A good salesperson can sell $1,000,000 worth of goods, while a poor one can sell only $100,000 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 and 20% commission. Assuming risk-neutral salespersons and no opportunistic behavior, what level must the fixed salary be so that the firm can distinguish a prospective good salesperson from a poor one, and thereby avoid hiring a poor one?

What will be an ideal response?

answer:

Under commission, a good salesperson will earn $200,000 and a poor salesperson will earn $20,000. A fixed salary that is above $20,000 but less than $200,000 would be preferred only by poor salespersons.