A good salesperson can sell $100,000 worth of goods, while a poor one can sell only $10,000 worth of goods. Job applicants know if they are good or bad, but the firm does not. A firm will offer job applicants a choice between a fixed salary of $2,000 or a commission on the sale. Assume risk-neutral salespersons and no opportunistic behavior. Given that the firm wants to distinguish a prospective good salesperson from a poor one, what should be the commission on sales?

A) Commission should be larger than 50%.
B) Commission should be larger than 40%.
C) Commission should be smaller than 2%
D) . Commission should be between 2% and 20%.

ANSWER:

D) . Commission should be between 2% and 20%.