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 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. Required:
a. Consider the optimal compensation scheme if Shimadzu is not concerned with whether the workers slack off. The corresponding equilibrium level of fixed wage is .
b. Say the workers get a bonus (B) when they sell an instrument: they get paid the base wage, (Wb) if they do not sell an instrument, and get paid the base wage and the bonus (Wb B) if they sell. The minimum level of bonus (B) that Shimadzu must offer to induce high effort from the workers is
c. Consider the case described in part (b) and assume that Shimadzu has only one worker. Assume that Shimadzu receives a profit of $300,000 from each sale, and $0 profit if there are no sales. The maximum level of bonus (B) Shimadzu would be willing to pay to induce high effort from the worker is
d. Given your answers to (b) and (c), under wage-plus-bonus mechanism, the equilibrium level of base wage is Answer 30,000 and bonus is