What will be an ideal response?
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. The $25,000 will work at screening out poor salespersons as long as the income that bad salespersons could earn elsewhere is at least $20,000, but less than $25,000. If the poor salesperson’s opportunity cost of working for this firm is less than $20,000, he might accept the commission plan just to send the false signal that he is a good salesperson, and, therefore, be hired.