 and b = 70,0008. f = 0 and b =100,0009. f = 0 and b = 125,000 ABC Instrument, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrumentrequires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance ofselling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages tosell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do notmind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 peryear 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 toseek alternate employment. Thus, the relevant data are:Effort Level Chance of success CostHigh Effort0.420,000 + 50,000Slack Effort0.250,000Please answer the next queston using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the sales person issuccessful in selling an instrument.What range of bonuses will induce high effort?O 1.b > 20,0002. b 2 50,000O 3. b 2 70,000O 4. b 2 100,000O 5. b 2 125,000O 6. b 2 250,000

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

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC