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Shimadzu, 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 (put in high effort) has a 40 percent chance (probability of 0.4) of selling an instrument in a given year while a salesperson who chooses to slack off (put in low effort) has a 20 percent chance (probability of 0.2) of making a sale. 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 a salary of at least $50,000 not to seek alternate employment. (So, the worker's net payoff in alternative employment is $50,000.) Answer the following questions considering only the three mechanisms discussed in class: Fixed (Pure) wage; Pure Franchise; Wage-plus-bonus. a. Consider the optimal compensation scheme if Shimadzu is not concerned with whether the workers slack off and it pays the worker the same wage regardless of whether the worker makes a sale. The corresponding equilibrium level of fixed wage is b. Say the workers gets paid a bonus when they make a sale. So, the worker gets paid the low wage, WL, if they do not sell an instrument, and gets paid the high wage, WH, if they make a sale (interpret the low and high wage as was used in the examples we worked on, the high wage includes the base wage and bonus). The minimum level of high wage (WH) that the worker needs to get paid for working hard to be their best-response is

Shimadzu, 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 (put in high effort) has a 40 percent chance (probability of 0.4) of selling an instrument in a given year while a salesperson who chooses to slack off (put in low effort) has a 20 percent chance (probability of 0.2) of making a sale. 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 a salary of at least $50,000 not to seek alternate employment. (So, the worker's net payoff in alternative employment is $50,000.) Answer the following questions considering only the three mechanisms discussed in class: Fixed (Pure) wage; Pure Franchise; Wage-plus-bonus. a. Consider the optimal compensation scheme if Shimadzu is not concerned with whether the workers slack off and it pays the worker the same wage regardless of whether the worker makes a sale. The corresponding equilibrium level of fixed wage is b. Say the workers gets paid a bonus when they make a sale. So, the worker gets paid the low wage, WL, if they do not sell an instrument, and gets paid the high wage, WH, if they make a sale (interpret the low and high wage as was used in the examples we worked on, the high wage includes the base wage and bonus). The minimum level of high wage (WH) that the worker needs to get paid for working hard to be their best-response is

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.3P
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Shimadzu, 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 (put in high effort) has a 40 percent chance (probability of 0.4) of selling an instrument in a given year while a salesperson who chooses to slack off (put in low effort) has a 20 percent chance (probability of 0.2) of making a sale. 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 a salary of at least $50,000 not to seek alternate employment. (So, the worker's net payoff in alternative employment is $50,000.) Answer the following questions considering only the three mechanisms discussed in class: Fixed (Pure) wage; Pure Franchise; Wage-plus-bonus. a. Consider the optimal compensation scheme if Shimadzu is not concerned with whether the workers slack off and it pays the worker the same wage regardless of whether the worker makes a sale. The corresponding equilibrium level of fixed wage is b. Say the workers gets paid a bonus when they make a sale. So, the worker gets paid the low wage, WL, if they do not sell an instrument, and gets paid the high wage, WH, if they make a sale (interpret the low and high wage as was used in the examples we worked on, the high wage includes the base wage and bonus). The minimum level of high wage (WH) that the worker needs to get paid for working hard to be their best-response is c. Consider the case described in part (b) and assume that Shimadzu receives a profit of $300,000 from each sale, and $0 profit if there are no sales. Also assume that Shimadzu has only one worker and, accordingly, its payoff is the (profit-wage). The maximum level of high wage (WH) Shimadzu would be willing to pay to induce high effort from the worker is d. Given your answers to (b) and (c), under the wage-plus-bonus mechanism, the equilibrium level of low wage is and high wage is + '. Accordingly, the worker's best-response is to put in
Transcribed Image Text:Shimadzu, 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 (put in high effort) has a 40 percent chance (probability of 0.4) of selling an instrument in a given year while a salesperson who chooses to slack off (put in low effort) has a 20 percent chance (probability of 0.2) of making a sale. 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 a salary of at least $50,000 not to seek alternate employment. (So, the worker's net payoff in alternative employment is $50,000.) Answer the following questions considering only the three mechanisms discussed in class: Fixed (Pure) wage; Pure Franchise; Wage-plus-bonus. a. Consider the optimal compensation scheme if Shimadzu is not concerned with whether the workers slack off and it pays the worker the same wage regardless of whether the worker makes a sale. The corresponding equilibrium level of fixed wage is b. Say the workers gets paid a bonus when they make a sale. So, the worker gets paid the low wage, WL, if they do not sell an instrument, and gets paid the high wage, WH, if they make a sale (interpret the low and high wage as was used in the examples we worked on, the high wage includes the base wage and bonus). The minimum level of high wage (WH) that the worker needs to get paid for working hard to be their best-response is c. Consider the case described in part (b) and assume that Shimadzu receives a profit of $300,000 from each sale, and $0 profit if there are no sales. Also assume that Shimadzu has only one worker and, accordingly, its payoff is the (profit-wage). The maximum level of high wage (WH) Shimadzu would be willing to pay to induce high effort from the worker is d. Given your answers to (b) and (c), under the wage-plus-bonus mechanism, the equilibrium level of low wage is and high wage is + '. Accordingly, the worker's best-response is to put in
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